UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549


FORM 10-K


(Mark
One)


x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the fiscal year ended December 31, 2008


or


o
            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)





Securities
registered pursuant to section 12(b) of the Act:


Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, $3.33-1/3 par value
            
            New
      York Stock ExchangePreferred
      Stock Purchase Rights
            
            New
      York Stock Exchange





Securities
registered pursuant to section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. x Yes o No




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




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during


the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing


requirements
for the past 90 days. x Yes o No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x




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
definitions of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer x
            Accelerated
      filer o
            Non-accelerated
      filer o
            Smaller
      reporting company o(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 Act).o Yes x No





Aggregate
market value of Common Stock held by nonaffiliates as of June 30, 2008:
$17.2 billion.


Number of
shares of Common Stock outstanding as of February 6, 2009:
172,913,730.





DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the Registrant’s definitive proxy statement for the 2009 Annual Meeting of
Stockholders to be held on April 28, 2009, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2008,
are incorporated by reference into Part III.














TABLE OF
CONTENTS





Part IItems 1 and 2.
                  Business and Properties.
                  1Item 1A.
                  Risk Factors.
                  19Item 1B.
                  Unresolved Staff
    Comments.
                  25Item 3.
                  Legal Proceedings.
                  25Item 4.
                  Submission of Matters to a Vote of
      Security Holders.
                  25Executive Officers
                  25Part IIItem 5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchasesof
      Equity Securities.
                  27Item 6.
                  Selected Financial Data.
                  29Item 7.
                  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations.
                  30Item 7A.
                  Quantitative and Qualitative
      Disclosures About Market Risk.
                  55Item 8.
                  Financial Statements and Supplementary
      Data.
                  56Item 9.
                  Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure.
                  108Item 9A.
                  Controls and Procedures.
                  108Item 9B.
                  Other Information.
                  108Part IIIItem 10.
                  Directors, Executive Officers and
      Corporate Governance.
                  109Item 11.
                  Executive Compensation.
                  109Item 12.
                  Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters.
                  109Item 13.
                  Certain Relationships and Related
      Transactions, and Director Independence
                  109Item 14.
                  Principal Accounting Fees and
      Services
                  109Part IVItem 15.
                  Exhibits, Financial Statements
      Schedules
                  109




Table of Contents





PART I


Items
1 and 2.     Business and
Properties




This
Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. These statements by their nature
are subject to risks, uncertainties and assumptions and are influenced by
various factors. As a consequence, actual results may differ materially from
those expressed in the forward-looking statements. For more information, see
Item 1A. Risk Factors—Disclosure Regarding Forward-Looking Statements of this
Form 10-K.




General




Noble Energy, Inc. (Noble Energy, we or us) is a
Delaware corporation, formed in 1969, that has been publicly traded on the New
York Stock Exchange (NYSE) since 1980. We are an independent energy company that
has been engaged in the acquisition, exploration, development, production and
marketing of crude oil, natural gas, and natural gas liquids (NGLs) since 1932.
In this report, unless otherwise indicated or where the context otherwise
requires, information includes that of Noble Energy and its subsidiaries. We
operate primarily in the Rocky Mountains, Mid-continent, and deepwater Gulf of
Mexico areas in the US, with key international operations offshore Israel, the
North Sea and West Africa.




Strategy




Our
strategy is to achieve growth in earnings and cash flow through the development
of a high quality portfolio of producing assets that is balanced between US and
international projects. Strategic acquisitions of Patina Oil & Gas
Corporation (Patina) in 2005 and U.S. Exploration Holdings, Inc. (U.S.
Exploration) in 2006, along with additional capital investment in US and
international locations, have resulted in substantial growth in the last several
years. Acquisitions and capital investment, combined with the sale of non-core
assets, have allowed us to achieve a strategic objective of enhancing our US
asset portfolio, resulting in a company with assets and capabilities that
include growing US basins coupled with a significant portfolio of international
properties. See Item 6. Selected Financial Data for additional financial and
operating information for fiscal years 2004-2008.




Proved Reserves




Proved reserves estimates at December 31, 2008
were as follows:




December 31, 2008Proved
                      
                      
                      Proved
                      
                      
                      TotalDeveloped
                      
                      
                      Undeveloped
                      
                      
                      ProvedReserves
                      
                      
                      Reserves
                      
                      
                      ReservesUnited StatesCrude oil, condensate and NGLs
      (MMBbls)
                      
                      
                      121
                      
                      
                      
                      77
                      
                      
                      
                      198Natural gas (Bcf)
                      
                      
                      1,268
                      
                      
                      
                      591
                      
                      
                      
                      1,859Total US (MMBoe) (1)
                      
                      
                      332
                      
                      
                      
                      176
                      
                      
                      
                      508InternationalCrude oil, condensate and NGLs
      (MMBbls)
                      
                      
                      78
                      
                      
                      
                      35
                      
                      
                      
                      113Natural gas (Bcf)
                      
                      
                      1,117
                      
                      
                      
                      339
                      
                      
                      
                      1,456Total International (MMBoe) (1)
                      
                      
                      264
                      
                      
                      
                      92
                      
                      
                      
                      356WorldwideCrude oil, condensate and NGLs
      (MMBbls)
                      
                      
                      199
                      
                      
                      
                      112
                      
                      
                      
                      311Natural gas (Bcf)
                      
                      
                      2,385
                      
                      
                      
                      930
                      
                      
                      
                      3,315Total Worldwide (MMBoe) (1)
      (2)
                      
                      
                      596
                      
                      
                      
                      268
                      
                      
                      
                      864







(1)
            Natural gas is converted on the basis of six
      Mcf of gas per one barrel of oil
equivalent.


(2)
            Approximately 69% are proved developed
      reserves.




Estimates of Proved Reserves– Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions. For additional information regarding
estimates of crude oil and natural gas reserves, including estimates of proved
and proved developed reserves, the standardized measure of discounted future net
cash flows, and the changes in discounted future net cash flows, see Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and
Estimates—Reserves and Item 8. Financial Statements and Supplementary
Data—Supplemental Oil and Gas Information.







1
 Table of Contents







Reserve Audit– Engineers in
our Houston, Denver and London offices prepare all reserve estimates for our
different geographical regions. These reserve estimates are reviewed and
approved by senior engineering staff and division management with final approval
by the vice president in charge of corporate reserves and certain members of
senior management. In each of the years 2008, 2007 and 2006, we retained
Netherland, Sewell & Associates, Inc. (NSAI), independent
third-party reserve engineers, to perform reserve audits of proved reserves. A
“reserve audit”, as we use the term, is a process involving an independent
third-party engineering firm’s visits, collection of any and all required
geologic, geophysical, engineering and economic data, and such firm’s complete
external preparation of reserve estimates. Our use of the term “reserve audit”
is intended only to refer to the collective application of the procedures which
NSAI was engaged to perform. The term “reserve audit” may be defined and used
differently by other companies.




The reserve audit for 2008 included a detailed review
of 18 of our major international, deepwater Gulf of Mexico and onshore US
fields, which covered approximately 79% of US proved reserves and 97% of
international proved reserves (86% of total proved reserves). The reserve audit
for 2007 included a detailed review of 16 of our major international, deepwater
Gulf of Mexico and onshore US fields, which covered approximately 71% of US
proved reserves and 96% of international proved reserves (81% of total proved
reserves). The reserve audit for 2006 included a detailed review of 14 of our
major international, deepwater Gulf of Mexico and onshore US fields, which
covered approximately 80% of our total proved reserves.




In connection with the 2008 reserve audit, NSAI
prepared its own estimates of our proved reserves. In order to prepare its
estimates of proved reserves, NSAI examined our estimates with respect to
reserve quantities, future producing rates, future net revenue, and the present
value of such future net revenue. NSAI also examined our estimates with respect
to reserve categorization, using the definitions for proved reserves set forth
in Regulation S-X Rule 4-10(a) and subsequent Securities and Exchange
Commission (SEC) staff interpretations and guidance. In the conduct of the
reserve audit, NSAI did not independently verify the accuracy and completeness
of information and data furnished by us with respect to ownership interests, oil
and gas production, well test data, historical costs of operation and
development, product prices, or any agreements relating to current and future
operations of the fields and sales of production. However, if in the course of
the examination something came to the attention of NSAI which brought into
question the validity or sufficiency of any such information or data, NSAI did
not rely on such information or data until it had satisfactorily resolved its
questions relating thereto or had independently verified such information or
data. NSAI determined that our estimates of reserves conform to the guidelines
of the SEC, including the criteria of “reasonable certainty,” as it pertains to
expectations about the recoverability of reserves in future years, under
existing economic and operating conditions, consistent with the definition in
Rule 4-10(a)(2) of Regulation S-X. NSAI issued an unqualified audit
opinion on our proved reserves at December 31, 2008, based upon its
evaluation. The NSAI opinion concluded that our estimates of proved reserves
were, in the aggregate, reasonable and have been prepared in accordance with
generally accepted petroleum engineering and evaluation
principles.




The fields audited by NSAI are chosen in accordance
with company guidelines and result in the audit of a minimum of 80% of our total
proved reserves. The fields are chosen by senior engineering staff and division
management with approval by the vice president in charge of corporate reserves
and certain members of senior management, and are reviewed by the Board of
Directors.




When compared on a field-by-field basis, some of our
estimates are greater and some are less than the estimates of NSAI. Given the
inherent uncertainties and judgments that go into estimating proved reserves,
differences between internal and external estimates are to be expected. On a
quantity basis, the NSAI field estimates ranged from two MMBoe above to 14 MMBoe
below as compared with our estimates. On a percentage basis, the NSAI field
estimates ranged from 10% above our estimates to 14% below our estimates.
Differences between our estimates and those of NSAI are reviewed for accuracy
but are not further analyzed unless the aggregate variance is greater than 10%.
At December 31, 2008, reserves differences, in the aggregate, were less
than 29 MMBoe, or 4%.




Since January 1, 2008, no crude oil or
natural gas reserve information has been filed with, or included in any report
to, any federal authority or agency other than the SEC and the Energy
Information Administration (EIA) of the US Department of Energy. We file
Form 23, including reserve and other information, with the
EIA.




Recent SEC Rule-Making Activity– In December 2008, the SEC announced that it had approved revisions to
modernize its oil and gas company reporting requirements. See Item 8. Financial
Statements and Supplementary Data – Supplemental Oil and Gas
Information.







2
 Table of Contents





Acquisition and Divestiture
Activities




We maintain an ongoing portfolio optimization
program. Accordingly, we may engage in acquisitions of additional crude oil or
natural gas properties and related assets through either direct acquisitions of
the assets or acquisitions of entities owning the assets. We may also divest
non-core assets in order to optimize our property portfolio.




Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $292
million in cash. Properties acquired cover approximately 15,500 net acres and
are currently producing a net 20 MMcfepd. The total purchase price has been
preliminarily allocated to the proved and unproved properties acquired based on
fair values at the acquisition date. Approximately $254 million was allocated to
proved properties and $38 million to unproved properties.




Sale of Argentina Assets – 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.
Our crude oil reserves for Argentina totaled 7 MMBbls at December 31,
2007.




Sale of Gulf of Mexico Shelf
Properties–In 2006, we sold all of
our significant Gulf of Mexico shelf properties except for the Main Pass area,
which required repairs related to hurricane damage at the time. As of the
effective date of the sale, proved reserves for the Gulf of Mexico properties
sold totaled approximately 7 MMBbls of crude oil and 110 Bcf of natural gas.
Deepwater Gulf of Mexico and Gulf Coast onshore areas remain core areas and are
more aligned with our long-term business strategies. See Item 8. Financial
Statements and Supplementary Data—Note 4—Acquisitions and
Divestitures.




U.S. Exploration Acquisition–In
2006,we acquired
U.S. Exploration, a privately held corporation, for $412 million in cash
plus liabilities assumed. U.S. Exploration’s reserves and production are located
primarily in Colorado’s Wattenberg field. This acquisition significantly
expanded our operations in one of our core areas. Proved reserves of U.S.
Exploration at the time of acquisition were approximately 234 Bcfe, of which 38%
were proved developed and 55% natural gas. Proved crude oil and natural gas
properties were valued at $413 million and unproved properties were valued
at $131 million. In addition, we recorded $34 million of goodwill. See Item
8. Financial Statements and Supplementary Data—Note
4—Acquisitions and Divestitures.




Patina Merger–In 2005, we acquired
Patina through merger (Patina Merger) for a total purchase price of
$4.9 billion. Patina’s long-lived crude oil and natural gas reserves
provide a significant inventory of low-risk opportunities that balanced our
portfolio. Patina’s proved reserves at the time of acquisition were estimated to
be approximately 1.6 Tcfe, of which 72% were proved developed and 67% natural
gas. Proved crude oil and natural gas properties were valued at
$2.6 billion and unproved properties were valued at $1.1 billion. In
addition, we recorded $875 million of goodwill.




Crude Oil and Natural Gas Properties and
Activities




We search for crude oil and natural gas properties,
seek to acquire exploration rights in areas of interest and conduct exploratory
activities. These activities include geophysical and geological evaluation and
exploratory drilling, where appropriate, on properties for which we have
acquired exploration rights. Our properties consist primarily of interests in
developed and undeveloped crude oil and natural gas leases and concessions. We
also own natural gas processing plants and natural gas gathering and other crude
oil and natural gas related pipeline systems which are primarily used in the
processing and transportation of our crude oil, natural gas and NGL
production.




2009 Budget




Due to
the uncertain economic and commodity price environment, we have designed a
flexible capital spending program that will be responsive to conditions that
develop during 2009. See Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – 2009 Outlook – 2009
Budget.




United
States




We have been engaged in crude oil and natural gas
exploration, exploitation and development activities throughout onshore US since
1932 and in the Gulf of Mexico since 1968. The Patina Merger and the acquisition
of U.S. Exploration significantly increased the breadth of our onshore
operations, especially in the Rocky Mountains and Mid-continent areas. These two
acquisitions, along with other acquisitions of producing and non-producing
properties, have provided us with a multi-year inventory of exploitation and
development opportunities. In 2008, we continued to expand our undeveloped
acreage position with the leasing of approximately 502,000 net acres in
Colorado, Kansas, Montana, Wyoming, East Texas and Oklahoma, along with 15 new
leases in the deepwater Gulf of Mexico.




US operations accounted for 56% of our 2008
consolidated sales volumes and 59% of total proved reserves at December 31,
2008. Approximately 61% of the proved reserves are natural gas and 39% are crude
oil, condensate and NGLs.
Our onshore US portfolio at December 31, 2008 included 996,000 net
developed acres and 1.3 million net undeveloped acres. We currently hold
interests in 93 offshore blocks in the Gulf of
Mexico.







3
 Table of Contents







Sales of production and estimates of proved reserves
for our significant US operating areas were as follows:




Year Ended December 31,
2008
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                December 31, 2008Sales Volumes
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Proved ReservesCrude Oil
                                                                                                                                                                                
                                                                                                                                                                                Natural Gas
                                                                                                                                                                                
                                                                                                                                                                                NGLs
                                                                                                                                                                                
                                                                                                                                                                                Total
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                Crude Oil(1)
                                                                                                                                                                                
                                                                                                                                                                                Natural Gas
                                                                                                                                                                                
                                                                                                                                                                                Total(MBopd)
                                                                                                                                                                                
                                                                                                                                                                                (MMcfpd)
                                                                                                                                                                                
                                                                                                                                                                                (MBpd)
                                                                                                                                                                                
                                                                                                                                                                                (MBoepd)
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                (MMBbls)
                                                                                                                                                                                
                                                                                                                                                                                (Bcf)
                                                                                                                                                                                
                                                                                                                                                                                (MMBoe)Northern RegionWattenberg field
                                                                                                                                                                                
                                                                                                                                                                                15
                                                                                                                                                                                
                                                                                                                                                                                146
                                                                                                                                                                                
                                                                                                                                                                                5
                                                                                                                                                                                
                                                                                                                                                                                45
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                118
                                                                                                                                                                                
                                                                                                                                                                                842
                                                                                                                                                                                
                                                                                                                                                                                259Piceance basin
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                39
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                7
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                263
                                                                                                                                                                                
                                                                                                                                                                                44Niobrara field (Tri-state
    area)
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                26
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                4
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                109
                                                                                                                                                                                
                                                                                                                                                                                18Mid-continent area
                                                                                                                                                                                
                                                                                                                                                                                7
                                                                                                                                                                                
                                                                                                                                                                                72
                                                                                                                                                                                
                                                                                                                                                                                1
                                                                                                                                                                                
                                                                                                                                                                                20
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                37
                                                                                                                                                                                
                                                                                                                                                                                336
                                                                                                                                                                                
                                                                                                                                                                                93Other
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                25
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                4
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                1
                                                                                                                                                                                
                                                                                                                                                                                122
                                                                                                                                                                                
                                                                                                                                                                                21Total
                                                                                                                                                                                
                                                                                                                                                                                22
                                                                                                                                                                                
                                                                                                                                                                                308
                                                                                                                                                                                
                                                                                                                                                                                6
                                                                                                                                                                                
                                                                                                                                                                                80
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                156
                                                                                                                                                                                
                                                                                                                                                                                1,672
                                                                                                                                                                                
                                                                                                                                                                                435Southern RegionDeepwater Gulf of Mexico
                                                                                                                                                                                
                                                                                                                                                                                13
                                                                                                                                                                                
                                                                                                                                                                                49
                                                                                                                                                                                
                                                                                                                                                                                3
                                                                                                                                                                                
                                                                                                                                                                                24
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                19
                                                                                                                                                                                
                                                                                                                                                                                64
                                                                                                                                                                                
                                                                                                                                                                                29Gulf Coast onshore and
other
                                                                                                                                                                                
                                                                                                                                                                                5
                                                                                                                                                                                
                                                                                                                                                                                38
                                                                                                                                                                                
                                                                                                                                                                                -
                                                                                                                                                                                
                                                                                                                                                                                12
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                23
                                                                                                                                                                                
                                                                                                                                                                                123
                                                                                                                                                                                
                                                                                                                                                                                44Total
                                                                                                                                                                                
                                                                                                                                                                                18
                                                                                                                                                                                
                                                                                                                                                                                87
                                                                                                                                                                                
                                                                                                                                                                                3
                                                                                                                                                                                
                                                                                                                                                                                36
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                42
                                                                                                                                                                                
                                                                                                                                                                                187
                                                                                                                                                                                
                                                                                                                                                                                73Total United States
                                                                                                                                                                                
                                                                                                                                                                                40
                                                                                                                                                                                
                                                                                                                                                                                395
                                                                                                                                                                                
                                                                                                                                                                                9
                                                                                                                                                                                
                                                                                                                                                                                116
                                                                                                                                                                                
                                                                                                                                                                                
                                                                                                                                                                                198
                                                                                                                                                                                
                                                                                                                                                                                1,859
                                                                                                                                                                                
                                                                                                                                                                                508




(1)
            Includes
NGLs.




Wells drilled in 2008 and productive wells at
December 31, 2008 for our significant US operating areas were as
follows:




Year EndedDecember 31, 2008
                                  
                                  December 31, 2008Gross Wells Drilled/
                                  
                                  GrossParticipated in
                                  
                                  Productive WellsNorthern RegionWattenberg field
                                  
                                  558
                                  
                                  5,731Piceance basin
                                  
                                  125
                                  
                                  238Niobrara field (Tri-State
    area)
                                  
                                  243
                                  
                                  982Mid-continent area
                                  
                                  93
                                  
                                  4,178Other
                                  
                                  31
                                  
                                  1,273Total
                                  
                                  1,050
                                  
                                  12,402Southern RegionDeepwater Gulf of Mexico
                                  
                                  3
                                  
                                  12Gulf Coast onshore and
other
                                  
                                  70
                                  
                                  1,073Total
                                  
                                  73
                                  
                                  1,085Total United States
                                  
                                  1,123
                                  
                                  13,487







4
 Table of Contents





















Northern Region—The Northern
region consists of our operations in the Rocky Mountains area, which includes
the Denver-Julesburg (D-J) (Wattenberg field), Piceance, San Juan, and Wind
River basins, as well as the Niobrara (Tri-State), Bowdoin and Siberia Ridge
fields. The Northern region also includes the Mid-continent area, consisting of
properties in the Texas Panhandle, Oklahoma and Kansas. The Rocky Mountains area
is one of our core operating assets. During 2008, we acquired a total of
approximately 490,000 net acres in southern Montana, the Mid-continent area and
the Niobrara and Wattenberg fields.




Wattenberg Field—The
Wattenberg field (approximately 96% operated working interest), located in the
D-J basin of north central Colorado, is our largest onshore US field and
continues to grow. We acquired working interests in the Wattenberg field through
the Patina Merger in 2005 and acquisition of U.S. Exploration in 2006. The
Wattenberg field held 51% of our US proved reserves on December 31,
2008.




One of the most attractive features of the field is
the presence of multiple productive formations, which include the Codell,
Niobrara, and J-Sand formations, as well as the D-Sand, Dakota and the shallower
Shannon, Sussex and Parkman formations. Drilling in the Wattenberg field is
considered lower risk from the perspective of finding crude oil and natural gas
reserves.




Our
current field activities are focused primarily on the improved recovery of
reserves through drilling new wells or deepening within existing wellbores,
recompleting the Codell formation within existing J-Sand wells, refracturing or
trifracturing existing Codell wells and refracturing or recompleting the
Niobrara formation within existing Codell wells. A refracture consists of the
restimulation of a producing formation within an existing wellbore to enhance
production and add incremental reserves. A trifracture is effectively a
refracture of a refracture. These projects and continued
success with our production enhancement program, which includes well workovers,
reactivations, and commingling of zones, allow us to increase production and add
proved reserves to what is considered a mature field.







5
 Table of Contents





We continue to improve efficiencies in Wattenberg
field drilling and completion operations and have significantly reduced drilling
time by utilizing the latest available technology, including automatic drilling
rigs (ADRs). An ADR uses an automated system to regulate the drill string of a
drilling rig in response to current drilling conditions, including drilling
fluid pressure, bit weight, drill string torque, and drill string revolutions
per minute to achieve an optimal rate of bit penetration.




In 2008, we drilled or participated in 558 Wattenberg
field development wells, with a 99.8% success rate and added approximately 186
Bcfe of proved reserves approximately 59% of which were natural
gas.  At year-end, we were running six drilling rigs and 15 completion
units in the field.




We have experienced significant growth in production
from the Wattenberg field, from an average of 199 MMcfepd at year-end 2005 to
approximately 268 MMcfepd at year-end 2008. Approximately 54% of 2008 production
was natural gas. However, expansion of field boundaries has resulted in a 110%
increase in our crude oil and NGL stream since year-end 2005. In 2008, sales of
Wattenberg field production accounted for 39% of total US sales
volumes.




The infrastructure in this area is improving and
expanding. Oil transport alternatives should improve in 2009 with the expected
start up of a new interstate crude oil transportation pipeline system which will
run from Weld County, Colorado, where the Wattenberg field is located, to
Cushing, Oklahoma. The pipeline, in which we own a small equity interest, will
provide another option for the marketing of our crude oil. We have entered into
a five-year throughput agreement with the pipeline.




We continue to acquire acreage in the area and held
interests in approximately 332,000 net acres at year-end 2008. We are planning
an active capital program in 2009; however, our program may decrease from 2008
levels.  We will have the flexibility with short-term drilling rig
contracts to decrease activity if economic conditions continue to decline. We
will continue to have a strong focus on Codell/Niobrara new
drills.  Additionally, we have a substantial project inventory
remaining and plan to continue steady refracture, trifracture, and recompletion
programs in 2009.




Piceance Basin—The Piceance
basin in western Colorado (approximately 93% operated working interest) is
another core area for us. It is a major North American natural gas basin,
characterized by low-porosity rock. The primary productive formation is the
Mesaverde Williams Fork formation.  Multiple wells are drilled from
individual drilling pads to reduce rig mobilization costs in mountainous terrain
and to minimize environmental impact on the surface area.  Well
spacing is approximately ten acres per well.




As in the Wattenberg field, Piceance basin drilling
time per well has been reduced significantly due to our increased use of
improved drilling technology. In the Piceance basin, we are using new
fit-for-purpose rigs which include design innovations and technology
improvements that capture incremental time savings during all phases of the well
drilling process, including moving between wells. Fit-for-purpose rigs can drill
multiple wells from one location and are particularly useful in developing hydrocarbon
resources in tight-gas areas such as the Piceance basin.




In 2008, we increased our drilling activities and
drilled or participated in 124 development wells and one exploratory well, 100%
of which were successful. Our 2008 drilling activity resulted in the addition of
135 Bcfe of proved reserves. Successful drilling activity in recent years has
led to significant volume growth; production has grown from 2 MMcfepd in 2005 to
53 MMcfepd at year-end 2008.




We have assembled a significant acreage position in
the area and currently hold interests in approximately 19,000 net acres
providing a large inventory of future projects. At this time, we plan to operate
a two-rig drilling program in 2009.




Tri-State Area (Niobrara)—Our
operations in the Tri-State area (eastern Colorado, extending into Kansas and
Nebraska) center primarily around the development of the Niobrara Trend
(approximately 88% operated working interest). The Niobrara formation is an
important shallow gas producer. Since 2006, we have expanded our acreage
position to over 580,000 net acres.  We have a substantial future
project inventory, including Niobrara infill and exploitation drilling along
with gathering system and compressor station additions to develop reserves and
deliver new production in 2009.  We are planning an active capital
program in 2009; however, our program may decrease from 2008
levels.  We will have the flexibility with short-term drilling rig
contracts to decrease activity if economic conditions continue to
decline.




In 2008, we doubled our drilling activity and drilled
or participated in 243 development wells. Increased use of 3-D seismic to
optimize well locations helped increase our success rate to over 80% in 2008.
Our 2008 drilling activity resulted in the addition of 35 Bcfe of proved
reserves, and we were producing approximately 28 MMcfepd, net at year-end.  Short-term
drilling rig contracts allow flexibility for our drilling plans if economic
conditions continue to decline.







6
 Table of Contents





Mid-continent Area—The
Mid-continent area includes properties in the Texas Panhandle, Oklahoma and
Kansas. Significant areas of activity have been the Granite Wash development in
the Texas Panhandle, infill drilling in several of our Oklahoma waterfloods, and
deeper completions to the Skinner formation in western Oklahoma. We drilled or
participated in 92 development wells in 2008, 96% of which were successful and
one successful exploratory well. The potential for Granite Wash horizontal
drilling is currently being evaluated, which, if successful, could increase the
recovery of reserves in place and daily production rates.




In July 2008, we expanded into a new area with a
15,500 net acre acquisition in western Oklahoma, which included approximately 16
MMboe of proved reserves. The target area is the Cleveland Sandstone, a tight
gas play characterized by low-permeability rock. Since acquiring the property we
have drilled seven development wells (included in the well count above).There are currently 56
operated wells on the property producing in aggregate a net 20
MMcfepd.  We have the flexibility of operating one to three rigs in
2009 with two rigs currently operating.




Other—We are also active in
the Bowdoin field (approximately 63% operated working interest), located in
north central Montana; the San Juan basin (approximately 82% operated working
interest), located in northwestern New Mexico and southwestern Colorado; and the
Wind River basin (approximately 74% operated working interest), located in
central Wyoming. In 2008, we drilled or participated in a total of 31
development wells in these areas, 100% of which were successful. We plan to have
reduced activity in these areas in 2009 as we focus most of our capital spending
on the core development fields of Wattenberg, Piceance and
Tri-State.




During 2008, we acquired approximately 205,000 net
exploratory acres in southern Montana and plan to test the area in
2009.




Southern Region—The Southern region includes
the deepwater Gulf of Mexico and onshore areas primarily in Texas, Louisiana,
Illinois and Indiana. In 2006, we sold all of our significant Gulf of Mexico
shelf properties except for the Main Pass area, which is currently held for
sale. The sale of our shelf properties allowed us to migrate future investments
and growth from the Gulf of Mexico shelf to the deepwater Gulf of Mexico which
we believe is an area of higher potential.




Deepwater Gulf of Mexico—The
deepwater Gulf of Mexico is one of our core areas and accounted for 21% of 2008
US sales volumes and 6% of US proved reserves at December 31, 2008. We currently
hold interests in 93 deepwater Gulf of Mexico leases, representing
approximately 315,000 net acres. We operate approximately 70% of the
leases.








The expansion of our deepwater Gulf of Mexico program
began in 2004 with the Ticonderoga discovery and the acquisition of additional
ownership interests in Swordfish and Lorien. Since then we have continued to
expand our operations primarily through an active exploration program, expansion
of our 3-D seismic database, and lease acquisition.
Our exploration activities have led to significant discoveries at Isabela and
Redrock/Raton, and, most recently, Gunflint, a 2008 discovery which is our
largest deepwater Gulf of Mexico discovery to date. Participation in the 2008
central Gulf of Mexico outer continental shelf sale resulted in our being
awarded 15 new deepwater Gulf of Mexico leases for approximately
$167 million, net to our interest, and allows us to expand our inventory
with the addition of several new deepwater Gulf of Mexico prospects in the
Atwater Valley, Mississippi Canyon, Green Canyon, Walker Ridge, and Garden Banks
areas.







7
 Table of Contents





In addition to Gunflint, 2008 exploration drilling
activities included a well at the Noble-operated Tortuga prospect (Mississippi
Canyon Blocks 561 and 605; 57% working interest). Although the well was
successful in locating hydrocarbons, we decided not to develop the
prospect due to near-term lease expiration as well as other considerations.
Accordingly, we impaired the well in the fourth quarter of 2008. We also
announced that an exploration well at the Stones River prospect
(Mississippi Canyon Block 285; 100% working interest) did not encounter
hydrocarbons in commercial quantities.




We plan to continue exploration activities in 2009 by
conducting a seismic program and drilling two to three exploratory
wells.




Our most significant deepwater Gulf of Mexico
properties and current development plans are discussed in more detail
below:




Gunflint (Mississippi Canyon Block
948; 37.5% working interest) – We originally acquired the block in the
2006 central Gulf of Mexico outer continental shelf sale and announced the
Gunflint crude oil discovery, our largest deepwater Gulf of Mexico discovery to
date, in October 2008. We are currently acquiring additional seismic information
and preparing to drill an appraisal well in 2009 or early 2010. We are the
operator of the block.




Isabela (Mississippi Canyon
Block 562, 33% working interest) – Isabela was a 2007 discovery and is
non-operated. Development planning is underway, Phase 1 of which is anticipated
to include a producing well with a subsea tieback to an existing production
facility. Initial production is currently anticipated in 2011. We also have an
interest in adjacent acreage with additional exploration potential on
Mississippi Canyon Blocks 519 and 563 (23.25% working interest).  We
are currently drilling an exploratory well on Block 519 (Santa Cruz
prospect).




Redrock/Raton (Mississippi
Canyon Blocks 204, 248 and 292; 66.67 % working interest)–Redrock was a 2006 natural
gas/condensate discovery and Raton was a 2006 natural gas discovery. The Raton
South appraisal well was also drilled during 2006.  In 2007, we
successfully sidetracked and completed the Raton discovery well and it was tied
back and came on production in late 2008. In 2008, we drilled a successful
sidetrack-appraisal well at Raton South, and tie back to a host facility is
anticipated in late 2009. Redrock is currently considered a co-development
candidate to the completed sidetrack well at Raton South. We are the operator of
Redrock/Raton.




Swordfish (Viosca Knoll
Blocks 917, 961 and 962; 85% working interest) – Swordfish was a 2001
discovery and began producing in 2005. In 2007, we drilled and completed a
sidetrack to Viosca Knoll Block 917 #1 well, which began production at the end
of 2007. The Swordfish project currently includes three producing wells
connected to a third-party production facility through subea tiebacks. We are
the operator of Swordfish.




Ticonderoga (Green Canyon
block 768; 50% working interest)–Ticonderoga is a
non-operated 2004 crude oil discovery and began producing in 2006. In 2007, we
drilled and completed the #3 and #1 ST4 wells to extend and enhance production
from the field.  The wells came on line first quarter 2008. The
project currently includes three producing wells connected to existing
infrastructure through subea tiebacks.




Lorien (Green Canyon Block
199; 60% working interest)– Lorien was a 2003
crude oil discovery and began producing in 2006.  The project
currently includes two producing wells connected to existing infrastructure
through subea tiebacks. We are the operator of Lorien.




In September 2008, Hurricanes Gustav and Ike moved
through the Gulf of Mexico. Inspection of our facilities and equipment indicated
there was no major damage from the hurricanes, although damage to third party
processing and pipeline facilities has slowed reinstatement of production from
our Gulf of Mexico assets, including Lorien and Ticonderoga. Approximately 8.5
MBoepd of production remained shut-in at year-end. We expect production to
resume during the first half of 2009, depending on the successful resumption of
pipeline and other non-operated facilities.




New
Albany Shale—We continue to selectively increase our acreage position in
resource plays, including shale plays. We have accumulated over 179,000 net
acres in the New Albany Shale in the Illinois Basin (approximately 92% working
interest), located in Indiana and Illinois. During 2008, we drilled 11
development wells, 100% of which were successful. We also drilled 12 development
wells in the Paxton area, 92% of which were successful, and seven
successful exploration wells on our Round Rock acreage in the Illinois
Basin.







8
 Table of Contents





East
Texas and North Louisiana—This is an emerging area for us. Recent
acquisitions have increased our leasehold acreage to approximately 17,700 net
acres. In 2008, we drilled seven horizontal James Lime wells and 24 Hosston,
Travis Peak and Cotton Valley wells, all of which were successful. We also
participated in the drilling of one successful horizontal Haynesville shale well
in North Louisiana.  Our drilling program for 2009 will focus on the
Haynesville shale.




Other—In addition to the East
Texas and North Louisiana programs, we drilled six successful development wells
within the South Central Robertson Unit in west Texas and two Gulf Coast
exploratory wells.




International




International operations are significant to our
business, accounting for 44% of consolidated sales volumes in 2008 and 41% of
total proved reserves at December 31, 2008. International proved reserves
are approximately 68% natural gas and 32% crude oil. Operations in Equatorial
Guinea, Cameroon, Ecuador, China and Suriname are conducted in accordance with
the terms of production sharing contracts. Operations in other foreign locations
are conducted in accordance with concession agreements or
licenses.




Sales of production and estimates of proved reserves
for our significant international operating areas are as
follows:




Year Ended December 31,
2008
                                                                                        
                                                                                        
                                                                                        December 31, 2008Sales Volumes
                                                                                        
                                                                                        
                                                                                        Proved ReservesCrude Oil
                                                                                        
                                                                                        Natural Gas
                                                                                        
                                                                                        NGL's
                                                                                        
                                                                                        Total
                                                                                        
                                                                                        
                                                                                        Crude Oil
                                                                                        
                                                                                        Natural Gas
                                                                                        
                                                                                        Total(MBopd)
                                                                                        
                                                                                        (MMcfpd)
                                                                                        
                                                                                        (MBpd)
                                                                                        
                                                                                        (MBoepd)
                                                                                        
                                                                                        
                                                                                        (MMBbls)
                                                                                        
                                                                                        (Bcf)
                                                                                        
                                                                                        (MMBoe)InternationalWest Africa
                                                                                        
                                                                                        15
                                                                                        
                                                                                        206
                                                                                        
                                                                                        -
                                                                                        
                                                                                        49
                                                                                        
                                                                                        
                                                                                        75
                                                                                        
                                                                                        978
                                                                                        
                                                                                        238North Sea
                                                                                        
                                                                                        10
                                                                                        
                                                                                        5
                                                                                        
                                                                                        -
                                                                                        
                                                                                        11
                                                                                        
                                                                                        
                                                                                        23
                                                                                        
                                                                                        19
                                                                                        
                                                                                        27Israel
                                                                                        
                                                                                        -
                                                                                        
                                                                                        139
                                                                                        
                                                                                        -
                                                                                        
                                                                                        23
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        273
                                                                                        
                                                                                        46Ecuador
                                                                                        
                                                                                        -
                                                                                        
                                                                                        22
                                                                                        
                                                                                        -
                                                                                        
                                                                                        4
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        180
                                                                                        
                                                                                        30China
                                                                                        
                                                                                        4
                                                                                        
                                                                                        -
                                                                                        
                                                                                        -
                                                                                        
                                                                                        4
                                                                                        
                                                                                        
                                                                                        15
                                                                                        
                                                                                        6
                                                                                        
                                                                                        15Total consolidated
                                                                                        
                                                                                        29
                                                                                        
                                                                                        372
                                                                                        
                                                                                        -
                                                                                        
                                                                                        91
                                                                                        
                                                                                        
                                                                                        113
                                                                                        
                                                                                        1,456
                                                                                        
                                                                                        356Equity investee
                                                                                        
                                                                                        2
                                                                                        
                                                                                        -
                                                                                        
                                                                                        6
                                                                                        
                                                                                        8Total
                                                                                        
                                                                                        31
                                                                                        
                                                                                        372
                                                                                        
                                                                                        6
                                                                                        
                                                                                        99
                                                                                        
                                                                                        
                                                                                        113
                                                                                        
                                                                                        1,456
                                                                                        
                                                                                        356Equity investee share of methanol sales
      (MMgal)
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        119









9
 Table of Contents






Wells drilled in 2008 and productive wells at
December 31, 2008 in our international operating areas were as
follows:


Year EndedDecember 31, 2008
                                
                                
                                December 31, 2008Gross Wells
                                
                                
                                GrossDrilled/Participated in
                                
                                
                                Productive WellsInternationalWest Africa
                                
                                
                                3
                                
                                
                                
                                23North Sea
                                
                                
                                4
                                
                                
                                
                                26Israel
                                
                                
                                -
                                
                                
                                
                                6Ecuador
                                
                                
                                -
                                
                                
                                
                                5China
                                
                                
                                -
                                
                                
                                
                                15Suriname
                                
                                
                                1
                                
                                
                                
                                -Total International
                                
                                
                                8
                                
                                
                                
                                75








West
Africa (Equatorial Guinea and Cameroon)—Operations in West Africa
accounted for 54% of 2008 consolidated international sales volumes and 67% of
international proved reserves at December 31, 2008. At December 31,
2008, we held approximately 15,000 net developed acres and 250,000 net
undeveloped acres in Equatorial Guinea and 563,000 net undeveloped acres in
Cameroon.  In 2008, approximately 190,000 gross undeveloped acres were
relinquished in Equatorial Guinea pursuant to contract terms.




We began investing in West Africa in the early
1990’s. Activities center around our 34% non-operated working interest in the
Alba field, offshore Equatorial Guinea, which is one of our most significant
assets. Operations include the Alba field and related production and condensate
facilities, a methanol plant, and an onshore LPG processing plant (both located
on Bioko Island) where additional condensate is produced. The methanol plant is
capable of producing up to 3,000 MTpd gross.




We sell our share of natural gas production from the
Alba field to the LPG plant, the methanol plant and an unaffiliated LNG plant.
The LPG plant is owned by Alba Plant LLC (Alba Plant) in which we have a 28%
interest accounted for by the equity method. The methanol plant is owned by
Atlantic Methanol Production Company, LLC (AMPCO) in which we have a 45%
interest accounted for by the equity method. The methanol plant purchases
natural gas from the Alba field under a contract that runs through 2026. AMPCO
subsequently markets the produced methanol to customers in the US and Europe. We
sell our share of condensate produced in the Alba field and from the LPG plant
under short-term contracts at market-based prices.




West Africa Exploration Activities—We have
conducted a successful exploration and appraisal drilling program in West
Africa, which centers around Blocks O and I, offshore Equatorial Guinea, and the
PH-77 license, offshore Cameroon. We are the technical operator on Block O (45%
working interest) and Block I (40% working interest) and the operator on the
PH-77 license (50% working interest).









10
 Table of Contents




Our first discovery occurred in October 2005,
when we announced successful test results from the O-1 (Belinda) exploration
well offshore Equatorial Guinea. In 2007, we drilled seven wells, resulting in
three new discoveries and three successful appraisal wells. In 2008, we
announced successful results from the I-5 Benita oil appraisal well on Block I;
theFelicita, a
condensate and natural gas discovery on Block O; and the Diega, a gas condensate
and oil discovery on Block I.  In February 2009, we announced a
successful oil discovery on Block O at the Carmen prospect.
  We are in the process of assessing our options to
commercialize our discoveries in the region. Engineering studies are underway,
and we expect to utilize a phased-in approach for development.  A
development plan for the Benita discovery on Block I was submitted to the
Equatorial Guinean government in December 2008, and we await their approval.
We anticipate sanction of the Benita project to occur in 2009, with first oil
production planned for 2012. The Benita development is expected to include
subsea tie-backs to a floating production, storage and offloading vessel (FPSO).
We are also evaluating options for natural gas production and
marketing.


North Sea—Operations in the
North Sea (the Netherlands and the UK) comprise another core international
asset. We have been conducting business in the North Sea since 1996 and
currently have working interests in 18 licenses with working interests ranging
from 7% to 40%. We are the operator of one block.  The North Sea
accounted for 13% of 2008 consolidated international sales volumes and 8% of
international proved reserves at December 31, 2008. During 2008, we
relinquished approximately 159,000 gross undeveloped acres. At
December 31, 2008, we held approximately 6,000 net developed acres and
54,000 net undeveloped acres.




We produce from the Dumbarton, MacCulloch, Hanze,
Cook and other fields. Most of our production is from the non-operated Dumbarton
Phase I development (30% working interest) in blocks 15/20a and 15/20b in the UK
sector of the North Sea. The Dumbarton development, which was completed and
began production in 2007, includes a subsea tie-back to the GP III, an FPSO in
which we own a 30% interest.




In 2008, we continued the development of Dumbarton
(30% working interest) with Phase 2. Phase 2 involves drilling up to six new
horizontal production wells and up to two water disposal wells. The first two
wells in Phase 2 were brought online in 2008, increasing the total field
production to approximately 40,000 Bopd, gross. With the additional two wells,
Dumbarton now has seven horizontal producers and two water injection wells.
Phase 2 drilling will continue into 2009.  As part of the project we
plan to participate in the development of the Lochranza discovery in block
15/20a (30% working interest) which includes drilling two horizontal production
wells which will be tied back to the Dumbarton subsea
facilities.




During 2008, we also participated in drilling the
Morgan exploratory well, in the UK Central North Sea (40% working interest). The
well did not contain hydrocarbons in commercial quantities.




Israel—Operations in Israel
accounted for 25% of 2008 consolidated international sales volumes and 13% of
international proved reserves at December 31, 2008. At
December 31, 2008, we held approximately 29,000 net developed acres
and 807,000 net undeveloped acres located between 10 and 60 miles offshore
Israel in water depths ranging from 700 feet to 5,500 feet. Our leasehold
position in Israel includes one preliminary permit, two leases and three
licenses.  We are the operator of our Israel
properties.




We have been operating in the Mediterranean Sea,
offshore Israel, since 1998, and the Mari-B field (47% working interest) is one
of our core international assets. The Mari-B field is the first offshore natural
gas production facility in Israel and has peak field deliverability of
approximately 600 MMcfpd from six wells. In 2008, we commissioned a permanent
onshore receiving terminal in Ashdod for distribution of natural gas from the
Mari-B field to purchasers.




Natural gas sales began in 2004 and have increased
steadily as Israel’s natural gas infrastructure has developed. Average sales
volumes have risen from 48 MMcfpd in 2004 to 139 MMcfpd in 2008. The Israel
Electric Corporation Limited (IEC) is our largest purchaser. The IEC has
continued to convert power plants to use natural gas as fuel and, in 2008, the
IEC power plant at Gezer began purchasing natural gas from us.  We
also sell to the Bazan Oil Refinery, Delek Independent Power Production and
associated desalinization plant, and a paper mill. In 2008, we entered a new
five-year natural gas sales contract with Israel Chemicals Ltd, with sales
expected to begin in 2009. In addition, the IEC power plant at Hagit is expected
to begin purchasing natural gas from us in 2009. Imports of natural gas from
Egypt to Israel began in 2008. However, there is still potential for significant
new sales in the future as the Israeli infrastructure and markets continue to
expand.




We are continuing exploration activities in Israel.
In fourth quarter 2008, we began drilling an exploration well to test the Tamar
prospect (36% working interest), offshore northern Israel, and in January 2009,
we announced a very significant natural gas discovery at Tamar.  In
February 2009, we announced a successful test of production flow rates at
Tamar as well as our plans to drill an appraisal well later in the
year.  We have conducted additional seismic activities in the area and
are conducting a compression study at the Mari-B field.









11
 Table of Contents




Other International—Other
international at December 31, 2008 includes the following:
  Ecuador—Operations in Ecuador
accounted for 4% of 2008 consolidated international sales volumes and 8% of
international proved reserves at December 31, 2008. The concession covers
approximately 12,000 net developed acres and 852,000 net undeveloped
acres.
  We have been operating in Ecuador since 1996. We
utilize natural gas from the Amistad field (offshore Ecuador) to generate
electricity through a 100%-owned natural gas-fired power plant, located near the
city of Machala. The Machala power plant, which began operating in 2002, is a
single cycle generator with a capacity of 130 MW from twin turbines. It is the
only natural gas-fired commercial power generator in Ecuador and currently one
of the lowest cost
producers of thermal power in the country. The Machala power plant connects to
the Amistad field via a 40-mile pipeline. In 2008, power generation totaled 749
GW hours.


China—We have been engaged in
exploration and development activities in China since 1996 with production
beginning in 2003. We are operator for the joint operating group of the Cheng
Dao Xi field (57% working interest), which is located in the shallow water of
the southern Bohai Bay. In 2008, activities consisted primarily of workover
operations, including installations of electric submersible pumps. China
accounted for 4% of 2008 consolidated international sales volumes and 4% of
international proved reserves at December 31, 2008. At December 31,
2008, we held approximately 4,000 net developed acres and no undeveloped acres.
The Supplemental Development Plan, which is designed to further develop the
Cheng Dao Xi field through additional drilling and facilities construction, has
received all necessary governmental approvals.




Suriname—Suriname, a country
located on the northern coast of South America, represents a new exploration
area for us. We have entered into participation agreements on non-operated Block
30 (45% working interest) and on Block 32 (100% working interest), which
combined cover approximately 6.4 million net acres offshore. During 2008,
we participated in the drilling of an exploratory well on the West Tapir
prospect on Block 30. The well, which did not contain hydrocarbons in commercial
quantities, was the first well to be drilled offshore Suriname in over 20 years
and the drilling results will allow us to evaluate and improve our understanding
of the basin. We will incorporate the findings into our geological and
geophysical interpretations, which will influence our risk assessment of the
remaining prospects.
















































































































12
 Table of Contents





Sales Volumes,
Price and Cost Data—Sales
volumes, price and cost data are as follows:




AverageSales Volumes
                                              
                                              Average Sales Price
                                              
                                              Production CostCrude Oil
                                              
                                              Natural Gas
                                              
                                              NGLs
                                              
                                              Crude Oil
                                              
                                              Natural Gas
                                              
                                              NGLsMBopd (1)
                                              
                                              MMcfpd
                                              
                                              MBpd
                                              
                                              Per Bbl (2)
                                              
                                              Per Mcf (2)
                                              
                                              Per Bbl
                                              
                                              Per BOE(3)Year Ended December 31,
2008United States
                                              
                                              
                                              40
                                              
                                              
                                              395
                                              
                                              
                                              9
                                              
                                              $
                                              75.53
                                              
                                              $
                                              8.12
                                              
                                              $
                                              50.15
                                              
                                              $
                                              10.43West Africa (4)
      (5)
                                              
                                              
                                              15
                                              
                                              
                                              206
                                              
                                              
                                              -
                                              
                                              
                                              88.95
                                              
                                              
                                              0.27
                                              
                                              
                                              -
                                              
                                              
                                              2.17North Sea
                                              
                                              
                                              10
                                              
                                              
                                              5
                                              
                                              
                                              -
                                              
                                              
                                              100.56
                                              
                                              
                                              10.54
                                              
                                              
                                              -
                                              
                                              
                                              14.30Israel
                                              
                                              
                                              -
                                              
                                              
                                              139
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              3.10
                                              
                                              
                                              -
                                              
                                              
                                              1.07Ecuador
                                              
                                              
                                              -
                                              
                                              
                                              22
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -Other International (6)
                                              
                                              
                                              4
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              82.66
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              15.94Total Consolidated
    Operations
                                              
                                              
                                              69
                                              
                                              
                                              767
                                              
                                              
                                              9
                                              
                                              
                                              82.60
                                              
                                              
                                              5.04
                                              
                                              
                                              50.15
                                              
                                              $
                                              7.84Equity Investee (7)
                                              
                                              
                                              2
                                              
                                              
                                              -
                                              
                                              
                                              6
                                              
                                              
                                              96.77
                                              
                                              
                                              -
                                              
                                              
                                              58.81Total
                                              
                                              
                                              71
                                              
                                              
                                              767
                                              
                                              
                                              15
                                              
                                              $
                                              82.96
                                              
                                              $
                                              5.04
                                              
                                              $
                                              53.45Year Ended December 31,
2007United States
                                              
                                              
                                              42
                                              
                                              
                                              412
                                              
                                              
                                              -
                                              
                                              $
                                              53.22
                                              
                                              $
                                              7.51
                                              
                                              
                                              -
                                              
                                              $
                                              8.49West Africa (4)
      (5)
                                              
                                              
                                              15
                                              
                                              
                                              132
                                              
                                              
                                              -
                                              
                                              
                                              71.27
                                              
                                              
                                              0.29
                                              
                                              
                                              -
                                              
                                              
                                              2.89North Sea
                                              
                                              
                                              13
                                              
                                              
                                              6
                                              
                                              
                                              -
                                              
                                              
                                              76.47
                                              
                                              
                                              6.54
                                              
                                              
                                              -
                                              
                                              
                                              9.81Israel
                                              
                                              
                                              -
                                              
                                              
                                              111
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              2.79
                                              
                                              
                                              -
                                              
                                              
                                              1.14Ecuador
                                              
                                              
                                              -
                                              
                                              
                                              26
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -Other International (6)
                                              
                                              
                                              7
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              53.69
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              12.06Total Consolidated
    Operations
                                              
                                              
                                              77
                                              
                                              
                                              687
                                              
                                              
                                              -
                                              
                                              
                                              60.61
                                              
                                              
                                              5.26
                                              
                                              
                                              -
                                              
                                              $
                                              6.99Equity Investee (7)
                                              
                                              
                                              2
                                              
                                              
                                              -
                                              
                                              
                                              6
                                              
                                              
                                              74.87
                                              
                                              
                                              -
                                              
                                              
                                              48.87Total
                                              
                                              
                                              79
                                              
                                              
                                              687
                                              
                                              
                                              6
                                              
                                              $
                                              60.94
                                              
                                              $
                                              5.26
                                              
                                              $
                                              48.87Year Ended December 31,
2006United States
                                              
                                              
                                              46
                                              
                                              
                                              452
                                              
                                              
                                              -
                                              
                                              $
                                              50.68
                                              
                                              $
                                              6.61
                                              
                                              
                                              -
                                              
                                              $
                                              8.12West Africa (4)
      (5)
                                              
                                              
                                              18
                                              
                                              
                                              45
                                              
                                              
                                              -
                                              
                                              
                                              62.51
                                              
                                              
                                              0.37
                                              
                                              
                                              -
                                              
                                              
                                              2.86North Sea
                                              
                                              
                                              4
                                              
                                              
                                              8
                                              
                                              
                                              -
                                              
                                              
                                              67.43
                                              
                                              
                                              8.00
                                              
                                              
                                              -
                                              
                                              
                                              10.08Israel
                                              
                                              
                                              -
                                              
                                              
                                              93
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              2.72
                                              
                                              
                                              -
                                              
                                              
                                              1.60Ecuador
                                              
                                              
                                              -
                                              
                                              
                                              25
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              -Other International (6)
                                              
                                              
                                              7
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              52.05
                                              
                                              
                                              -
                                              
                                              
                                              -
                                              
                                              
                                              9.74Total Consolidated
    Operations
                                              
                                              
                                              75
                                              
                                              
                                              623
                                              
                                              
                                              -
                                              
                                              
                                              54.47
                                              
                                              
                                              5.55
                                              
                                              
                                              -
                                              
                                              $
                                              6.97Equity Investee (7)
                                              
                                              
                                              2
                                              
                                              
                                              -
                                              
                                              
                                              6
                                              
                                              
                                              66.60
                                              
                                              
                                              -
                                              
                                              
                                              40.10Total
                                              
                                              
                                              77
                                              
                                              
                                              623
                                              
                                              
                                              6
                                              
                                              $
                                              54.75
                                              
                                              $
                                              5.55
                                              
                                              $
                                              40.10




(1)
            In 2008, volumes include the effect of crude
      oil sales in excess of volumes produced of 1 MBopd in West Africa. During
      2007, crude oil sales volumes equaled volumes produced. In 2006, volumes
      include the effect of crude oil sales in excess of volumes produced of 1
      MBopd in West Africa and crude oil sales less than volumes produced of 1
      MBopd in other international.


(2)
              Average crude oil sales prices for the US
      reflect reductions of $22.06 per Bbl (2008), $13.68 per Bbl (2007), and
      $11.41 per Bbl (2006) from hedging activities. Average crude oil sales
      prices for West Africa reflect reductions of $7.59 per Bbl (2008) and
      $2.19 per Bbl (2007) from hedging activities. We did not hedge West Africa
      crude oil sales in 2006. Average natural gas sales prices in the US
      reflect an increase of $0.23 per Mcf (2008), an increase of $1.12 per Mcf
      (2007), and a reduction of $0.25 per Mcf (2006) from hedging
      activities.


(3)
              Average production costs include oil and gas
      operating costs, workover and repair expense, production and ad valorem
      taxes, and transportation
expense.


(4)
            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 plant. Sales to these plants are based on a BTU
      equivalent and then converted to a dry gas equivalent volume. The methanol
      and LPG plants are owned by affiliated entities accounted for under the
      equity method of accounting. The volumes produced by the LPG plant are
      included in the crude oil information. The price on an Mcf basis has been
      adjusted to reflect the Btu content of gas
  sales.





13
 Table of Contents





(5)
            Equatorial Guinea natural gas volumes include
      sales to the LNG plant of 163 MMcfpd for 2008 and 78 MMcfpd for
      2007.  There were no natural gas sales to the LNG plant before
      2007.


(6)
            Other International crude oil volumes include
      China and Argentina (through February 2008). Other International natural
      gas volumes include Argentina (through February
  2008).


(7)
            Volumes represent sales of condensate and LPG
      from the LPG plant in Equatorial
Guinea.




Revenues from sales of crude oil and natural gas have
accounted for 90% or more of consolidated revenues for each of the last three
fiscal years.




At December 31, 2008, our operated properties
accounted for approximately 61% of our total production. Being the operator of a
property improves our ability to directly influence production levels and the
timing of projects, while also enhancing our control over operating expenses and
capital expenditures.




Productive
Wells—The number
of productive crude oil and natural gas wells in which we held an interest as of
December 31, 2008 was as follows:




Crude Oil Wells
                                                
                                                Natural Gas Wells
                                                
                                                TotalGross
                                                
                                                Net
                                                
                                                Gross
                                                
                                                Net
                                                
                                                Gross
                                                
                                                NetUnited StatesNorthern Region
                                                
                                                
                                                7,567
                                                
                                                
                                                5,853.8
                                                
                                                
                                                4,835
                                                
                                                
                                                3,384.6
                                                
                                                
                                                12,402
                                                
                                                
                                                9,238.4Southern Region
                                                
                                                
                                                833
                                                
                                                
                                                796.0
                                                
                                                
                                                252
                                                
                                                
                                                105.7
                                                
                                                
                                                1,085
                                                
                                                
                                                901.7West Africa
                                                
                                                
                                                3
                                                
                                                
                                                1.2
                                                
                                                
                                                20
                                                
                                                
                                                7.7
                                                
                                                
                                                23
                                                
                                                
                                                8.9North Sea
                                                
                                                
                                                17
                                                
                                                
                                                3.5
                                                
                                                
                                                9
                                                
                                                
                                                1.2
                                                
                                                
                                                26
                                                
                                                
                                                4.7Israel
                                                
                                                
                                                -
                                                
                                                
                                                -
                                                
                                                
                                                6
                                                
                                                
                                                2.8
                                                
                                                
                                                6
                                                
                                                
                                                2.8Ecuador
                                                
                                                
                                                -
                                                
                                                
                                                -
                                                
                                                
                                                5
                                                
                                                
                                                5.0
                                                
                                                
                                                5
                                                
                                                
                                                5.0China
                                                
                                                
                                                14
                                                
                                                
                                                8.0
                                                
                                                
                                                1
                                                
                                                
                                                0.6
                                                
                                                
                                                15
                                                
                                                
                                                8.6Total
                                                
                                                
                                                8,434
                                                
                                                
                                                6,662.5
                                                
                                                
                                                5,128
                                                
                                                
                                                3,507.6
                                                
                                                
                                                13,562
                                                
                                                
                                                10,170.1Multiple Completions
                                                
                                                
                                                -
                                                
                                                
                                                -
                                                
                                                
                                                16
                                                
                                                
                                                3.3
                                                
                                                
                                                16
                                                
                                                
                                                3.3




Productive wells are producing wells and wells
capable of production. A gross well is a well in which a working interest is
owned. The number of gross wells is the total number of wells in which a working
interest is owned. A net well is deemed to exist when the sum of fractional
ownership working interests in gross wells equals one. The number of net wells
is the sum of the fractional working interests owned in gross wells expressed as
whole numbers and fractions thereof. Wells with multiple completions are counted
as one well in the table above.




Developed and
Undeveloped Acreage—Developed and undeveloped
acreage (including both leases and concessions) held at
December 31, 2008 was as follows:




Developed Acreage
                                    
                                    Undeveloped AcreageGross
                                    
                                    Net
                                    
                                    Gross
                                    
                                    NetUnited States
                                    
                                    (in thousands)Onshore
                                    
                                    
                                    1,352
                                    
                                    
                                    893
                                    
                                    
                                    1,361
                                    
                                    
                                    1,014Offshore
                                    
                                    
                                    164
                                    
                                    
                                    103
                                    
                                    
                                    556
                                    
                                    
                                    300Total United States
                                    
                                    
                                    1,516
                                    
                                    
                                    996
                                    
                                    
                                    1,917
                                    
                                    
                                    1,314InternationalEquatorial Guinea
                                    
                                    
                                    45
                                    
                                    
                                    15
                                    
                                    
                                    618
                                    
                                    
                                    250Cameroon
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    1,125
                                    
                                    
                                    563North Sea (1)
                                    
                                    
                                    48
                                    
                                    
                                    6
                                    
                                    
                                    266
                                    
                                    
                                    54Israel
                                    
                                    
                                    62
                                    
                                    
                                    29
                                    
                                    
                                    1,823
                                    
                                    
                                    807Ecuador
                                    
                                    
                                    12
                                    
                                    
                                    12
                                    
                                    
                                    852
                                    
                                    
                                    852China
                                    
                                    
                                    7
                                    
                                    
                                    4
                                    
                                    
                                    -
                                    
                                    
                                    -Suriname
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    7,740
                                    
                                    
                                    6,363Other International (2)
                                    
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    
                                    1,830
                                    
                                    
                                    1,142Total International
                                    
                                    
                                    174
                                    
                                    
                                    66
                                    
                                    
                                    14,254
                                    
                                    
                                    10,031Total Worldwide(3)
                                    
                                    
                                    1,690
                                    
                                    
                                    1,062
                                    
                                    
                                    16,171
                                    
                                    
                                    11,345







14
 Table of Contents





(1)
            The North Sea includes acreage in the UK and
      the Netherlands. In 2008, we sold our interest in Norway acreage
      consisting of approximately 411,000 gross (127,000 net) undeveloped
      acres.


(2)
            Other International includes India and
      Cyprus.


(3)
            Approximately 258,000 gross acres (176,000 net
      acres) will expire in 2009, 662,000 gross acres (385,000 net acres) will
      expire in 2010, and 1,370,000 gross acres (1,285,000 net acres) will
      expire in 2011 if production is not established or we take no other action
      to extend the terms.




Developed acreage is comprised of leased acres that
are within an area spaced by or assignable to a productive
well.


Undeveloped acreage is comprised of leased acres with
defined remaining terms and not within an area spaced by or assignable to a
productive well.




A gross acre is any leased acre in which a working
interest is owned. A net acre is comprised of the total of the owned working
interest(s) in a gross acre expressed in a fractional format.




Drilling
Activity—The
results of crude oil and natural gas wells drilled and completed for each of the
last three years were as follows:




Net Exploratory Wells
                                            
                                            Net Development WellsProductive
                                            
                                            Dry
                                            
                                            Total
                                            
                                            Productive (1)
                                            
                                            Dry
                                            
                                            TotalYear Ended December 31,
2008United StatesNorthern Region
                                            
                                            
                                            1.0
                                            
                                            
                                            -
                                            
                                            
                                            1.0
                                            
                                            
                                            837.2
                                            
                                            
                                            42.0
                                            
                                            
                                            879.2Southern Region
                                            
                                            
                                            14.6
                                            
                                            
                                            2.0
                                            
                                            
                                            16.6
                                            
                                            
                                            30.9
                                            
                                            
                                            2.0
                                            
                                            
                                            32.9West Africa
                                            
                                            
                                            1.3
                                            
                                            
                                            
                                            
                                            
                                            1.3
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -North Sea
                                            
                                            
                                            -
                                            
                                            
                                            0.4
                                            
                                            
                                            0.4
                                            
                                            
                                            0.6
                                            
                                            
                                            0.3
                                            
                                            
                                            0.9Israel
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -Suriname
                                            
                                            
                                            -
                                            
                                            
                                            0.5
                                            
                                            
                                            0.5
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -Total
                                            
                                            
                                            16.9
                                            
                                            
                                            2.9
                                            
                                            
                                            19.8
                                            
                                            
                                            868.7
                                            
                                            
                                            44.3
                                            
                                            
                                            913.0Year Ended December 31,
2007United StatesNorthern Region
                                            
                                            
                                            13.9
                                            
                                            
                                            1.9
                                            
                                            
                                            15.8
                                            
                                            
                                            738.0
                                            
                                            
                                            24.5
                                            
                                            
                                            762.5Southern Region
                                            
                                            
                                            0.3
                                            
                                            
                                            2.6
                                            
                                            
                                            2.9
                                            
                                            
                                            19.6
                                            
                                            
                                            3.1
                                            
                                            
                                            22.7West Africa
                                            
                                            
                                            2.6
                                            
                                            
                                            0.5
                                            
                                            
                                            3.1
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -North Sea
                                            
                                            
                                            0.5
                                            
                                            
                                            -
                                            
                                            
                                            0.5
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -Israel
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            0.4
                                            
                                            
                                            -
                                            
                                            
                                            0.4Argentina(2)
                                            
                                            
                                            -
                                            
                                            
                                            0.1
                                            
                                            
                                            0.1
                                            
                                            
                                            6.7
                                            
                                            
                                            -
                                            
                                            
                                            6.7Total
                                            
                                            
                                            17.3
                                            
                                            
                                            5.1
                                            
                                            
                                            22.4
                                            
                                            
                                            764.7
                                            
                                            
                                            27.6
                                            
                                            
                                            792.3Year Ended December 31,
2006United StatesNorthern Region
                                            
                                            
                                            5.5
                                            
                                            
                                            4.6
                                            
                                            
                                            10.1
                                            
                                            
                                            521.4
                                            
                                            
                                            4.6
                                            
                                            
                                            526.0Southern Region
                                            
                                            
                                            0.8
                                            
                                            
                                            4.4
                                            
                                            
                                            5.2
                                            
                                            
                                            145.2
                                            
                                            
                                            0.9
                                            
                                            
                                            146.1West Africa
                                            
                                            
                                            -
                                            
                                            
                                            0.4
                                            
                                            
                                            0.4
                                            
                                            
                                            1.8
                                            
                                            
                                            -
                                            
                                            
                                            1.8North Sea
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            1.1
                                            
                                            
                                            -
                                            
                                            
                                            1.1Argentina(2)
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            -
                                            
                                            
                                            7.6
                                            
                                            
                                            -
                                            
                                            
                                            7.6Total
                                            
                                            
                                            6.3
                                            
                                            
                                            9.4
                                            
                                            
                                            15.7
                                            
                                            
                                            677.1
                                            
                                            
                                            5.5
                                            
                                            
                                            682.6




(1)
            Excludes wells drilled but not yet
      completed.


(2)     Our
assets in Argentina were sold February 2008.




A productive well is an exploratory or a development
well that is not a dry well. A dry well (hole) is an exploratory or a
development well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas
well.




An exploratory well is a well drilled to find and
produce crude oil or natural gas in an unproved area, to find a new reservoir in
a field previously found to be productive of crude oil or natural gas in another
reservoir, or to extend a known reservoir. A development well, for purposes of
the table above and as defined in the rules and regulations of the SEC, is a
well drilled within the proved area of a crude oil or natural gas reservoir to
the depth of a stratigraphic horizon known to be productive. The number of wells
drilled refers to the number of wells completed at any time during the
respective year, regardless of when drilling was initiated. Completion refers to
the installation of permanent
equipment for the production of crude oil or natural gas, or in the case of a
dry hole, to the reporting of abandonment to the appropriate
agency.







15
 Table of Contents





In addition to the wells drilled and completed in
2008 included in the table above, at December 31, 2008, we were in the
process of drilling or completing 269 gross (215.4 net) wells in the Northern
region of our US operations, two gross (1.2 net) onshore wells in the Southern
region of our US operations, one gross (0.5 net) well in Equatorial Guinea, and
one gross (0.4 net) well in Israel.




Marketing Activities—We seek opportunities to
enhance the value of our US natural gas production by marketing directly to
end-users and aggregating natural gas to be sold to natural gas marketers and
pipelines. We also engage in the purchase and sale of third-party crude oil and
natural gas production. Such third-party production may be purchased from
non-operators who own working interests in our wells or from other producers’
properties in which we own no interest. We sell our natural gas production at
both market-based and fixed prices. In 2008, approximately 15% of natural gas
sales were made pursuant to long-term contracts under either fixed or
market-based prices.




Crude oil, condensate and NGLs produced in the US and
foreign locations are generally sold under short-term contracts at market-based
prices adjusted for location and quality. In China, we sell crude oil into the
local market under a long-term contract at market-based prices. In Israel, we
sell natural gas under long-term contracts at negotiated prices. Crude oil and
condensate are distributed through pipelines and by trucks or tankers to
gatherers, transportation companies and refineries.




Significant Purchaser—Suncor Energy Marketing
(Suncor) was the largest single non-affiliated purchaser of 2008 production and
purchased our share of crude oil from the Wattenberg field in Colorado. Sales to
Suncor accounted for 22% of 2008 crude oil sales, or 13% of 2008 total oil and
gas sales. No other single non-affiliated purchaser accounted for 10% or more of
crude oil and natural gas sales in 2008. We believe that the loss of any one
purchaser would not have a material effect on our financial position or results
of operations since there are numerous potential purchasers of our
production.




Hedging Activities—Commodity prices were
volatile in 2008 and prices for crude oil and natural gas are affected by a
variety of factors beyond our control. We have used derivative instruments, and
expect to do so in the future, to achieve a more predictable cash flow by
reducing our exposure to commodity price fluctuations. For additional
information, see Item 1A. Risk Factors—Hedging transactions may limit our
potential gains and Hedging transactions, receivables
and cash investments expose us to counterparty credit risk, Item 7A.
Quantitative and Qualitative Disclosures About Market Risk, and Item 8.
Financial Statements and Supplementary Data—Note
6—Derivative Instruments and Hedging Activities.




Regulations




Government Regulation—Exploration for, and
production and marketing of, crude oil and natural gas are extensively regulated
at the international, federal, state and local levels. Crude oil and natural gas
development and production activities are subject to various laws and
regulations (and orders of regulatory bodies pursuant thereto) governing a wide
variety of matters, including, among others, allowable rates of production,
transportation, prevention of waste and pollution and protection of the
environment. Laws affecting the crude oil and natural gas industry are under
constant review for amendment or expansion and frequently increase the
regulatory burden on companies. Our ability to economically produce and sell
crude oil and natural gas is affected by a number of legal and regulatory
factors, including federal, state and local laws and regulations in the US and
laws and regulations of foreign nations. Many of these governmental bodies have
issued rules and regulations that are often difficult and costly to comply with,
and that carry substantial penalties for failure to comply. These laws,
regulations and orders may restrict the rate of crude oil and natural gas
production below the rate that would otherwise exist in the absence of such
laws, regulations and orders. The regulatory burden on the crude oil and natural
gas industry increases our costs of doing business and consequently affects our
profitability.




Examples of US federal agencies with regulatory
authority over our exploration for, and production and sale of, crude oil and
natural gas include:




·
            the Bureau of Land Management and the Minerals
      Management Service, which under laws such as the Federal Land Policy and
      Management Act, Endangered Species Act, National Environmental Policy Act
      and Outer Continental Shelf Lands Act have certain authority over our
      operations on federal lands, particularly in the Rocky Mountains and
      deepwater Gulf of Mexico;


·
            the Environmental Protection Agency and the
      Occupational Safety and Health Administration, which under laws such as
      the Comprehensive Environmental Response, Compensation and Liability Act,
      as amended, the Resource Conservation and Recovery Act, as amended, the
      Oil Pollution Act of 1990, the Clean Air Act,
  the





16
 Table of Contents





Clean Water Act and the Occupational Safety and
      Health Act have certain authority over environmental, health and safety
      matters affecting our operations as discussed
  below;


·
            the Federal Energy Regulatory Commission, which
      under laws such as the Energy Policy Act of 2005 has certain authority
      over the marketing and transportation of crude oil and natural gas we
      produce onshore and from the deepwater Gulf of
  Mexico;


·
            the Department of Transportation, which has
      certain authority over the transportation of products, equipment and
      personnel necessary to our US onshore and deepwater Gulf of Mexico
      operations; and


·
            other federal agencies with certain authority
      over our business, such as the Internal Revenue Service and the SEC, as
      well as the NYSE upon which shares of our common stock are
      traded.




Most of the states within which we operate have
separate agencies with authority to regulate related operational and
environmental matters.  Examples of such regulation on the operational
side include the Greater Wattenberg Area Special Well Location Rule 318A, which
was adopted by the Colorado Oil and Gas Conservation Commission to address oil
and gas well drilling, production, commingling and spacing in the Wattenberg
field, and, more recently, the same commission’s December 10, 2008 approval of a
comprehensive update to statewide rules governing oil and gas operations in
Colorado. These rules will be reviewed by the Colorado legislature in its 2009
session and will become effective in the second quarter of 2009, addressing
areas such as public drinking water protection, monitoring and disclosure of
chemicals used in drilling operations, erosion management and environment and
wildlife protection. On the environmental side, Colorado Regulation Seven and
requirements for storm water management plans were adopted by the Colorado
Department of Environmental Quality, under delegation from the US Environmental
Protection Agency, to regulate air emissions, water protection and waste
handling and disposal relating to our oil and gas exploration and
production.




Some of the counties and municipalities within which
we operate have adopted regulations or ordinances that impose additional
restrictions on our oil and gas exploration and production.  An
example is Garfield County, Colorado, which provides local land and road use
restrictions affecting our Piceance basin operations and requires us to post
bonds to secure any restoration obligations.




Our international operations are subject to legal and
regulatory oversight by energy-related ministries of our host countries, each
having certain relevant energy or hydrocarbons laws.  Examples of
these ministries include the Ecuador Ministry of Petroleum and Mines, the
Equatorial Guinea Ministry of Mines, Industry and Energy and the UK Department
of Energy and Climate Change.  An example of a law affecting our
international operations is the UK Finance Act of 2006, which increased the
income tax rate on our UK operations effective January 1, 2006.




Environmental Matters—As a developer, owner and
operator of crude oil and natural gas properties, we are subject to various
federal, state, local and foreign country laws and regulations relating to the
discharge of materials into, and the protection of, the environment. We must
take into account the cost of complying with environmental regulations in
planning, designing, drilling, operating and abandoning wells. In most
instances, the regulatory requirements relate to the handling and disposal of
drilling and production waste products, water and air pollution control
procedures, and the remediation of petroleum-product contamination. Under state
and federal laws, we could be required to remove or remediate previously
disposed wastes, including wastes disposed of or released by us or prior owners
or operators in accordance with current laws or otherwise, to suspend or cease
operations in contaminated areas, or to perform remedial well plugging
operations or cleanups to prevent future contamination. The US Environmental
Protection Agency and various state agencies have limited the disposal options
for hazardous and non-hazardous wastes. The owner and operator of a site, and
persons that treated, disposed of or arranged for the disposal of hazardous
substances found at a site, may be liable, without regard to fault or the
legality of the original conduct, for the release of a hazardous substance into
the environment. The US Environmental Protection Agency, state environmental
agencies and, in some cases, third parties are authorized to take actions in
response to threats to human health or the environment and to seek to recover
from responsible classes of persons the costs of such action. Furthermore,
certain wastes generated by our crude oil and natural gas operations that are
currently exempt from treatment as hazardous wastes may in the future be
designated as hazardous wastes and, therefore, be subject to considerably more
rigorous and costly operating and disposal requirements. See Item 1A. Risk
Factors—We are subject to
various governmental regulations and environmental risks that may cause us to
incur substantial costs.




Federal and state occupational safety and health laws
require us to organize information about hazardous materials used, released or
produced in our operations. Certain portions of this information must be
provided to employees, state and local governmental authorities and local
citizens. We are also subject to the requirements and reporting set forth in
federal workplace standards.




Certain state or local laws or regulations and common
law may impose liabilities in addition to, or restrictions more stringent than,
those described herein.







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We have made and will continue to make expenditures
in our efforts to comply with environmental requirements. We do not believe that
we have, to date, expended material amounts in connection with such activities
or that compliance with such requirements will have a material adverse effect on
our capital expenditures, earnings or competitive position. Although such
requirements do have a substantial impact on the crude oil and natural gas
industry, they do not appear to affect us to any greater or lesser extent than
other companies in the industry.




Competition




The crude
oil and natural gas industry is highly competitive. We encounter competition
from other crude oil and natural gas companies in all areas of operations,
including the acquisition of seismic and lease rights on crude oil and natural
gas properties and for the labor and equipment required for exploration and
development of those properties. Our competitors include major integrated crude
oil and natural gas companies and numerous independent crude oil and natural gas
companies, individuals and drilling and income programs. Many of our competitors
are large, well established companies. Such companies may be able to pay more
for seismic and lease rights on crude oil and natural gas properties and
exploratory prospects and to define, evaluate, bid for and purchase a greater
number of properties and prospects than our financial or human resources permit.
Our ability to acquire additional properties and to discover reserves in the
future will be dependent upon our ability to evaluate and select suitable
properties and to consummate transactions in a highly competitive environment.
See Item 1A. Risk Factors—We face significant competition and
many of our competitors have resources in excess of our available
resources.




Geographical Data




We have
operations throughout the world and manage our operations by country.
Information is grouped into five components that are all primarily in the
business of crude oil, natural gas and NGL acquisition, exploration, development
and production: United States, West Africa, North Sea, Israel, and Other
International, Corporate and Marketing. For more information, see Item 8.
Financial Statements and Supplementary Data—Note 15—Segment Information.




Employees




Our total number of employees increased during the
year from 1,398 at December 31, 2007 to 1,571 at December 31, 2008.
The 2008 year-end employee count includes 182 foreign nationals working as
employees in Ecuador, China, Israel, the UK, Equatorial Guinea and
Cameroon.




Offices




Our principal corporate office, including our offices
for US and international operations, is located at 100 Glenborough Drive,
Suite 100, Houston, Texas 77067-3610. We maintain additional offices in
Ardmore, Oklahoma and Denver, Colorado and in China, Cameroon, Ecuador,
Equatorial Guinea, Israel and the UK.




Title to Properties




We believe that our title to the various interests
set forth above is satisfactory and consistent with generally accepted industry
standards, subject to exceptions that are not so material as to detract
substantially from the value of the interests or materially interfere with their
use in our operations. Individual properties may be subject to burdens such as
royalty, overriding royalty and other outstanding interests customary in the
industry. In addition, interests may be subject to obligations or duties under
applicable laws or burdens such as production payments, net profits interest,
liens incident to operating agreements and for current taxes, development
obligations under crude oil and natural gas leases or capital commitments under
production sharing contracts or exploration licenses.




Available Information




Our website address is www.nobleenergyinc.com.
Available on this website under “Investor Relations—Investor Relations Menu—SEC
Filings,” free of charge, are our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5
filed on behalf of directors and executive officers and amendments to those
reports as soon as reasonably practicable after such materials are
electronically filed with or furnished to the SEC.




Also posted on our website, and available in print
upon request made by any stockholder to the Investor Relations Department, are
charters for our Audit Committee; Compensation, Benefits and Stock Option
Committee; Corporate Governance and Nominating Committee; and Environment,
Health and Safety Committee. Copies of the Code of Business Conduct and Ethics,
and the Code of Ethics for Chief Executive and Senior Financial Officers (the
Codes) are posted on our website under the “Corporate Governance” section.
Within the time period required by the SEC and the NYSE, as applicable, we will
post on our website any modifications to the Codes and any waivers applicable to
senior officers as defined in the applicable Code, as required by the
Sarbanes-Oxley Act of 2002.







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In 2008, we submitted the annual certification of our
Chief Executive Officer regarding compliance with the NYSE’s corporate
governance listing standards, pursuant to Section 303A.12(a) of the
NYSE Listed Company Manual.




Item
1A.              
Risk Factors




Crude oil and natural gas prices are volatile and a
substantial reduction in these prices could adversely affect our results and the
price of our common stock.




Our
revenues, operating results and future rate of growth depend highly upon the
prices we receive for our crude oil and natural gas production. Historically,
the markets for crude oil and natural gas have been volatile and are likely to
continue to be volatile in the future. For example, the NYMEX daily settlement
price for the prompt month oil contract in 2008 ranged from a high of $145.29
per barrel to a low of $33.87 per barrel. The NYMEX daily settlement price for
the prompt month natural gas contract in 2008 ranged from a high of $13.58 per
MMBtu to a low of $5.29 per MMBtu. The markets and prices for crude oil and
natural gas depend on factors beyond our control. These factors include demand
for crude oil and natural gas, which fluctuates with changes in market and
economic conditions, and other factors, including:




·
            worldwide
      and domestic supplies of crude oil and natural
  gas;


·
            actions
      taken by foreign oil and gas producing
nations;


·
            political
      conditions and events (including instability or armed conflict) in crude
      oil or natural gas producing
regions;


·
            the
      level of global crude oil and natural gas
  inventories;


·
            the
      price and level of foreign imports;


·
            the
      price and availability of alternative
fuels;


·
            the
      availability of pipeline capacity and
  infrastructure;


·
            the
      availability of crude oil transportation and refining
      capacity;


·
            weather
      conditions;


·
            electricity
      dispatch;


·
            domestic
      and foreign governmental regulations and taxes;
  and


·
            the
      overall economic environment.




Significant
declines in crude oil and natural gas prices for an extended period may have the
following effects on our business:




·
            limiting
      our financial condition, liquidity, ability to finance planned capital
      expenditures and results of
operations;


·
            reducing
      the amount of crude oil and natural gas that we can produce
      economically;


·
            causing
      us to delay or postpone some of our capital
  projects;


·
            reducing
      our revenues, operating income and cash
flows;


·
            reducing
      the carrying value of our crude oil and natural gas properties;
      or


·
            limiting
      our access to sources of capital, such as equity and long-term
      debt.




Estimates
of crude oil and natural gas reserves are not precise.




There are
numerous uncertainties inherent in estimating crude oil and natural gas reserves
and their value, including many factors that are beyond our control. Reservoir
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner. Our
reserve estimates are based on year-end commodity prices; therefore, reserve
quantities will change when actual prices increase or decrease. The estimates
depend on a number of factors and assumptions that may vary considerably from
actual results, including:




·
            historical
      production from the area compared with production from other
      areas;


·
            the
      assumed effects of regulations by governmental agencies, including the
      impact of the SEC’s new oil and gas company reserve reporting
      requirements;


·
            assumptions
      concerning future crude oil and natural gas
  prices;


·
            future
      operating costs;


·
            severance
      and excise taxes;


·
            development
      costs; and


·
            workover
      and remedial costs.




For these
reasons, estimates of the economically recoverable quantities of crude oil and
natural gas attributable to any particular group of properties, classifications
of those reserves based on risk of recovery and estimates of the future
net cash flows expected from them prepared by different engineers or by the same
engineers but at different times may vary substantially. Accordingly, reserve
estimates may be subject to upward or downward adjustment, and actual
production, revenue and expenditures with respect to our reserves likely will
vary, possibly materially, from estimates.







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Additionally,
because some of our reserve estimates are calculated using volumetric analysis,
those estimates are less reliable than the estimates based on a lengthy
production history. Volumetric analysis involves estimating the volume of a
reservoir based on the net feet of pay of the structure and an estimation of the
area covered by the structure. In addition, realization or recognition of proved
undeveloped reserves will depend on our development schedule and plans. A change
in future development plans for proved undeveloped reserves could cause the
discontinuation of the classification of these reserves as proved.




Failure
to fund continued capital expenditures could adversely affect our
properties.




Ouracquisition,
exploration, and development activities require substantial capital expenditures
especially in the case of our active drilling programs, such as the Wattenberg
field, and our significant exploration and development program in West Africa.
Historically, we have funded our capital expenditures through a combination of
cash flows from operations, our revolving bank credit facility and debt and
equity issuances. Future cash flows are subject to a number of variables, such
as the level of production from existing wells, prices of crude oil and natural
gas, and our success in finding, developing and producing new reserves. If
revenues were to decrease as a result of lower crude oil and natural gas prices
or decreased production, and our access to capital were limited, we would have a
reduced ability to replace our reserves, resulting in a decrease in production
over time. If our cash flows from operations are not sufficient to meet our
obligations and fund our capital budget, we may not be able to access debt,
equity or other methods of financing on an economic basis to meet these
requirements, particularly in the current economic environment. If we are not
able to fund our capital expenditures, interests in some properties might be
reduced or forfeited as a result.




The
current recession could have a material adverse impact on our financial
position, results of operations and cash flows.




The oil
and gas industry is cyclical in nature and tends to reflect general economic
conditions. The US and other world economies are in a recession which could last
well into 2009 and beyond. The recession may lead to significant fluctuations in
demand and pricing for our crude oil and natural gas production, such as the
decline in commodity prices which occurred during 2008 and into 2009. Our
profitability will likely be significantly affected by decreased demand and
lower commodity prices. Due to lower commodity prices, we recorded asset
impairment charges during fourth quarter 2008. If commodity prices continue to
decline, there could be additional impairments of our operating assets or an
impairment of goodwill. Our future access to capital, as well as that of our
partners and contractors, could be limited due to tightening credit markets that
could inhibit development of our property interests.  Some of our
longer term projects require significant investment and may be delayed due to
capital constraints.  In addition, if drilling costs decline
significantly, our long-term drilling rig contracts may require us to pay rates
higher than the current market.  See Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations-Contractual
Obligations for additional information on drilling rig
contracts.




Our
international operations may be adversely affected by economic and political
developments.




We have
significant international crude oil and natural gas operationscompared to companies we
consider to be our peers, with approximately 44% of our consolidated sales
volumes in 2008 coming from international operations. These operations may be
adversely affected by political and economic developments, including the
following:




·
            war,
      terrorist acts, civil disturbances, or territorial disputes, such as may
      occur in regions that encompass our operations, including Ecuador, Israel
      and West Africa;


·
            loss
      of revenue, property and equipment as a result of actions taken by foreign
      crude oil and natural gas producing nations, such as expropriation or
      nationalization of assets and renegotiation, modification or nullification
      of existing contracts, such as may occur pursuant to the hydrocarbons law
      enacted in 2006 by the government of Equatorial
  Guinea;


·
            changes
      in taxation policies, such as the UK Finance Act of 2006, which increased
      the income tax rate on our UK operations effective January 1, 2006, and
      the China Petroleum Special Profits Tax enacted in 2006, which imposed an
      excise tax on crude oil produced in the
country;


·
            laws
      and policies of the US and foreign jurisdictions affecting foreign
      investment, taxation, trade and business
  conduct;


·
            foreign
      exchange restrictions;


·
            international
      monetary fluctuations and changes in the relative value of the US dollar
      as compared with the currencies of other countries in which we conduct
      business, such as the UK; and


·
            other
      hazards arising out of foreign governmental sovereignty over areas in
      which we conduct operations.




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Exploration,
development and production risks and natural disasters could result in liability
exposure or the loss of production and revenues.




Ouroperations are subject
to hazards and risks inherent in the drilling, production and transportation of
crude oil and natural gas, including:




·
            pipeline
      ruptures and spills;


·
            fires;


·
            explosions,
      blowouts and cratering;


·
            formations
      with abnormal pressures;


·
            equipment
      malfunctions;


·
            hurricanes,
      such as Gustav and Ike in 2008, which could affect our operations in areas
      such as the Gulf Coast and deepwater Gulf of Mexico, and cyclones, which
      could affect our operations offshore China;
and


·
            other
      natural disasters.




Any of
these can result in loss of hydrocarbons, environmental pollution and other
damage to our properties or the properties of others.




Exploration
and development drilling may not result in commercially productive
reserves.




We do not
always encounter commercially productive reservoirs through our drilling
operations. The wells we drill or participate in may not be productive and we
may not recover all or any portion of our investment in those wells. The seismic
data and other technologies we use do not allow us to know conclusively prior to
drilling a well that crude oil or natural gas is present or may be produced
economically, and area well data and other data may be limited or less-developed
in some of the international areas in which we explore. The cost of drilling,
completing and operating a well is often uncertain, and cost factors can
adversely affect the economics of a project. Our efforts will be unprofitable if
we drill dry holes or wells that are productive but do not produce enough
reserves to return a profit after drilling, operating and other costs. Further,
our drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including:




·
            unexpected
      drilling conditions;


·
            title
      problems;


·
            pressure
      or other irregularities in
formations;


·
            equipment
      failures or accidents;


·
            adverse
      weather conditions;


·
            compliance
      with environmental and other governmental requirements;
  and


·
            increases
      in the cost of, or shortages or delays in the availability of, drilling
      rigs and equipment.




We
may be unable to make attractive acquisitions or integrate acquired businesses
and/or assets, and any inability to do so may disrupt our business.




One
aspect of our business strategy calls for acquisitions of businesses and assets
that complement or expand our current business, such as our Patina Merger and
our purchase of U.S. Exploration.  This may present greater risks for
us than those faced by peer companies that do not consider acquisitions as a
part of their business strategy. We cannot provide assurance that we will be
able to identify attractive acquisition opportunities. Even if we do identify
attractive opportunities, we cannot provide assurance that we will be able to
complete the acquisition due to capital market constraints or even if such
capital is available on commercially acceptable terms. Additionally, if we
acquire another business, we could have difficulty integrating its operations,
systems, management and other personnel and technology with our own. These
difficulties could disrupt ongoing business, distract management and employees,
increase expenses and adversely affect results of operations. Even if these
difficulties could be overcome, we cannot provide assurance that the anticipated
benefits of any acquisition would be realized.




We
are subject to various governmental regulations and environmental risks that may
cause us to incur substantial costs.




From time
to time, in varying degrees, political developments and federal and state laws
and regulations affect our operations. In particular, price controls, taxes and
other laws relating to the crude oil and natural gas industry, changes in these
laws and changes in administrative regulations have affected and in the future
could affect crude oil and natural gas production, operations and economics. We
cannot predict how agencies or courts will interpret existing laws and
regulations or the effect these adoptions and interpretations may have on our
business or financial condition.




Our
business is subject to laws and regulations promulgated by international,
federal, state and local authorities relating to the exploration for, and the
development, production and marketing of, crude oil and natural gas, as well
as
safety matters. Legal requirements are frequently changed and subject to
interpretation and we are unable to predict the ultimate cost of compliance with
these requirements or their effect on our operations. We may be required to make
significant expenditures to comply with governmental laws and
regulations.







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Our
operations are subject to complex international, federal, state and local
environmental laws and regulations including, for example, in the case of
federal laws, the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, the Resource Conservation and Recovery Act, as
amended, the Oil Pollution Act of 1990, the Clean Air Act, the Clean Water Act
and the Occupational Safety and Health Act. Environmental laws and regulations
change frequently and the implementation of new, or the modification of
existing, laws or regulations could negatively impact our operations. The
discharge of natural gas, crude oil, or other pollutants into the air, soil or
water may give rise to significant liabilities on our part to the government and
third parties and may require us to incur substantial costs of remediation. In
addition, we may incur costs and penalties in addressing regulatory agency
procedures involving instances of possible non-compliance.




Potential
regulations regarding climate change could alter the way we conduct our
business.




As
awareness of climate change issues increases, governments around the world are
beginning to address the matter. This may result in new environmental
regulations that may unfavorably impact us, our suppliers, and our customers.
The cost of meeting these requirements may have an adverse impact on our
financial condition, results of operations and cash flows.




The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
other oil field services could adversely affect our ability to execute our
exploration and development plans on a timely basis and within our
budget.




Our
industry is cyclical and, from time to time, there is a shortage of drilling
rigs, equipment, supplies or qualified personnel. During these periods, the
costs of rigs, equipment and supplies are substantially greater and their
availability may be limited, particularly in areas of high activity and demand
in which we concentrate, such as the Rocky Mountains and deepwater Gulf of
Mexico, and in some international locations that typically have more limited
availability of equipment and personnel, such as Ecuador, Israel and West
Africa. During periods of increasing levels of exploration and production in
response to strong demand for crude oil and natural gas, the demand for oilfield
services and the costs of these services increase. Additionally, these services
may not be available on commercially reasonable terms.




We
may not have enough insurance to cover all of the risks we face, which could
result in significant financial exposure.




Exploration
for and production of crude oil and natural gas can be hazardous, involving
natural disasters and other unfortuitous events such as blowouts, cratering,
fire and explosion and loss of well control which can result in damage to or
destruction of wells or production facilities, injury to persons, loss of life,
or damage to property and the environment. In accordance with industry
practices, we maintain insurance against many, but not all, potential perils
confronting our operations and in coverage amounts and deductible levels that we
believe to be reasonable. Consistent with that profile, our insurance program is
structured to provide us financial protection from unfavorable loss severity
resulting from damages to or the loss of physical assets or loss of human life,
liability claims of third parties, and business interruption (loss of
production) attributed to certain assets. Although we believe the coverages and
amounts of insurance carried are adequate, we may not have sufficient protection
against some of the risks we face, because we chose not to insure certain risks,
insurance is not available on commercially reasonable terms or actual losses
exceed coverage limits. If an event occurs that is not covered by insurance or
not fully protected by insured limits, it could have an adverse impact on our
financial condition, results of operations and cash flows.




We face significantcompetition and many of our
competitors have resources in excess of our available resources.




We
operate in the highly competitive areas of crude oil and natural gas
exploration, exploitation, acquisition and production. We face intense
competition from a large number of independent, technology-driven companies as
well as both major and other independent crude oil and natural gas companies in
a number of areas such as:




·
            seeking
      to acquire desirable producing properties or new leases for future
      exploration;


·
            marketing
      our crude oil and natural gas
production;


·
            seeking
      to acquire the equipment and expertise necessary to operate and develop
      properties; and


·
            attracting
      and retaining employees with certain
skills.




Many of
our competitors have financial and other resources substantially in excess of
those available to us. For example, in the deepwater Gulf of Mexico we compete
with major integrated crude oil and natural gas companies and in international
locations such as the North Sea we compete with major integrated crude oil and
natural gas companies
as well as state-controlled multinational companies. This highly competitive
environment could have an adverse impact on our business.







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Our
level of indebtedness may limit our financial flexibility.




As of
December 31, 2008, we had long-term indebtedness of $2.2 billion
(excluding unamortized discount), with $1.6 billion drawn under our bank
credit facility. Our indebtedness represented 26% of our total book
capitalization at December 31, 2008.




Our level
of indebtedness affects our operations in several ways, including the
following:




·
            a
      portion of our cash flows from operating activities must be used to
      service our indebtedness and is not available for other
      purposes;


·
            we
      may be at a competitive disadvantage as compared to similar companies that
      have less debt;


·
            the
      covenants contained in the agreements governing our outstanding
      indebtedness and future indebtedness may limit our ability to borrow
      additional funds, pay dividends and make certain investments and may also
      affect our flexibility in planning for, and reacting to, changes in the
      economy and in our industry;


·
            additional
      financing in the future for working capital, capital expenditures,
      acquisitions, general corporate or other purposes may have higher costs
      and more restrictive covenants;


·
            additional
      financing in the future is likely to have higher costs due to the negative
      impact of the current credit market crisis which has restricted access to
      the bond markets;


·
            changes
      in the credit ratings of our debt may negatively affect the cost, terms,
      conditions and availability of future financing, and lower ratings will
      increase the interest rate and fees we pay on our revolving credit
      facility; and


·
            we
      may be more vulnerable to general adverse economic and industry
      conditions.




We may
incur additional debt in order to fund our acquisition, exploration and
development activities. A higher level of indebtedness increases the risk that
we may default on our debt obligations. Our ability to meet our debt obligations
and reduce our level of indebtedness depends on future performance. General
economic conditions, crude oil and natural gas prices and financial, business
and other factors will affect our operations and our future performance. Many of
these factors are beyond our control and we may not be able to generate
sufficient cash flow to pay the interest on our debt, and future working
capital, borrowings and equity financing may not be available to pay or
refinance such debt.




Hedging
transactions may limit our potential gains.




In order
to manage our exposure to price risks in the marketing of our crude oil and
natural gas, we enter into crude oil and natural gas price hedging arrangements
with respect to a portion of our expected production. Our hedges, consisting of
a series of contracts, are limited in duration, usually for periods of one to
four years. While intended to reduce the effects of volatile crude oil and
natural gas prices, such transactions may limit our potential gains if crude oil
and natural gas prices rise over the price established by the arrangements. In
trying to manage our exposure to price risk, we may end up hedging too much or
too little, depending upon how our crude oil or natural gas volumes and our
production mix fluctuate in the future. In addition, hedging transactions may
expose us to the risk of financial loss in certain circumstances, including
instances in which our production is less than expected; there is a widening of
price basis differentials between delivery points for our production and the
delivery point assumed in the hedge arrangement; the counterparties to our
future contracts fail to perform under the contracts; or a sudden unexpected
event materially impacts crude oil or natural gas prices. We cannot assure that
our hedging transactions will reduce the risk or minimize the effect of any
decline in crude oil or natural gas prices.




Hedging
transactions, receivables and cash investments expose us to counterparty credit
risk.




Our
hedging transactions also expose us to risk of financial loss if a counterparty
fails to perform under a contract.  To mitigate counterparty credit
risk we conduct our hedging activities with a diverse group of major financial
institutions.  We use master agreements which allow us, in the event
of default, to elect early termination of all contracts with the defaulting
counterparty. If we choose to elect early termination, all asset and liability
positions with the defaulting counterparty would be net settled at the time of
election. We also monitor the creditworthiness of our counterparties on an
ongoing basis. However, the current disruptions occurring in the financial
markets could lead to sudden changes in a counterparty’s liquidity, which could
impair their ability to perform under the terms of the hedging contract. We are
unable to predict sudden changes in a counterparty’s creditworthiness or ability
to perform. Even if we do accurately predict sudden changes, our ability to
negate the risk may be limited depending upon market conditions.







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During
periods of falling commodity prices, such as in late 2008, our hedge receivable
positions increase, which increases our exposure. If the creditworthiness of our
counterparties, which are major financial institutions, deteriorates and results
in their nonperformance, we could incur a significant loss.




In
addition to hedging transactions, we are exposed to risk of financial loss from
trade and other receivables.  We sell our crude oil, natural gas and
NGLs to a variety of purchasers.  Some of these parties are not as
creditworthy as we are and may experience liquidity problems.  Credit
enhancements have been obtained from some parties in the way of parental
guarantees or letters of credit, including from our largest international crude
oil purchaser; however, we do not have all of our trade credit enhanced through
guarantees or credit support.  Nonperformance by a trade creditor
could result in significant financial losses.




We have
over $1.0 billion in cash and cash equivalents, including investments in US
Treasury securities and short-term cash investments with major financial
institutions. In response to the credit market crisis, we have shortened the
duration of our investment maturities and have increased our investments in US
Treasury securities. However, we are unable to predict sudden changes in
solvency of our financial institutions. In the event of a bank failure, we could
incur a significant loss.




Information
technology systems implementation issues could disrupt our internal operations,
increase our costs and adversely affect our financial results or our ability to
report our financial results.




We have
been in the process of implementing a new Enterprise Resource Planning software
system to replace our various legacy systems. Our implementation is based on a
phased approach, the first phase of which was implemented fourth quarter 2007.
We implemented additional phases in 2008 and expect to implement additional
phases in 2009. As a part of this effort, we are transitioning data and changing
certain processes and this may be more expensive, time consuming and resource
intensive than planned. Any disruptions that may occur in the implementation or
operation of this system or any future systems could increase our expenses and
adversely affect our ability to report in an accurate and timely manner our
financial position, results of operations and cash flows and to otherwise
operate our business.




Provisions
in our Certificate of Incorporation and Delaware law may inhibit a takeover of
us.




Under our
Certificate of Incorporation, our Board of Directors is authorized to issue
shares of our common or preferred stock without approval of our stockholders.
Issuance of these shares could make it more difficult to acquire us without the
approval of our Board of Directors as more shares would have to be acquired to
gain control. In addition, Delaware law imposes restrictions on mergers and
other business combinations between us and any holder of 15% or more of our
outstanding common stock. These provisions may deter hostile takeover attempts
that could result in an acquisition of us that would have been financially
beneficial to our stockholders.




Disclosure Regarding Forward-Looking
Statements




This
annual report on Form 10-K and the documents incorporated by reference in
this report contain 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 acquisition, exploration and
      development activities;


·
            our
      outlook on global economic conditions and
  markets;


·
            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 management’s 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 and other sections of this report, which describe factors that could
cause our actual results to differ from those set forth in the forward-looking
statements.







24
 Table of Contents





Item
1B.               
Unresolved Staff Comments




None.




Item
3.                 
Legal Proceedings




Purchaser Bankruptcy–We have an 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 22,
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
December 31, 2008, we had a receivable of approximately $71 million from
SemCrude. We have determined that it is probable that a portion of the
receivable is uncollectible. Therefore, in third quarter 2008, we reduced the
carrying value of the SemCrude receivable and recognized a pre-tax charge of $38
million for the probable loss. We are pursuing various legal remedies to protect
our interests. We believe that ultimate disposition of this matter will not have
a material adverse affect on our financial position, results of operations, or
cash flows.




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 April 27, 2009.  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 legal proceedings, including the foregoing matters, 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 do not believe that the ultimate disposition of such proceedings
will have a material adverse effect on our financial position, results of
operations or cash flows.




Item
4.                 
Submission of Matters to a Vote of Security Holders




There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.




Executive Officers




The
following table sets forth certain information, as of
February 19, 2009, with respect to our executive
officers.




Name
            
            Age
            
            PositionCharles
      D. Davidson (1)
            
            58
            
            Chairman
      of the Board, President, Chief Executive Officer and
    DirectorDavid
      L. Stover (2)
            
            51
            
            Executive
      Vice President, Chief Operating OfficerChris
      Tong (3)
            
            52
            
            Senior
      Vice President, Chief Financial OfficerTed
      D. Brown (4)
            
            53
            
            Senior
      Vice President, Northern RegionRodney
      D. Cook (5)
            
            51
            
            Senior
      Vice President, InternationalSusan
      M. Cunningham (6)
            
            53
            
            Senior
      Vice President, ExplorationArnold
      J. Johnson(7)
            
            53
            
            Senior
      Vice President, General Counsel and SecretaryAndrea
      Lee Robison(8)
            
            50
            
            Vice
      President, Human Resources







(1)
            Charles
      D. Davidson was elected President and Chief Executive Officer of Noble
      Energy in October 2000 and Chairman of the Board in April 2001.
      Prior to October 2000, he served as President and Chief Executive
      Officer of Vastar Resources, Inc. from March 1997 to
      September 2000 (Chairman from April 2000) and was a Vastar
      Director from March 1994 to September 2000. From
      September 1993 to March 1997, he served as a Senior Vice
      President of Vastar. From 1972 to October 1993, he held various
      positions with ARCO.


(2)
            David
      L. Stover was elected Executive Vice President and Chief Operating Officer
      of Noble Energy in August 2006. Prior thereto, he served as Senior
      Vice President of North America and Business Development from July 2004
      through July 2006. He served as Noble Energy's Vice President of Business
      Development from December 2002 through June 2004. Previous to his
      employment with Noble Energy, he was employed by BP America, Inc. as Vice
      President, Gulf of Mexico Shelf from September 2000 to August 2002. Prior
      to joining BP, Mr. Stover was employed by Vastar, as Area Manager for Gulf
      of Mexico Shelf from April 1999 to September 2000, and prior thereto, as
      Area Manager for Oklahoma/Arklatex from January 1994 to April 1999. From
      1979 to 1994, he held various positions with
  ARCO.







25
 Table of Contents









(3)
            Chris
      Tong was elected a Senior Vice President and Chief Financial Officer of
      Noble Energy in January 2005. Prior to January 2005, he had
      served as Senior Vice President and Chief Financial Officer for Magnum
      Hunter Resources, Inc. since August 1997. Prior thereto, he was
      Senior Vice President of Finance of Tejas Acadian Holding Company and its
      subsidiaries including Tejas Gas Corp., Acadian Gas Corporation and
      Transok, Inc., all of which were wholly-owned subsidiaries of Tejas
      Gas Corporation. Mr. Tong held these positions since
      August 1996, and served in other treasury positions with Tejas
      beginning August 1989. From 1980 to 1989, Mr. Tong served in
      various energy lending capacities with several commercial banking
      institutions. Prior to his banking career, Mr. Tong served over a
      year with Superior Oil Company as a Reservoir Engineering
      Assistant.


(4)
            Ted
      D. Brown was elected a Senior Vice President of Noble Energy in April 2008
      and is currently responsible for the Northern Region of our North America
      division. He served as Vice President, responsible for the same region,
      from August 2006 to April 2008 and as a vice president of that division
      since joining us upon our acquisition of Patina in May 2005. He served as
      Senior Vice President of Patina from July 2004 to May 2005. Prior thereto
      he served as Director, Piceance Basin Asset along with Engineering Manager
      for Williams and Barrett Resources since 1993 and, before that, in various
      positions with Union Pacific Resources and Amoco Production
      Company.


(5)
            Rodney
      D. Cook was elected a Senior Vice President of Noble Energy in April
      2008 and is currently responsible for the International division. He
      served as Vice President of Noble Energy, responsible for the Southern
      Region of our North America division, from August 2006 to April 2008
      and as a vice president of that division from May 2005 to August 2006. He
      served as Manager of our West Africa and Middle East Business Unit
      from 2002 to 2005. Prior thereto he served as Operations Manager of the
      International division since 1996. From 1980 to 1996 he held various
      positions with Noble Energy. Prior to joining Noble Energy in 1980, Mr.
      Cook held various positions with Texas Pacific
  Oil.


(6)
            Susan
      M. Cunningham was elected a Senior Vice President of Noble Energy in
      April 2001 and is currently responsible for our world-wide
      exploration. Prior to joining Noble Energy, Ms. Cunningham was
      Texaco’s Vice President of worldwide exploration from April 2000 to
      March 2001. From 1997 through 1999, she was employed by Statoil,
      beginning in 1997 as Exploration Manager for deepwater Gulf of Mexico,
      appointed a Vice President in 1998 and responsible, in 1999, for Statoil’s
      West Africa exploration efforts. She joined Amoco in 1980 as a geologist
      and held various exploration and development positions until
      1997.


(7)
            Arnold
      J. Johnson was elected Senior Vice President, General Counsel and
      Secretary of Noble Energy in July  2008. Prior thereto, he
      served as Vice President, General Counsel and Secretary of Noble Energy
      since February 2004. He served as Associate General Counsel and Assistant
      Secretary of Noble Energy from January 2001 through
      January 2004. Previous to his employment with Noble Energy, he served
      as Senior Counsel for BP America, Inc. from October 2000 to
      January 2001. Mr. Johnson held several positions as an attorney
      for Vastar and ARCO from March 1989 through September 2000, most
      recently as Assistant General Counsel and Assistant Secretary of Vastar
      from 1997 through 2000. From 1980 to March 1989, he held various
      positions with ARCO.


(8)
            Andrea
      Lee Robison was elected to the position of Vice President of Noble Energy
      in November 2007 and is responsible for Human Resources. Prior thereto,
      she served as Director of Human Resources from May 2002 through October
      2007. Prior to joining us, Ms. Robison was Manager of Human Resources for
      the Gulf of Mexico Shelf for BP America, Inc. from September 2000 through
      April 2002. Prior to her employment at BP, she served as HR Director at
      Vastar from 1997 through September 2000, and Compensation Consultant from
      January 1994 through 1996. From 1980 through 1993 she held various
      positions with ARCO.







26
 Table of Contents





PART II


Item
5.                 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities




Common Stock.Our common stock, $3.33
1/3 par value, is listed and traded on the NYSE under the symbol “NBL.” The
declaration and payment of dividends are at the discretion of our Board of
Directors and the amount thereof will depend on our results of operations,
financial condition, contractual restrictions, cash requirements, future
prospects and other factors deemed relevant by the Board of
Directors.




Stock Prices and Dividends
by Quarters.The high and low sales
price per share of common stock on the NYSE and quarterly dividends paid per
share were as follows:




DividendsHigh
                        
                        
                        Low
                        
                        
                        Per
      Share2007First
      quarter
                        
                        $
                        60.69
                        
                        
                        $
                        46.33
                        
                        
                        $
                        0.075Second
      quarter
                        
                        
                        65.50
                        
                        
                        
                        58.81
                        
                        
                        
                        0.120Third
      quarter
                        
                        
                        70.55
                        
                        
                        
                        58.17
                        
                        
                        
                        0.120Fourth
      quarter
                        
                        
                        81.64
                        
                        
                        
                        69.69
                        
                        
                        
                        0.1202008First
      quarter
                        
                        $
                        81.35
                        
                        
                        $
                        69.18
                        
                        
                        $
                        0.120Second
      quarter
                        
                        
                        103.83
                        
                        
                        
                        75.79
                        
                        
                        
                        0.180Third
      quarter
                        
                        
                        102.79
                        
                        
                        
                        51.18
                        
                        
                        
                        0.180Fourth
      quarter
                        
                        
                        54.01
                        
                        
                        
                        33.15
                        
                        
                        
                        0.180




On
January 27, 2009, the Board of Directors declared a quarterly cash dividend
of 0.18 cents per common share, which will be paid February 23, 2009 to
shareholders of record on February 9, 2009.




Transfer Agent and
Registrar. The transfer agent and registrar for the common stock is Wells
Fargo Bank, N.A., 161 North Concord Exchange, South St. Paul, MN,
55075.




Stockholders’
Profile. Pursuant to the records of the transfer agent, as of
February 6, 2009, the number of holders of record of common stock was
775.




Stock
      Repurchases. We did not repurchase any of our common stock in the
      fourth quarter of 2008.




Equity Compensation Plan
Information. The following table summarizes information regarding the
number of shares of our common stock that are available for issuance under all
of our existing equity compensation plans as of December 31,
2008.




Number
      of securitiesremaining
      availableWeighted-average
                                          for
      future issuanceNumber
      of securities
                                          
                                          exercise
      price of
                                          under
      equityto
      be issued upon
                                          
                                          outstanding
                                          
                                          compensation
      plansexercise
      of
                                          
                                          
                                          options,
      warrants
                                          (excluding
      securitiesPlan
      Category
                                          
                                          outstanding
      options
                                          
                                          and
      rights
                                          
                                          reflected
      in column (a))(a)
                                          
                                          
                                          (b)
                                          
                                          (c)Equity
      compensation plans approved by security holders
                                          
                                          
                                          6,082,375
                                          
                                          
                                          $
                                          41.41
                                          
                                          
                                          5,319,463Equity
      compensation plans not approved by security holders
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          -Total
                                          
                                          
                                          6,082,375
                                          
                                          
                                          $
                                          41.41
                                          
                                          
                                          5,319,463







27
 Table of Contents





Stock Performance
Graph. This graph shows our cumulative total shareholder return over the
five-year period from December 31, 2003, to December 31, 2008. The
graph also shows the cumulative total returns for the same five-year period of
the S&P 500 Index and our peer group of companies. At December 31, 2008, our
peer group of companies consisted of the following:




Anadarko
      Petroleum Corp.
              Murphy
      Oil Corp.Apache
      Corp.
              Newfield
      Exploration CompanyCabot
      Oil & Gas Corp.
              Pioneer
      Natural Resources CompanyChesapeake
      Energy Corp.
              Plains
      Exploration and Production CompanyDevon
      Energy Corp.
              Range
      Resources Corp.EOG
      Resources, Inc.
              Southwestern
      Energy CompanyForest
      Oil Corp.
              XTO
      Energy Inc.




The
comparison assumes $100 was invested on December 31, 2003, in our common
stock, in the S&P 500 Index and in our peer group and assumes that all of
the dividends were reinvested.









12/03
                                                                                                                                    
                                                                                                                                    12/04
                                                                                                                                    
                                                                                                                                    12/05
                                                                                                                                    
                                                                                                                                    12/06
                                                                                                                                    
                                                                                                                                    12/07
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    12/08Noble
      Energy, Inc.
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    100.00
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    139.34
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    182.87
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    223.97
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    365.44
                                                                                                                                    
                                                                                                                                    $
                                                                                                                                    228.44S&P
      500
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    100.00
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    110.88
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    116.33
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    134.70
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    142.10
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    89.53Peer
      Group
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    100.00
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    133.07
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    208.21
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    207.03
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    300.86
                                                                                                                                    
                                                                                                                                    
                                                                                                                                    187.65




28
 Table of Contents




Item
6.                 
Selected Financial Data




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006
      (1)
                            
                            
                            2005
      (2)
                            
                            
                            2004(in
      millions, except as noted)Revenues
      and IncomeTotal
      revenues
                            
                            $
                            3,901
                            
                            
                            $
                            3,272
                            
                            
                            $
                            2,940
                            
                            
                            $
                            2,187
                            
                            
                            $
                            1,351Income
      from continuing operations
                            
                            
                            1,350
                            
                            
                            
                            944
                            
                            
                            
                            678
                            
                            
                            
                            646
                            
                            
                            
                            314Net
      income
                            
                            
                            1,350
                            
                            
                            
                            944
                            
                            
                            
                            678
                            
                            
                            
                            646
                            
                            
                            
                            329Per
      Share DataBasic
      earnings per share -Income
      from continuing operations
                            
                            $
                            7.83
                            
                            
                            $
                            5.52
                            
                            
                            $
                            3.86
                            
                            
                            $
                            4.20
                            
                            
                            $
                            2.69Net
      income
                            
                            
                            7.83
                            
                            
                            
                            5.52
                            
                            
                            
                            3.86
                            
                            
                            
                            4.20
                            
                            
                            
                            2.82Cash
      dividends
                            
                            
                            0.660
                            
                            
                            
                            0.435
                            
                            
                            
                            0.275
                            
                            
                            
                            0.150
                            
                            
                            
                            0.100Year-end
      stock price
                            
                            
                            49.22
                            
                            
                            
                            80.66
                            
                            
                            
                            49.07
                            
                            
                            
                            40.30
                            
                            
                            
                            30.83Basic
      weighted average shares outstanding
                            
                            
                            173
                            
                            
                            
                            171
                            
                            
                            
                            176
                            
                            
                            
                            154
                            
                            
                            
                            117Cash
      FlowsNet
      cash provided by operating activities
                            
                            $
                            2,285
                            
                            
                            $
                            2,017
                            
                            
                            $
                            1,730
                            
                            
                            $
                            1,240
                            
                            
                            $
                            708Additions
      to property, plant and equipment
                            
                            
                            1,971
                            
                            
                            
                            1,414
                            
                            
                            
                            1,357
                            
                            
                            
                            786
                            
                            
                            
                            554Acquisitions
                            
                            
                            292
                            
                            
                            
                            -
                            
                            
                            
                            412
                            
                            
                            
                            1,111
                            
                            
                            
                            -Financial
      PositionCash
      and cash equivalents
                            
                            
                            1,140
                            
                            
                            
                            660
                            
                            
                            
                            153
                            
                            
                            
                            110
                            
                            
                            
                            180Commodity
      derivative instruments - current
                            
                            
                            437
                            
                            
                            
                            15
                            
                            
                            
                            35
                            
                            
                            
                            29
                            
                            
                            
                            29Property,
      plant, and equipment, net
                            
                            
                            9,004
                            
                            
                            
                            7,945
                            
                            
                            
                            7,171
                            
                            
                            
                            6,199
                            
                            
                            
                            2,181Goodwill
                            
                            
                            759
                            
                            
                            
                            761
                            
                            
                            
                            781
                            
                            
                            
                            863
                            
                            
                            
                            -Total
      assets
                            
                            
                            12,384
                            
                            
                            
                            10,831
                            
                            
                            
                            9,589
                            
                            
                            
                            8,878
                            
                            
                            
                            3,436Long-term
      obligations -Long-term
      debt
                            
                            
                            2,241
                            
                            
                            
                            1,851
                            
                            
                            
                            1,801
                            
                            
                            
                            2,031
                            
                            
                            
                            880Deferred
      income taxes
                            
                            
                            2,174
                            
                            
                            
                            1,984
                            
                            
                            
                            1,758
                            
                            
                            
                            1,201
                            
                            
                            
                            180Commodity
      derivative instruments
                            
                            
                            2
                            
                            
                            
                            83
                            
                            
                            
                            329
                            
                            
                            
                            758
                            
                            
                            
                            10Asset
      retirement obligations
                            
                            
                            184
                            
                            
                            
                            131
                            
                            
                            
                            128
                            
                            
                            
                            279
                            
                            
                            
                            175Other
                            
                            
                            300
                            
                            
                            
                            337
                            
                            
                            
                            275
                            
                            
                            
                            280
                            
                            
                            
                            69Shareholders'
      equity
                            
                            
                            6,309
                            
                            
                            
                            4,809
                            
                            
                            
                            4,114
                            
                            
                            
                            3,090
                            
                            
                            
                            1,460Operations
      InformationConsolidated
      crude oil sales (MBopd)
                            
                            
                            69
                            
                            
                            
                            77
                            
                            
                            
                            75
                            
                            
                            
                            57
                            
                            
                            
                            44Average
      realized price ($/Bbl) (3)
                            
                            $
                            82.60
                            
                            
                            $
                            60.61
                            
                            
                            $
                            54.47
                            
                            
                            $
                            45.35
                            
                            
                            $
                            34.48Consolidated
      natural gas sales (MMcfpd)
                            
                            
                            767
                            
                            
                            
                            687
                            
                            
                            
                            623
                            
                            
                            
                            508
                            
                            
                            
                            367Average
      realized price ($/Mcf) (3)
                            
                            $
                            5.04
                            
                            
                            $
                            5.26
                            
                            
                            $
                            5.55
                            
                            
                            $
                            5.78
                            
                            
                            $
                            4.76Consolidated
      NGL sales (MBpd) (4)
                            
                            
                            9
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Average
      realized price ($/Bbl)
                            
                            $
                            50.15
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Proved
      ReservesCrude
      oil, condensate and NGL reserves (MMBbl)
                            
                            
                            311
                            
                            
                            
                            329
                            
                            
                            
                            296
                            
                            
                            
                            291
                            
                            
                            
                            193Natural
      gas reserves (Bcf)
                            
                            
                            3,315
                            
                            
                            
                            3,307
                            
                            
                            
                            3,231
                            
                            
                            
                            3,091
                            
                            
                            
                            1,987Total
      reserves (MMBoe)
                            
                            
                            864
                            
                            
                            
                            880
                            
                            
                            
                            835
                            
                            
                            
                            806
                            
                            
                            
                            525Number
      of employees
                            
                            
                            1,571
                            
                            
                            
                            1,398
                            
                            
                            
                            1,243
                            
                            
                            
                            1,171
                            
                            
                            
                            559




(1)
            Includes
      effect of acquisition of U.S. Exploration and sale of Gulf of Mexico shelf
      properties. See Item 8. Financial Statements and Supplementary Data—Note 4—Acquisitions and Divestitures for additional
      information.


(2)
            Includes
      effect of Patina Merger.


(3)
            Prices
      include effects of oil and gas hedging activities. See Item 8. Financial
      Statements and Supplementary Data—Note 6—Derivative Instruments and Hedging
      Activities.


(4)
            Prior
      to 2008, US NGL sales volumes were included with natural gas volumes.
      Effective in 2008 we began reporting US NGLs separately where we have the
      right to take title, which lowered the comparative natural gas salesvolumes for 2008.





29
 Table of Contents





Item
7.                  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




We are an
independent energy company engaged in worldwide crude oil, natural gas and NGL
exploration and production. We operate primarily in the Rocky Mountains,
Mid-continent, and deepwater Gulf of Mexico areas in the US, with key
international operations offshore Israel, the North Sea and West
Africa.




Our
accompanying consolidated financial statements, including the notes thereto,
contain detailed information that should be referred to in conjunction with the
following discussion.




EXECUTIVE
OVERVIEW




We are a
worldwide producer of crude oil and natural gas. Our strategy is to achieve
growth in earnings and cash flows through the continued expansion of a high
quality portfolio of producing assets that is diversified among US and
international projects; crude oil and natural gas; and near, medium and
long-term opportunities.




Financial and Operating Results -2008 was a successful year for us as evidenced by our record earnings,
cash flows provided by operating activities and production. We extended our
acreage position both onshore and offshore US and pursued new exploration
opportunities in the deepwater Gulf of Mexico and international locations which
led to significant new discoveries. We funded our capital program primarily with
cash flows from operations and increased our ending cash balance.




Our
financial results included the following:




·
            net
      income of $1.4 billion, a 43% increase over
  2007;


·
            $440
      million gain on commodity derivative
  instruments;


·
            diluted
      earnings per share of $7.58, a 39% increase over
  2007;


·
            cash
      flows provided by operating activities of $2.3 billion, a 13% increase
      over 2007;


·
            $294
      million asset impairment charges;


·
            $38
      million write-down of receivable from Semcrude,
  L.P.;


·
            year-end
      cash balance of $1.1 billion, a $480 million increase over the prior year
      ending cash balance; and


·
            year-end
      ratio of debt-to-book capital of 26% as compared with 28% at December 31,
      2007.




Significant
operational highlights included the following:




·
            significant
      oil discovery at the Gunflint prospect in the deepwater Gulf of
      Mexico;


·
            continued
      production growth in the Rocky Mountains area of our US
      operations;


·
            successful
      Benita oil appraisal well, offshore Equatorial
  Guinea;


·
            exploration
      discoveries offshore Equatorial Guinea at Diega and
    Felicita;


·
            start-up
      of Phase 2 at the North Sea Dumbarton
  development;


·
            acquisition
      of producing properties in western
Oklahoma;


·
            expanded
      acreage position onshore North
America;


·
            successful
      appraisal of the South Raton discovery in the deepwater Gulf of
      Mexico;


·
            production
      start-up at the Raton gas development in the deepwater Gulf of
      Mexico;


·
            new
      Ticonderoga development wells brought online in the deepwater Gulf of
      Mexico;


·
            successful
      high bids on 15 deepwater Gulf of Mexico lease blocks in the central Gulf
      of Mexico lease sale; and


·
            record
      annual natural gas production in Israel of 139
  MMcfpd.




In
addition, in January 2009, we announced a very significant natural gas
discovery at the Tamar prospect offshore Israel.




Impact of Recession and Current
Credit and Commodity Markets–The US and other world economies are
currently in a recession which could last well into 2009 and beyond.
Additionally, the credit markets are experiencing significant volatility, and
many financial institutions have liquidity concerns, prompting government
intervention to mitigate pressure on the credit markets. Our primary exposure to
the current credit market crisis includes our revolving credit facility, cash
investments and counterparty nonperformance risks.




Our
revolving credit facility is committed in the amount of $2.1 billion until
December 2011, at which time it reduces to $1.8 billion. As of December 31,
2008, we had $494 million available credit under the facility. If not extended,
the credit facility matures in December 2012. Should current credit market
tightening be prolonged for several years, future extensions of our credit
facility may contain terms that are less favorable than those of our current
credit facility.




Current
market conditions also elevate the concern over our cash investments, which
total $1.1 billion, and counterparty risks related to our commodity derivative
contracts and trade credit.  With regard to our cash investments, we
invest in highly liquid, investment-grade securities, US Treasury securities and
short-term deposits with
major financial institutions.  In response to the credit market
crisis, we have shortened the duration of our investment maturities and have
increased our investments in US Treasury securities.







30
 Table of Contents





At
December 31, 2008, our open commodity derivative instruments were in a net
receivable position with a fair value of $445 million. We have all of our
commodity derivative instruments with major financial
institutions.  Should one of these financial counterparties not
perform, we may not realize the benefit of some of our derivative instruments
under lower commodity prices and we could incur a loss.




We sell
our crude oil, natural gas and NGLs to a variety of purchasers.  Some
of these parties are not as creditworthy as we are and may experience liquidity
problems.  Credit enhancements have been obtained from some parties in
the way of parental guarantees or letters of credit, including from our largest
international crude oil purchaser; however, we do not have all of our trade
credit enhanced through guarantees or credit support.  Nonperformance
by a trade creditor could result in losses. In third quarter 2008, we reduced
the carrying value of a receivable from SemCrude, L.P., a crude oil purchaser,
and recognized a pre-tax charge of $38 million for a probable loss. See Item 8.
Financial Statements and Supplementary Data– Note 17 –
Commitments and Contingencies.




Crude oil
and natural gas prices are also volatile as evidenced by the significant decline
during 2008 and into 2009. Continued lower commodity prices will reduce our cash
flows from operations. To mitigate the impact of lower commodity prices on our
cash flows, we have entered into crude oil and natural gas commodity contracts
for 2009 and, to a lesser extent, 2010. See Item 8. Financial Statements
and Supplementary Data—Note 6– Derivative Instruments and
Hedging Activities.  Depending on the length of the current recession,
commodity prices may stay depressed or decline further, thereby causing a
prolonged downturn, which would further reduce our cash flows from
operations.  This could cause us to alter our business plans including
reducing or delaying our exploration and development program spending and other
cost reduction initiatives.




In
addition, the following events impacted our business in 2008:




Asset
Impairments–As a result of the
depressed economic environment, coupled with a severe decrease in
commodity prices during the fourth quarter of 2008, we assessed the
recoverability of our oil and gas properties and other investments. As a result
of this analysis we determined that certain of our assets were impaired. In
addition, during third quarter 2008, we initiated a process to sell our
remaining operated non-core Gulf of Mexico shelf asset at Main Pass and recorded
an impairment loss (based on anticipated proceeds less costs to sell). For 2008,
total pre-tax (non-cash) asset impairment charges totaled $294 million. See
Critical Accounting Policies – Impairment of Proved Oil and Gas Properties and
Other Investments, and Impairment of Unproved Oil and Gas Properties. See also
Item 8. Financial Statements and Supplementary Data—Note
3– Asset
Impairments and Note 4 –Acquisitions and
Divestitures–Main Pass
Asset.




Hurricanes Gustav and Ike –In September, Hurricanes Gustav and Ike moved through the Gulf of Mexico.
Inspection of our facilities and equipment indicated there was no major damage
from the hurricanes, although damage to third party processing and pipeline
facilities has slowed reinstatement of production from our Gulf of Mexico
assets, including Lorien and Ticonderoga. Temporary shut-ins of production
reduced volumes on average 7.2 MBoepd during third quarter 2008 and 9.0 MBoepd
during fourth quarter 2008. Approximately 8.5 MBoepd of our Gulf of Mexico
production remained shut-in at December 31, 2008. We expect production to resume
during the first half of 2009, pending the successful resumption of pipeline and
other non-operated facilities.




Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $292
million in cash. Properties acquired cover approximately 15,500 net acres and
are currently producing a net 20 MMcfepd with approximately 70% natural gas and
30% liquids. We operate the assets with an average working interest of
83%.




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, which has not been received. Accordingly, the gain on sale of
approximately $24 million has been deferred. We are currently unable to predict
when government approval will be obtained.




2009
OUTLOOK




We expect
the mid-point of our 2009 crude oil, natural gas and NGL production to be
slightly above our 2008 results. The expected year-over-year change in
production is impacted by several factors including:




·
            the
      amount of development capital
expenditures;


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


·
            growth
      in demand for natural gas in Israel;
and


·
            growing
      production from our Rocky Mountains assets, where we are continuing an
      active drilling program;


offset
by


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


31
 Table of Contents
  Factors
      potentially impacting our expected production profile
    include:


·
            overall
      level and timing of capital expenditures, as discussed below, which,
      dependent upon our drilling success, are expected to result in near-term
      production growth;


·
            potential
      hurricane-related volume curtailments in the Gulf of Mexico and Gulf Coast
      areas of our US operations as occurred with Hurricanes Gustav and
      Ike;


·
            the
      restoration of pipeline and facilities necessary to increase our Gulf of
      Mexico production;


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


·
            potential
      pipeline and processing facility capacity constraints in the Rocky
      Mountains area of our US operations and timing of start up of a new
      interstate crude oil transportation pipeline system which will run from
      Weld County, Colorado to Cushing,
Oklahoma;


·
            deliveries
      of Egyptian gas in Israel, which could lower our sales
      volumes;


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


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


·
            timing
      of significant project completion and initial
  production.




2009 Budget—Due to the uncertain
economic and commodity price environment, we have designed a flexible capital
spending program that will be responsive to conditions that develop during
2009.  Our preliminary base capital program for 2009 will accommodate
an investment level similar to our original 2008 program which was $1.6
billion.  However, depending on commodity prices and other economic
conditions we experience in the first half of 2009, this base capital program
may be adjusted up or down by approximately 10% to 15%.




Approximately
40% of the 2009 budget is committed to longer-term projects that will provide
considerable production growth several years in the future. The remainder is
allocated toward maintaining and strengthening the existing property
base.  Development spending will focus on our international and
deepwater Gulf of Mexico assets as well as certain higher return opportunities
onshore in the US.  The exploration budget will center on significant
resource potential in Israel, West Africa and the deepwater Gulf of
Mexico.  International expenditures are estimated to represent 30% of
the total capital program.




The 2009
budget does not include the impact of possible asset purchases. We expect that
the 2009 budget will be funded primarily from cash flows from operations, cash
on hand, and borrowings under our revolving credit facility and/or other
financing. We will evaluate the level of capital spending throughout the year
based on drilling results, commodity prices, cash flows from operations and
property acquisitions and divestitures.




RESULTS
OF OPERATIONS




Net
Income




Net
income for 2008 was $1.4 billion, a 43% increase over 2007. Factors
contributing to the increase in net income included the following:




·
            $629 million,
      or 19%, increase in total revenues, due primarily to higher commodity
      prices; and


·
            $440
      million gain on derivative
instruments;


offset
by:


·
            $294
      million impairment of assets;


·
            $106
      million increase in total production
costs;


·
            $55
      million increase in DD&A expense;
and


·
            $38
      million write-down of receivable from Semcrude,
  L.P.




Net
income for 2007 was $944 million, a 39% increase over 2006. Factors
contributing to the increase in net income from 2006 to 2007 included the
following:




·
            $332 million,
      or 11%, increase in total revenues, due primarily to higher average
      realized commodity prices and an increase in income from equity method
      investees; and


·
            $394
      million decrease in loss on derivative
  instruments;


offset
by:


·
            $208
      million decrease in gains from asset
sales;


·
            $103
      million increase in DD&A
expense;


·
            $51
      million loss on involuntary conversion expense;
  and


·
            $51
      million increase in oil and gas exploration
  expense.









32
 Table of Contents





Discontinuance
of Cash Flow Hedge Accounting–Effective
January 1, 2008, we discontinued cash flow hedge accounting on all existing
commodity contracts (or “commodity derivative instruments”). We voluntarily made
thischange 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 net income.




Net
income for 2008 included a $440 million gain on commodity derivative
instruments, of which $82 million was a pre-tax realized loss, and $522 million
was a pre-tax, unrealized, non-cash gain due to the change in the mark-to-market
value of our commodity contracts related to production in future periods.
Unrealized mark-to-market gains or losses recognized in the current period
will be realized in the future when they are cash settled in the month that the
related production occurs. The amount of gain or loss actually realized may be
more or less than the amount of unrealized mark-to-market gain or loss
previously reported.




Oil,
Gas and NGL Sales




Revenues
from sales of commodities were as follows:




Year
      Ended December 31,2008
                                
                                
                                2007
                                
                                
                                2006(in
      millions)Crude
      oil and condensate sales
                                
                                $
                                2,101
                                
                                
                                $
                                1,694
                                
                                
                                $
                                1,489Natural
      gas sales
                                
                                
                                1,375
                                
                                
                                
                                1,272
                                
                                
                                
                                1,212NGL
      sales (1)
                                
                                
                                175
                                
                                
                                
                                -
                                
                                
                                
                                -Total
                                
                                $
                                3,651
                                
                                
                                $
                                2,966
                                
                                
                                $
                                2,701




(1)
            For
      2007 and 2006, US NGL sales volumes were included with natural gas
      volumes.  Effective in 2008, we began reporting US NGLs
      separately, which has lowered the comparative natural gas sales revenues
      from 2007 to 2008.







33
 Table of Contents





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)Year
      Ended December 31, 2008United
      States (2)
                                        
                                        
                                        40
                                        
                                        
                                        395
                                        
                                        
                                        9
                                        
                                        
                                        $
                                        75.53
                                        
                                        $
                                        8.12
                                        
                                        $
                                        50.15West
      Africa (3)
                                        
                                        
                                        15
                                        
                                        
                                        206
                                        
                                        
                                        -
                                        
                                        
                                        
                                        88.95
                                        
                                        
                                        0.27
                                        
                                        
                                        -North
      Sea
                                        
                                        
                                        10
                                        
                                        
                                        5
                                        
                                        
                                        -
                                        
                                        
                                        
                                        100.56
                                        
                                        
                                        10.54
                                        
                                        
                                        -Israel
                                        
                                        
                                        -
                                        
                                        
                                        139
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        3.10
                                        
                                        
                                        -Ecuador
      (4)
                                        
                                        
                                        -
                                        
                                        
                                        22
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -Other
      International
                                        
                                        
                                        4
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        
                                        82.66
                                        
                                        
                                        -
                                        
                                        
                                        -Total
      Consolidated Operations
                                        
                                        
                                        69
                                        
                                        
                                        767
                                        
                                        
                                        9
                                        
                                        
                                        
                                        82.60
                                        
                                        
                                        5.04
                                        
                                        
                                        50.15Equity
      Investees (5)
                                        
                                        
                                        2
                                        
                                        
                                        -
                                        
                                        
                                        6
                                        
                                        
                                        
                                        96.77
                                        
                                        
                                        -
                                        
                                        
                                        58.81Total
                                        
                                        
                                        71
                                        
                                        
                                        767
                                        
                                        
                                        15
                                        
                                        
                                        $
                                        82.96
                                        
                                        $
                                        5.04
                                        
                                        $
                                        53.45Year
      Ended December 31, 2007United
      States (2)
                                        
                                        
                                        42
                                        
                                        
                                        412
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        53.22
                                        
                                        $
                                        7.51
                                        
                                        $
                                        -West
      Africa (3)
                                        
                                        
                                        15
                                        
                                        
                                        132
                                        
                                        
                                        -
                                        
                                        
                                        
                                        71.27
                                        
                                        
                                        0.29
                                        
                                        
                                        -North
      Sea
                                        
                                        
                                        13
                                        
                                        
                                        6
                                        
                                        
                                        -
                                        
                                        
                                        
                                        76.47
                                        
                                        
                                        6.54
                                        
                                        
                                        -Israel
                                        
                                        
                                        -
                                        
                                        
                                        111
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        2.79
                                        
                                        
                                        -Ecuador
      (4)
                                        
                                        
                                        -
                                        
                                        
                                        26
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -Other
      International
                                        
                                        
                                        7
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        
                                        53.69
                                        
                                        
                                        -
                                        
                                        
                                        -Total
      Consolidated Operations
                                        
                                        
                                        77
                                        
                                        
                                        687
                                        
                                        
                                        -
                                        
                                        
                                        
                                        60.61
                                        
                                        
                                        5.26
                                        
                                        
                                        -Equity
      Investees (5)
                                        
                                        
                                        2
                                        
                                        
                                        -
                                        
                                        
                                        6
                                        
                                        
                                        
                                        74.87
                                        
                                        
                                        -
                                        
                                        
                                        48.87Total
                                        
                                        
                                        79
                                        
                                        
                                        687
                                        
                                        
                                        6
                                        
                                        
                                        $
                                        60.94
                                        
                                        $
                                        5.26
                                        
                                        $
                                        48.87Year
      Ended December 31, 2006United
      States (2)
                                        
                                        
                                        46
                                        
                                        
                                        452
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        50.68
                                        
                                        $
                                        6.61
                                        
                                        $
                                        -West
      Africa (3)
                                        
                                        
                                        18
                                        
                                        
                                        45
                                        
                                        
                                        -
                                        
                                        
                                        
                                        62.51
                                        
                                        
                                        0.37
                                        
                                        
                                        -North
      Sea
                                        
                                        
                                        4
                                        
                                        
                                        8
                                        
                                        
                                        -
                                        
                                        
                                        
                                        67.43
                                        
                                        
                                        8.00
                                        
                                        
                                        -Israel
                                        
                                        
                                        -
                                        
                                        
                                        93
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        2.72
                                        
                                        
                                        -Ecuador
      (4)
                                        
                                        
                                        -
                                        
                                        
                                        25
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -Other
      International
                                        
                                        
                                        7
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        
                                        52.05
                                        
                                        
                                        -
                                        
                                        
                                        -Total
      Consolidated Operations
                                        
                                        
                                        75
                                        
                                        
                                        623
                                        
                                        
                                        -
                                        
                                        
                                        
                                        54.47
                                        
                                        
                                        5.55
                                        
                                        
                                        -Equity
      Investees (5)
                                        
                                        
                                        2
                                        
                                        
                                        -
                                        
                                        
                                        6
                                        
                                        
                                        
                                        66.60
                                        
                                        
                                        -
                                        
                                        
                                        40.10Total
                                        
                                        
                                        77
                                        
                                        
                                        623
                                        
                                        
                                        6
                                        
                                        
                                        $
                                        54.75
                                        
                                        $
                                        5.55
                                        
                                        $
                                        40.10







(1)
            For
      2007 and 2006, US NGL sales volumes were included with natural gas
      volumes. Effective in 2008, we began reporting US NGLs separately, which
      has lowered the comparative natural gas sales volumes from 2007 to
      2008.


(2)
            Average
      realized crude oil and condensate prices reflect reductions of $22.06 per
      Bbl for 2008, $13.68 per Bbl for 2007, and $11.41 per Bbl for 2006 from
      hedging activities. Average realized natural gas prices reflect increases
      of $0.23 per Mcf for 2008 and $1.12 per Mcf for 2007, and a reduction of
      $0.25 per Mcf for 2006 from hedging activities.  The price
      increases and reductions resulted from hedge gains and losses that had
      been previously deferred in accumulated other comprehensive income or loss
      (AOCL).


(3)
            Average
      realized crude oil and condensate prices reflect reductions of $7.59 per
      Bbl for 2008 and $2.19 per Bbl for 2007 from hedging
      activities.  The price reductions resulted from hedge losses
      that had been previously deferred in AOCL. We did not hedge West Africa
      crude oil sales in 2006. 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 plant. 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 plant totaled
      163 MMcfpd in 2008 and 78 MMcfpd in 2007. The natural gas sold to the LNG
      and methanol plants 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 to 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. See Electricity Sales
      below.


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




34
 Table of Contents




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




Year
      Ended December 31,2008
                                
                                2007
                                
                                2006(MBopd)United
      States
                                
                                
                                40
                                
                                
                                42
                                
                                
                                46West
      Africa
                                
                                
                                14
                                
                                
                                15
                                
                                
                                17North
      Sea
                                
                                
                                10
                                
                                
                                13
                                
                                
                                4Other
      International
                                
                                
                                4
                                
                                
                                7
                                
                                
                                8Total
      Consolidated Operations
                                
                                
                                68
                                
                                
                                77
                                
                                
                                75Equity
      Investees
                                
                                
                                2
                                
                                
                                2
                                
                                
                                2Total
                                
                                
                                70
                                
                                
                                79
                                
                                
                                77




If the
realized gains and losses on commodity derivative instruments, which are
included in (gain) loss on commodity derivative instruments, had been included
in oil and gas revenues, average realized prices would have been as
follows:




Year
      Ended December 31,2008 (1)Crude
      Oil &
                                      NaturalCondensate
                                      Gas(Per
      Bbl)
                                      (Per
      Mcf)United
      States
                                      
                                      $
                                      71.68
                                      
                                      
                                      $
                                      8.05West
      Africa
                                      
                                      
                                      85.98
                                      
                                      
                                      
                                      0.27Total
      Consolidated Operations
                                      
                                      
                                      79.75
                                      
                                      
                                      
                                      5.00Total
                                      
                                      
                                      80.19
                                      
                                      
                                      
                                      5.00




(1)
            In
      2007 and 2006 we applied cash flow hedge
  accounting.




Crude
Oil and Condensate Sales




2008 Compared with 2007
—Crude oil sales increased a net $407 million, or 24%, in 2008 as compared with
2007. The increase was affected by both volume and price changes. In the US,
crude oil sales increased by $286 million due to higher average realized prices.
Sales volumes declined due to hurricane-related production shut-ins in the Gulf
of Mexico from Hurricanes Gustav and Ike and declining production in the Gulf
Coast onshore and Mid-continent areas of our US operations, offset by growth in
the Rocky Mountains area of our US operations.




Internationally,
West Africa crude oil sales increased $88 million due to higher average realized
prices. North Sea crude oil sales increased $39 million due to higher average
realized prices, while sales volumes were affected by natural field decline.
Other international crude oil sales decreased $6 million primarily due to
natural field decline in China.




Fourth
quarter 2008 crude oil sales were significantly impacted by declining prices.
Our average realized crude oil prices were $33.16 per Bbl for the US and $43.80
per Bbl for total consolidated operations for fourth quarter 2008.




2007 Compared with 2006—Crude
oil sales increased a net $205 million, or 14%, in 2007 as compared with 2006.
The increase was affected by both volume and price changes. In the US, crude oil
sales declined by $25 million from the previous year. Deepwater Gulf of Mexico
volumes were lower due to well performance, third-party facility restrictions
and storm-related shut-ins. The Gulf Coast onshore area had lower production due
to natural field decline, and a loss of production from the sale of our
significant Gulf of Mexico shelf properties in 2006. Northern region production
was negatively impacted by severe winter weather in the Rocky Mountains in the
first and fourth quarters of 2007. However, development activity in the
Wattenberg field, as well as a full year of production from U.S. Exploration
properties acquired in 2006, resulted in increased production in our Northern
region. The overall US volume decline was partially offset by higher average
realized prices.







35
 Table of Contents





Internationally,
West Africa crude oil sales declined by $15 million from the previous year.
Volumes declined due to increased downtime and lower condensate yields in
Equatorial Guinea, but the decline was offset by substantially higher average
realized crude oil prices. In January 2007, production began at the Dumbarton
development in the North Sea, and, as a result, crude oil production was more
than triple that of the prior year. North Sea crude oil sales increased $257
million over 2006 due to the increased volumes and, to a lesser extent, higher
average realized prices. Other international crude oil sales declined $12
million. China experienced lower volumes due to facility downtime and natural
field decline.




Crude oil
sales 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 $365 million in 2008, $223
million in 2007, and $191 million in 2006.  See Item 8. Financial
Statements and Supplementary Data—Note 6—Derivative
Instruments and Hedging Activities.




Natural
Gas Sales




2008 Compared with
2007—Natural gas sales increased a net $103 million, or 8%, in 2008 as
compared with 2007. The increase was affected by both volume and price changes.
In the US, natural gas sales increased $44 million primarily due to higher
commodity prices despite lower sales volumes. Lower volumes were the result of
several factors including hurricane-related production shut-ins in the Gulf of
Mexico from Hurricanes Gustav and Ike, reduction for shrink gas associated with
the natural gas liquids now being reported separately, and declining production
in the Gulf Coast onshore and Mid-continent areas of our US operations. The
volume decline was offset by a successful drilling program in the Piceance basin
along with less severe winter weather in the Rocky Mountains area of our US
operations.




Internationally,
West Africa gas sales increased $6 million from the previous year. Natural gas
volumes were higher due to increased sales of natural gas from the Alba field in
Equatorial Guinea; however, the effect of higher production was somewhat offset
by lower average realized gas prices. In the North Sea, sales increased $6
million primarily due to higher average realized prices. In Israel, natural gas
sales increased $44 million due to record sales volumes, which included the
commencement of sales to the IEC power plant at Gezer, and higher average
realized prices.




Fourth
quarter 2008 natural gas sales were significantly impacted by declining prices.
Our average realized natural gas prices were $5.30 per Mcf for the US and $3.62
per Mcf for total consolidated operations for fourth quarter 2008.




2007 Compared with
2006—Natural gas sales increased a net $60 million, or 5%, in 2007 as
compared with 2006. The increase was affected by both volume and price changes.
In the US, natural gas sales increased $40 million from the previous year
despite lower sales volumes. Deepwater Gulf of Mexico volumes were slightly
higher than 2006, while development activity in the Piceance basin and a full
year of production from U.S. Exploration properties acquired in 2006 resulted in
increased production in the Northern region. However, the Gulf Coast onshore
area had lower production due to natural field decline, and there was a loss of
production due to the sale of our significant Gulf of Mexico shelf properties in
2006. The Northern region also experienced a temporary decline in production due
to third party processing downtime and inclement weather. The net production
decrease was more than offset by a 14% increase in average realized natural gas
prices.




Internationally,
West Africa natural gas sales increased $8 million from the previous year.
Natural gas volumes were higher due to increased sales of natural gas from the
Alba field in Equatorial Guinea; however, the effect of higher production was
somewhat offset by lower average realized gas prices. In the North Sea, natural
gas production decreased 23% as compared with the prior year primarily due to
natural field decline. Lower production, combined with lower average realized
prices, resulted in a $9 million decrease in North Sea natural gas sales. In
Israel, natural gas sales increased $21 million due to record sales volumes.
There was a full year of sales to the IEC Reading power plant in Tel Aviv, as
well as the start up of sales to a desalinization plant and a paper
mill.




Natural
gas 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 increases of $34 million in 2008
and $169 million in 2007, and a decrease of $41 million in 2006.  See
Item 8. Financial Statements and Supplementary Data—Note
6—Derivative Instruments and Hedging Activities.







36
 Table of Contents





NGL
Sales




Effective
in 2008, we began reporting US NGL sales separately. This has lowered the
comparative natural gas sales volumes and revenues from 2007 to 2008. Most of
our US NGL production is from the Wattenberg field and deepwater Gulf of
Mexico.




Income
from Equity Method Investees




We have a
45% interest in AMPCO, which owns and operates a methanol plant and related
facilities. We also have a 28% interest in Alba Plant, which owns and operates
an LPG processing plant. The plants and related facilities are located in
Equatorial Guinea. We account for investments in entities that we do not control
but over which we exert significant influence using the equity method of
accounting.




Our share
of operations of equity method investees was as follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Net
      income
                            
                            (in
      millions, except as noted)AMPCO
      and affiliates
                            
                            $
                            56
                            
                            
                            $
                            83
                            
                            
                            $
                            38Alba
      Plant
                            
                            
                            118
                            
                            
                            
                            128
                            
                            
                            
                            101Distributions/dividendsAMPCO
      and affiliates
                            
                            
                            65
                            
                            
                            
                            97
                            
                            
                            
                            37Alba
      Plant
                            
                            
                            156
                            
                            
                            
                            132
                            
                            
                            
                            151Sales
      volumesMethanol
      (MMgal) (1)
                            
                            
                            119
                            
                            
                            
                            161
                            
                            
                            
                            110Condensate
      (MBopd)
                            
                            
                            2
                            
                            
                            
                            2
                            
                            
                            
                            2LPG
      (MBpd)
                            
                            
                            6
                            
                            
                            
                            6
                            
                            
                            
                            6Production
      volumesMethanol
      (MMgal) (1)
                            
                            
                            116
                            
                            
                            
                            163
                            
                            
                            
                            109Condensate
      (MBopd)
                            
                            
                            2
                            
                            
                            
                            2
                            
                            
                            
                            2LPG
      (MBpd)
                            
                            
                            6
                            
                            
                            
                            6
                            
                            
                            
                            6Average
      realized pricesMethanol
      (per gallon)
                            
                            $
                            1.25
                            
                            
                            $
                            1.09
                            
                            
                            $
                            0.90Condensate
      (per Bbl)
                            
                            
                            96.77
                            
                            
                            
                            74.87
                            
                            
                            
                            66.60LPG
      (per Bbl)
                            
                            
                            58.81
                            
                            
                            
                            48.87
                            
                            
                            
                            40.10




(1)
            The
      variance between methanol production and sales volumes is attributable to
      management’s decision to increase or decrease
  inventory.




AMPCO and Affiliates— Net
income from AMPCO and affiliates decreased $27 million, or 33%, in 2008 as
compared with 2007 due to decreases in methanol sales volumes that resulted from
95 days of down time for compressor and other equipment repair and maintenance.
The decreases in methanol sales volumes were offset by higher average realized
methanol prices.




Net
income from AMPCO and affiliates increased substantially in 2007 as compared
with 2006 due to increases in methanol sales volumes and average realized
methanol prices. The increase in methanol sales volumes was due to a 57-day
shutdown of methanol production for the plant turnaround that occurred during
May and June 2006 followed by 35 days of compressor repairs.




Alba Plant—Net income from
Alba Plant decreased $10 million, or 8%, in 2008 as compared with 2007 primarily
due to the expiration of the Alba Plant tax holiday, offset by higher average
realized condensate and LPG prices. Net income from Alba Plant increased $27
million, or 27%, in 2007 as compared with 2006 due to increases in average
realized condensate and LPG prices.




Our
operating cash flows include dividends received from Alba Plant of $156 million
in 2008 and $132 million in 2007. In 2006, distributions received from Alba
Plant were classified within investing cash flows as a repayment of a loan. The
change in classification was the result of all outstanding loans being repaid to
us by Alba Plant in December 2006.




Other
Revenues




Other
revenues include electricity sales and gathering, marketing and processing
revenues. See Electricity Sales below. See also Item 8. Financial Statements -
Note 2 - Summary of Significant Accounting
Policies.







37
 Table of Contents





Costs
and Expenses




Production Costs—Production
costs were as follows:




United
                        
                        
                        West
                        
                        
                        North
                        
                        
                        
                        
                        
                        Other
      Int'l/Total
                        
                        
                        States
                        
                        
                        Africa
                        
                        
                        Sea
                        
                        
                        Israel
                        
                        
                        Corporate
      (1)(in
      millions)Year
      Ended December 31, 2008Oil
      and gas operating costs(2)
                        
                        $
                        333
                        
                        
                        $
                        222
                        
                        
                        $
                        39
                        
                        
                        $
                        50
                        
                        
                        $
                        9
                        
                        
                        $
                        13Workover
      and repair expense
                        
                        
                        38
                        
                        
                        
                        35
                        
                        
                        
                        -
                        
                        
                        
                        3
                        
                        
                        
                        -
                        
                        
                        
                        -Lease
      operating expense
                        
                        
                        371
                        
                        
                        
                        257
                        
                        
                        
                        39
                        
                        
                        
                        53
                        
                        
                        
                        9
                        
                        
                        
                        13Production
      and ad valorem taxes
                        
                        
                        166
                        
                        
                        
                        135
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        31Transportation
      expense
                        
                        
                        57
                        
                        
                        
                        49
                        
                        
                        
                        -
                        
                        
                        
                        7
                        
                        
                        
                        -
                        
                        
                        
                        1Total
      production costs
                        
                        $
                        594
                        
                        
                        $
                        441
                        
                        
                        $
                        39
                        
                        
                        $
                        60
                        
                        
                        $
                        9
                        
                        
                        $
                        45Year
      Ended December 31, 2007Oil
      and gas operating costs(2)
                        
                        $
                        299
                        
                        
                        $
                        190
                        
                        
                        $
                        39
                        
                        
                        $
                        38
                        
                        
                        $
                        8
                        
                        
                        $
                        24Workover
      and repair expense
                        
                        
                        23
                        
                        
                        
                        23
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Lease
      operating expense
                        
                        
                        322
                        
                        
                        
                        213
                        
                        
                        
                        39
                        
                        
                        
                        38
                        
                        
                        
                        8
                        
                        
                        
                        24Production
      and ad valorem taxes
                        
                        
                        114
                        
                        
                        
                        91
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        23Transportation
      expense
                        
                        
                        52
                        
                        
                        
                        40
                        
                        
                        
                        -
                        
                        
                        
                        11
                        
                        
                        
                        -
                        
                        
                        
                        1Total
      production costs
                        
                        $
                        488
                        
                        
                        $
                        344
                        
                        
                        $
                        39
                        
                        
                        $
                        49
                        
                        
                        $
                        8
                        
                        
                        $
                        48Year
      Ended December 31, 2006Oil
      and gas operating costs(2)
                        
                        $
                        270
                        
                        
                        $
                        205
                        
                        
                        $
                        27
                        
                        
                        $
                        12
                        
                        
                        $
                        9
                        
                        
                        $
                        17Workover
      and repair expense
                        
                        
                        47
                        
                        
                        
                        47
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Lease
      operating expense
                        
                        
                        317
                        
                        
                        
                        252
                        
                        
                        
                        27
                        
                        
                        
                        12
                        
                        
                        
                        9
                        
                        
                        
                        17Production
      and ad valorem taxes
                        
                        
                        109
                        
                        
                        
                        86
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23Transportation
      expense
                        
                        
                        29
                        
                        
                        
                        21
                        
                        
                        
                        -
                        
                        
                        
                        7
                        
                        
                        
                        -
                        
                        
                        
                        1Total
      production costs
                        
                        $
                        455
                        
                        
                        $
                        359
                        
                        
                        $
                        27
                        
                        
                        $
                        19
                        
                        
                        $
                        9
                        
                        
                        $
                        41




(1)
            Other
      international includes Ecuador, China and Argentina (through February
      2008).


(2)
            Oil
      and gas operating costs include labor, fuel, repairs, replacements,
      saltwater disposal and other related lifting costs and exclude
      depreciation of support equipment and facilities such as
      vehicles.




Oil and
gas operating costs increased $34 million, or 11%, in 2008 as compared with
2007. The increase is primarily the result of higher costs related to the
continuing active drilling program in the Rocky Mountains and Mid-continent
areas of our US operations. North Sea oil and gas operating costs increased due
to expanded operations and higher costs at the Dumbarton
development.




Oil and
gas operating costs increased $29 million, or 11%, in 2007 as compared with
2006. The increase was primarily the result of expanded operations in Equatorial
Guinea and the North Sea.




Workover
and repair expense increased $15 million, or 65%, in 2008 as compared with 2007.
The increase was primarily due to increased workover activity in the Piceance
basin, Wattenberg field, and Mid-continent and Gulf Coast areas of our US
operations.




Workover
and repair expense decreased $24 million, or 51%, in 2007 as compared with 2006.
The decrease was primarily due to a reduction in hurricane-related repair
expense, which totaled $30 million in 2006 and $1 million in 2007.




Production
and ad valorem tax expense increased $52 million, or 46%, in 2008 as compared
with 2007, and increased $5 million, or 5%, in 2007 as compared with 2006. The
increases were driven primarily by higher commodity prices and also by an
increase in volumes subject to such taxes, mainly in the Northern region of our
US operations.




Transportation
expense increased $5 million, or 10%, in 2008 as compared with 2007. The
increase was due primarily to higher natural gas production in the Wattenberg
field and increased production from the Swordfish development in the deepwater
Gulf of Mexico.





38
 Table of Contents








Transportation
expense increased $23 million, or 79%, in 2007 as compared with 2006. The
increase was due primarily due to changes in the terms of certain sales
contracts for Northern region production and increased production in the North
Sea.




Selected
expenses on a per BOE of sales volume basis were as follows:




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Oil
      and gas operating  costs
                          
                          $
                          4.39
                          
                          
                          $
                          4.29
                          
                          
                          $
                          4.14Workover
      and repair expense
                          
                          
                          0.51
                          
                          
                          
                          0.33
                          
                          
                          
                          0.72Lease
      operating costs
                          
                          
                          4.90
                          
                          
                          
                          4.62
                          
                          
                          
                          4.86Production
      and ad valorem taxes
                          
                          
                          2.19
                          
                          
                          
                          1.63
                          
                          
                          
                          1.67Transportation
      expense
                          
                          
                          0.75
                          
                          
                          
                          0.74
                          
                          
                          
                          0.44Total
      production costs (1)
                          
                          $
                          7.84
                          
                          
                          $
                          6.99
                          
                          
                          $
                          6.97




(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees. Sales volumes include natural gas sales to an LNG plant in
      Equatorial Guinea that began late first quarter of 2007. The inclusion of
      these volumes reduced the unit rate by $1.19 per BOE for 2008 and $0.51
      per BOE for 2007.




The unit
rates of total production costs per BOE have been increasing year-over-year
since 2006. The increases are due to rising third-party costs, higher production
taxes and increased workover activity in the Piceance basin, Wattenberg field,
and Mid-continent and Gulf Coast areas of our US operations.




Oil and Gas Exploration
Expense—Exploration expense was as follows:




United
                      
                      
                      West
                      
                      
                      North
                      
                      
                      
                      
                      
                      Other
      Int'l/Total
                      
                      
                      States
                      
                      
                      Africa
                      
                      
                      Sea
                      
                      
                      Israel
                      
                      
                      Corporate
      (1)(in
      millions)Year
      Ended December 31, 2008Dry
      hole expense
                      
                      $
                      84
                      
                      
                      $
                      42
                      
                      
                      $
                      1
                      
                      
                      $
                      8
                      
                      
                      $
                      -
                      
                      
                      $
                      33Seismic
                      
                      
                      57
                      
                      
                      
                      50
                      
                      
                      
                      -
                      
                      
                      
                      4
                      
                      
                      
                      3
                      
                      
                      
                      -Staff
      expense
                      
                      
                      62
                      
                      
                      
                      14
                      
                      
                      
                      7
                      
                      
                      
                      5
                      
                      
                      
                      1
                      
                      
                      
                      35Other
                      
                      
                      14
                      
                      
                      
                      13
                      
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      exploration expense
                      
                      $
                      217
                      
                      
                      $
                      119
                      
                      
                      $
                      8
                      
                      
                      $
                      18
                      
                      
                      $
                      4
                      
                      
                      $
                      68Year
      Ended December 31, 2007Dry
      hole expense
                      
                      $
                      90
                      
                      
                      $
                      50
                      
                      
                      $
                      40
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Seismic
                      
                      
                      65
                      
                      
                      
                      55
                      
                      
                      
                      1
                      
                      
                      
                      8
                      
                      
                      
                      1
                      
                      
                      
                      -Staff
      expense
                      
                      
                      46
                      
                      
                      
                      12
                      
                      
                      
                      2
                      
                      
                      
                      9
                      
                      
                      
                      1
                      
                      
                      
                      22Other
                      
                      
                      18
                      
                      
                      
                      17
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1Total
      exploration expense
                      
                      $
                      219
                      
                      
                      $
                      134
                      
                      
                      $
                      43
                      
                      
                      $
                      17
                      
                      
                      $
                      2
                      
                      
                      $
                      23Year
      Ended December 31, 2006Dry
      hole expense
                      
                      $
                      70
                      
                      
                      $
                      66
                      
                      
                      $
                      -
                      
                      
                      $
                      4
                      
                      
                      $
                      -
                      
                      
                      $
                      -Seismic
                      
                      
                      38
                      
                      
                      
                      29
                      
                      
                      
                      4
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      4Staff
      expense
                      
                      
                      39
                      
                      
                      
                      13
                      
                      
                      
                      3
                      
                      
                      
                      5
                      
                      
                      
                      -
                      
                      
                      
                      18Other
                      
                      
                      21
                      
                      
                      
                      20
                      
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      exploration expense
                      
                      $
                      168
                      
                      
                      $
                      128
                      
                      
                      $
                      7
                      
                      
                      $
                      11
                      
                      
                      $
                      -
                      
                      
                      $
                      22


(1)
            Other
      international includes Ecuador, China, Argentina (through February 2008),
      Suriname and other international new
ventures.




Exploration
expense was flat in 2008 as compared with 2007. Dry hole expense in 2008 related
to exploratory drilling in Suriname ($33 million), the deepwater Gulf of Mexico
($35 million), the North Sea ($8 million), and other onshore US areas ($7
million).




Exploration
expense increased $51 million, or 30%, in 2007 as compared with 2006. US dry
hole expense decreased $16 million due to a reduction in the number of dry holes
drilled in 2007. Dry hole expense increased $40 million in West Africa and
included amounts related to a dry exploratory well in Equatorial Guinea and
expense related to a secondary target of an exploration well in Cameroon.
Seismic expense increased a net $27 million in 2007 as compared with 2006,
primarily due to increases in US seismic expense incurred in support of the 2007
central Gulf of Mexico
outer continental shelf sale. Staff expense increased a net $7 million primarily
due to new venture activity.







39
 Table of Contents





Exploration
expense included stock-based compensation expense of $1 million in 2008, $2
million in 2007 and $1 million in 2006.




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




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions)United
      States
                            
                            $
                            646
                            
                            
                            $
                            580
                            
                            
                            $
                            552West
      Africa
                            
                            
                            34
                            
                            
                            
                            25
                            
                            
                            
                            24North
      Sea
                            
                            
                            55
                            
                            
                            
                            81
                            
                            
                            
                            9Israel
                            
                            
                            24
                            
                            
                            
                            18
                            
                            
                            
                            14Other
      international, corporate, and other
                            
                            
                            32
                            
                            
                            
                            32
                            
                            
                            
                            34Total
      DD&A expense (1)
                            
                            $
                            791
                            
                            
                            $
                            736
                            
                            
                            $
                            633Unit
      rate of DD&A per BOE (2)
                            
                            $
                            10.44
                            
                            
                            $
                            10.55
                            
                            
                            $
                            9.71




(1)
            DD&A
      expense includes accretion of discount on asset retirement obligations of
      $10 million in 2008, $8 million in 2007, and $11 million in
      2006.


(2)
            Consolidated
      unit rates exclude sales volumes and costs
      attributable to equity method investees. Sales
      volumes include natural gas sales to an LNG plant in Equatorial Guinea
      that began late first quarter of 2007. The inclusion of these volumes
      reduced the unit rate by $1.29 per BOE for 2008 and $0.63 per BOE for
      2007.







Total
DD&A expense increased in 2008 as compared with 2007 due to several factors
including higher acquisition and/or development costs in the Wattenberg field
and other Rocky Mountain and Mid-continent areas in the US, negative year-end
reserve revisions in the US due to lower commodity prices, and higher
natural gas sales volumes in Israel and West Africa,  offset by declining
production in the North Sea.




Total
DD&A expense increased in 2007 as compared with 2006 primarily due to higher
crude oil sales volumes in the North Sea due to start-up of the Dumbarton
development, higher natural gas sales volumes in Israel and West Africa and
higher acquisition and/or development costs in the North Sea and in the
Wattenberg field and deepwater Gulf of Mexico in the US.




The
decrease in the unit rate for 2008 as compared with 2007 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 increased production from areas with higher acquisition and/or
development costs (the Wattenberg field and other Rocky Mountain and
Mid-continent areas in the US) and negative year-end reserve revisions in the US
due to lower commodity prices.




The
increase in the unit rate for 2007 as compared with 2006 was primarily due to
higher acquisition and development costs in the US and the North Sea Dumbarton
development.




DD&A
expense includes abandoned assets cost of $5 million in 2007 and
$1 million in 2006. There was no abandoned asset cost in 2008.




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




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006G&A
      expense (in millions)
                            
                            $
                            236
                            
                            
                            $
                            206
                            
                            
                            $
                            165Unit
      rate per BOE(1)
                            
                            $
                            3.12
                            
                            
                            $
                            2.96
                            
                            
                            $
                            2.52




(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees. Sales volumes include natural gas sales to an LNG plant in
      Equatorial Guinea that began late first quarter of 2007. The inclusion of
      these volumes reduced the unit rate by $0.47 per BOE for 2008 and $0.21
      per BOE for 2007.




G&A
expense increased $30 million, or 15%, in 2008 as compared with
2007.  Our increased activities require additional personnel, which
has resulted in higher payroll costs. We have also increased our incentive
compensation accruals.







40
 Table of Contents





G&A
expense increased $41 million, or 25%, in 2007 as compared with 2006 due to
higher salaries and wages, including incentive compensation programs, resulting
from an increase in the number of employees and results exceeding targeted
performance goals.




In
addition, the amount of stock-based compensation expense included in G&A has
been increasing since the adoption of SFAS No. 123(R), “Share-Based Payment” in
2006 combined with additional equity-based awards. Stock-based compensation
expense included in G&A totaled $38 million in 2008, $25 million in 2007 and
$11 million in 2006.




G&A
also includes actuarially-computed net periodic benefit cost related to pension
and other postretirement benefit plans of $17 million in 2008, $17 million in
2007, and $19 million in 2006.




Impairment of Assets—During
2008, we recorded total pre-tax (non-cash) impairment charges of $294 million
primarily due to lower commodity prices at year-end. We recorded impairments of
$4 million in 2007 and $9 million in 2006, primarily related to downward
reserve revisions on proved US oil and gas properties and/or adjustment of the
carrying value of properties to their fair values. See Critical Accounting
Policies – Impairment of Proved Oil and Gas Properties and Other Investments and
Impairment of Unproved Oil and Gas Properties; and Item 8. Financial Statements
– Note 3 – Asset Impairments.




Gain on Sale of Assets—See
Item 8. Financial Statements and Supplementary Data—Note
4—Acquisitions and Divestitures.




Other Operating Expense, Net –Other operating expense, net includes electricity generation expense,
gathering, marketing and processing expense, loss on involuntary conversion of
assets and other operating (income) expense, net. See Electricity Sales and Loss
on Involuntary Conversion below. See also Item 8. Financial Statements – Note 2 – Summary of Significant Accounting Policies and Note 17 – Commitments and Contingencies - Purchaser
Bankruptcy for a discussion of the SemCrude matter.




Electricity Sales—We have a
100% ownership interest in an integrated natural gas-to-power project. The
project includes the Amistad natural gas field, offshore Ecuador, which supplies
fuel to the Machala power plant. Electricity sales are included in other
revenues and electricity generation expense is included in other operating
expense, net in the consolidated statements of operations.




Operating
data is as follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions, except as noted)Electricity
      sales
                            
                            $
                            56
                            
                            
                            $
                            71
                            
                            
                            $
                            72Electricity
      generation expense
                            
                            
                            57
                            
                            
                            
                            57
                            
                            
                            
                            59Operating
      income
                            
                            
                            (1
                            )
                            
                            
                            14
                            
                            
                            
                            13Power
      generation (GW)
                            
                            
                            749
                            
                            
                            
                            912
                            
                            
                            
                            866Average
      power price ($/Kwh)
                            
                            $
                            0.074
                            
                            
                            $
                            0.078
                            
                            
                            $
                            0.083




The
volume of natural gas produced and electric power generated in Ecuador are
related to thermal electricity demand in Ecuador which typically declines at the
onset of the rainy season. When Ecuador has sufficient rainfall to allow
hydroelectric power producers to provide base load power, we provide electricity
only to meet peak demand. As seasonal rains subside, we experience increasing
demand for thermal electricity.




Electricity
generation expense includes DD&A expense and changes in the allowance for
doubtful accounts of $11 million in 2008, $14 million in 2007, and $15 million
in 2006.  Through December 31, 2008, we recorded an allowance for
doubtful accounts of $57 million. The allowance was necessary to cover
potentially uncollectible balances related to the Ecuador power operations, as
certain entities purchasing electricity in Ecuador have been slow to pay amounts
due us. As a result of pursuing various strategies to protect our interests,
including international arbitration and litigation, we reached a settlement in
fourth quarter 2008. However, we have not yet received any funds related to the
settlement. We will reverse our allowance for doubtful accounts upon receipt of
payment from the Ecuadorian government. If not received in the near term, we may
continue pursuing our arbitration claim and litigation.




As a
result of the depressed economic environment, coupled with a severe decrease in
commodity prices during the fourth quarter of 2008, we assessed the
recoverability of our Ecuador investment. As a result of this analysis we
determined that our investment was impaired and recorded a pre-tax (non-cash)
impairment of $70 million.  See Critical Accounting Policies –
Impairment of Proved Oil and Gas Properties and Other Investments and Item 8.
Financial Statements – Note 3 – Asset
Impairments.







41
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Loss on Involuntary
Conversion— We recorded losses on involuntary conversion of $9 million in
2008 and $51 million in 2007 related to hurricane damage to our Gulf of Mexico
Main Pass assets. The amounts are included in other operating expense, net in
the consolidated statements of operations. See Item 8. Financial Statements and
Supplementary Data—Note 2—Summary of Significant Accounting
Policies.




(Gain) Loss on Commodity Derivative
Instruments— We recorded a gain of $440 million in 2008, a gain of $2
million in 2007, and a loss of $392 million in 2006 related to commodity
derivative instruments. See Item 8. Financial Statements and Supplementary
Data—Note 6—Derivative Instruments and Hedging
Activities.




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




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)Interest
      expense
                          
                          $
                          102
                          
                          
                          $
                          130
                          
                          
                          $
                          130Capitalized
      interest
                          
                          
                          (33
                          )
                          
                          
                          (17
                          )
                          
                          
                          (13
                          )Interest
      expense, net
                          
                          $
                          69
                          
                          
                          $
                          113
                          
                          
                          $
                          117




Interest
expense decreased in 2008 as compared with 2007 due to declining interest rates
applicable to our credit facility from 5.28% at December 31, 2007 to 0.80% at
December 31, 2008, partially offset by a higher amount outstanding under our
credit facility during 2008.




Interest
expense was flat in 2007 as compared with 2006. The rate of interest applicable
to the credit facility declined from 5.69% at December 31, 2006 to 5.28% at
December 31, 2007, while the balance outstanding increased
slightly.




Interest
is capitalized on exploration and development projects using an interest rate
equivalent to the average rate paid on long-term debt. Capitalized interest is
included in the cost of oil and gas assets and amortized with other costs on a
unit-of-production basis. The majority of the capitalized interest is related to
long lead-time projects in West Africa and deepwater Gulf of Mexico and numerous
projects in the Rocky Mountains area in 2008; West Africa, the North Sea and
deepwater Gulf of Mexico in 2007; and the North Sea and deepwater Gulf of Mexico
in 2006. See Item 8. Financial Statements and Supplementary Data—Note 7 – Exploratory Well Costs.




We
occasionally enter into forward contracts or swap agreements to hedge exposure
to interest rate risk. At December 31, 2008, AOCL included a deferred loss
of $3 million, net of tax, related to interest rate swaps. This amount is
being reclassified into earnings, at the rate of $0.8 million per year, as an
adjustment to interest expense over the term of our 51⁄4% senior notes due 2014.
See Item 8. Financial Statements and Supplementary Data—Note
6—Derivative Instruments and Hedging Activities.




Other (Income) Expense, net—
Other (income) expense, net includes deferred compensation (income) expense,
interest income and other (income) expense, net. See Deferred Compensation
(Income) Expense below. See also Item 8. Financial Statements – Note 2 – Summary of Significant Accounting
Policies.




Deferred Compensation (Income)
Expense—In connection with the Patina Merger in 2005, we acquired the
assets and assumed the liabilities related to a deferred compensation plan. The
assets of the deferred compensation plan are held in a rabbi trust and include
shares of our common stock and mutual fund investments. At December 31,
2008, approximately 42% of the market value of the assets in the rabbi trust
related to our common stock. Increases in the market value of our common stock
held in the trust result in the recognition of deferred compensation expense.
Decreases in the market value of our common stock held in the trust result in
the recognition of deferred compensation income. We recognized deferred
compensation income of $32 million in 2008 and deferred compensation expense of
$33 million in 2007 and $16 million in 2006. The amounts are included in other
(income) expense, net  in the consolidated statements of operations.
See Item 8. Financial Statements and Supplementary Data— Note
2 – Summary of Significant Accounting Policies and Note
12—Benefit Plans.




Income Tax Provision—The
income tax provision was as follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Income
      tax provision (in millions)
                            
                            $
                            711
                            
                            
                            $
                            424
                            
                            
                            $
                            418Effective
      rate
                            
                            
                            34.5
                            %
                            
                            
                            31.0
                            %
                            
                            
                            38.1
                            %




Our
effective tax rate increased in 2008 compared to 2007 primarily due to the fact
that pre-tax earnings increased by a proportionately greater amount than our
excludible permanent differences.  In addition, there was a rate
increase due to (1) a partial shift of taxable income from lower rate
jurisdictions such as Equatorial Guinea and Israel to
higher rate jurisdictions, (2) the recording of US deferred taxes on the
anticipated repatriation of a portion of our foreign earnings, and (3) the
recording of an impairment for a foreign asset on which the tax benefit was
offset by a valuation allowance. See Liquidity and Capital Resources–Overview –
Cash and Cash Equivalents below.







42
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Several
factors resulted in a decrease in our effective tax rate for 2007 as compared
with 2006. The major factor was that, in 2006, $100 million of goodwill
write-off associated with the sale of Gulf of Mexico shelf properties was not
deductible, which increased the rate for 2006. Other factors were an increase in
deferred tax assets arising from foreign tax credits, a decrease in the Chinese
tax rate, and the realization of additional income from equity method investees
which is a favorable permanent difference in calculating the income tax
expense.




In
addition to the nondeductible goodwill write-off of $100 million related to the
sale of Gulf of Mexico shelf properties discussed in the preceding paragraph,
the 2006 effective tax rate was impacted by decreases in our US deferred tax
assets arising from future foreign tax credits due to changes in the limitation
on our ability to claim foreign tax credits. In addition, a change in UK tax law
increased our UK tax expense in 2006 as compared with 2005. Offsetting these
increases was a reduction in the effective tax rate due to an increase in
earnings from equity method investees, which is a favorable
permanent difference in calculating income tax expense.See Item 8.
Financial Statements – Note 9 —Income Taxes.




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
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.




The
recent disruption in the credit markets has had a significant adverse impact on
a number of financial institutions. 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 materially impacted. However, further
deterioration in the credit markets could adversely affect our results of
operations and cash flows.  See Executive Overview - Impact of
Recession and Current Credit and Commodity Markets.




Cash and Cash Equivalents –We had $1.1 billion in cash and cash equivalents at December 31, 2008,
compared with $660 million at December 31, 2007. Our 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.
Substantially all of this cash is attributable to our foreign subsidiaries and
most would be subject to US income taxes if repatriated. We currently intend to
use a majority of our international cash to fund international projects,
including the development of West Africa.




During
fourth quarter 2008, we performed an analysis of projected short-term working
capital needs as well as long-term capital requirements for our US and foreign
operations. As a result, we believe it is likely that repatriation of a portion
of the accumulated earnings of foreign subsidiaries will occur during 2009.
Therefore, at December 31, 2008, we recorded deferred taxes on the portion of
those earnings that we expect will be repatriated. The recognition of deferred
tax liabilities resulted in $9 million additional income tax expense reported in
continuing operations.




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




As of
December 31, 2008, we had commodity derivative assets totaling $470 million and
commodity derivative liabilities totaling $25 million (afterconsideration ofnetting agreements). Our hedging arrangements are currently with a
diversified group of 11 financial institutions, substantially all of which are
lenders under our credit facility arrangement. See Item 1A. Risk Factors – Hedging transactions may limit our
potential gainand Hedging transactions, receivables
and cash investments expose us to counterparty credit risk.




Current
period settlements on commodity derivative instruments impact our liquidity,
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 will be lower than if we had no
derivative instruments. Conversely, if actual commodity prices are lower than
the fixed or floor prices in our derivative instruments, our cash flows will be
higher than if we had no derivative instruments. Except for certain minor
derivative contracts that are entered into from time to time by our marketing
subsidiary, none of our counterparty agreements contain margin requirements.
See additional information included in Critical Accounting Policies – Commodity
Derivative Instruments and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.







43
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Certain
of our commodity contracts were executed in connection with the Patina Merger,
prior to the global crude oil and natural gas price escalations which began in
early 2005.  The settlements of these contracts have reduced our cash
flows. However, these contracts expired in December 2008.  Our
remaining commodity contracts were executed in more favorable price
environments.  Although we cannot predict market prices, our remaining
commodity contract positions should result in more favorable cash flows as
compared to our commodity contract positions in prior periods.  See
Item 8. Financial Statements and Supplementary Data – Note
6 – Derivative Instruments and Hedging Activities for our current hedge
positions.




Cash
Flows




Summary
      cash flow information is as
follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions)Total
      cash provided by (used in):Operating
      activities
                            
                            $
                            2,285
                            
                            
                            $
                            2,017
                            
                            
                            $
                            1,730Investing
      activities
                            
                            
                            (2,132
                            )
                            
                            
                            (1,403
                            )
                            
                            
                            (1,098
                            )Financing
      activities
                            
                            
                            327
                            
                            
                            
                            (107
                            )
                            
                            
                            (589
                            )Increase
      in cash and cash equivalents
                            
                            $
                            480
                            
                            
                            $
                            507
                            
                            
                            $
                            43







Operating Activities—Net cash
provided by operating activities totaled $2.3 billion in 2008, an increase of
$268 million, or 13%, as compared with 2007. The increase was primarily due to a
significant increase in oil, gas and NGL sales resulting from higher average
realized crude oil and natural gas prices during the first nine months of 2008.
The revenue increase was slightly offset by higher production costs and G&A
expense. Net cash provided by operating activities includes dividends received
from equity method investees.




Net cash
provided by operating activities was $2.0 billion in 2007, an increase of $287
million, or 17% as compared with 2006. The increase was due primarily to
increased sales resulting from higher average realized crude oil prices and
higher average realized US natural gas prices. These increases were partially
offset by higher exploration expense and G&A expense. In addition, cash
flows from operating activities in 2007 included dividends from equity method
investees. Cash distributions from equity method investees received in 2006 were
repayments of loans and were included in investing activities. See Results of
Operations—Income from Equity Method Investees.




Investing Activities—The
primary use of cash in investing activities is for capital spending, which may
be offset by proceeds from property sales or distributions from equity method
investees. Net cash used in investing activities totaled $2.1 billion in 2008,
as compared with $1.4 billion in 2007. In 2008 we had an expanded capital
budget, with increased acquisition, development and exploratory activity in
onshore US and deepwater Gulf of Mexico areas as well as increased exploratory
activity in international locations including Equatorial Guinea and Israel. Our
total additions to property, plant and equipment plus acquisitions ($2.3
billion) were minimally offset by proceeds from property sales ($131
million).




In
comparison, in 2007, we had additions to property, plant and equipment ($1.4
billion) primarily due to development activity in the US and North Sea and
acquisition and exploratory activities in the US and West Africa. Expenditures
were minimally offset by proceeds from property sales of $9
million.




In
comparison, in 2006 cash flows from investing activities totaled $1.1 billion.
We had acquisitions and additions to property, plant and equipment ($1.8
billion) due to the acquisition of U.S. Exploration plus additional development
and exploratory activity in the US and development activity in the North Sea.
These expenditures were offset by proceeds from the sale of our significant Gulf
of Mexico shelf properties ($520 million) and net distributions received from
equity method investees ($151 million). The distributions from equity method
investees were the result of repayment of loans and therefore were included in
cash flows from investing activities. See Results of Operations—Income from
Equity Method Investees.







44
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Financing Activities—In 2008,
net cash of $327 million was provided by financing activities. We borrowed a net
$426 million under our credit facility in support of our expanded capital
budget, noted above, which included significant domestic acquisition,
development and exploration activities and as well as new international
ventures. Funds were also provided by the cash proceeds from, and tax benefits
related to, the exercise of stock options ($51 million). Other financing
activities included the payment of cash dividends on common stock ($115
million), the repayment of installment and other notes ($32 million) and the
repurchase of stock ($3 million).




In
comparison, in 2007, we used cash of $107 million in financing activities. Our
capital expenditures, noted above, were somewhat reduced from that of 2006
resulting in a need for borrowings of only a net $25 million. Funds were also
provided by the cash proceeds from, and tax benefits related to, the exercise of
stock options ($45 million). We were able to use available cash to finance the
repurchase of two million shares of our common stock ($102 million) and pay cash
dividends on common stock ($75 million).




In 2006,
we used cash of $589 million in financing activities. We used excess cash to
reduce borrowings by a net $230 million, repurchase eight million shares of our
common stock ($399 million), and pay cash dividends on common stock ($49
million). Funds were also provided by the cash proceeds from, and tax benefits
related to, the exercise of stock options ($89 million).




Acquisition,
Capital and Other Exploration Expenditures




Expenditure
information (on an accrual basis) is as follows:




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)Acquisition,
      Capital and Other Exploration ExpendituresUnproved
      property acquisition (1)
                          
                          $
                          303
                          
                          
                          $
                          145
                          
                          
                          $
                          185Proved
      property acquisition (2)
                          
                          
                          255
                          
                          
                          
                          11
                          
                          
                          
                          523Exploration
      expenditures
                          
                          
                          448
                          
                          
                          
                          372
                          
                          
                          
                          203Development
      expenditures
                          
                          
                          1,193
                          
                          
                          
                          1,175
                          
                          
                          
                          1,055Corporate
      and other expenditures
                          
                          
                          65
                          
                          
                          
                          36
                          
                          
                          
                          35Total
      expenditures
                          
                          
                          2,264
                          
                          
                          
                          1,739
                          
                          
                          
                          2,001




(1)
            Unproved
      property acquisition cost for 2008 includes $179 million for deepwater
      Gulf of Mexico lease blocks, $38 million related to the Mid-continent
      acquisition, $80 million related to additional onshore US lease
      acquisitions and $6 million related to international lease acquisitions.
      Unproved property acquisition cost for 2006 includes $131 million
      allocated to properties acquired in the U.S. Exploration
      acquisition.


(2)
            Proved
      property acquisition cost for 2008 includes $254 million related to the
      Mid-continent acquisition. Proved property acquisition cost for 2006
      includes $413 million allocated to properties acquired in the U.S.
      Exploration acquisition.




Total
expenditures in 2008 increased $525 million, or 30%, as compared with 2007. The
increase was due to increased acquisition, development and exploratory activity
in onshore US and deepwater Gulf of Mexico areas as well as increased
exploratory activity in international locations including Equatorial Guinea and
Israel.




Total
expenditures in 2007 decreased $262 million, or 13%, as compared with 2006. The
decrease was due to significantly lower acquisition expenditures, offset by
exploratory activities in West Africa and the North Sea, and increased
development activity in the Northern region and Gulf of Mexico area of our US
operations.




Insurance
Recoveries




Our
corporate insurance program provides up to $260 million property damage
coverage per loss event. However, our insurance carrier’s aggregation limit for
catastrophic windstorm events is $750 million. If an insured catastrophic loss
event occurs, we could still recover less than our stated limits should the
total aggregate losses realized by our carrier exceed its $750 million
aggregation limit that is applicable to any single loss event.




We carry
additional property damage and control of well coverage for our deepwater Gulf
of Mexico and remaining Gulf of Mexico shelf properties. This additional
insurance provides up to $100 million in additional coverage forcertain claims which
exceed the $260 million property damage coverage or where the $260 million
property damage coverage is reduced by application of the $750 million
aggregation limit.  We carry business interruption insurance for
certain international locations.







45
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Financing
Activities




Long-Term Debt—Our long-term
debt totaled $2.245 billion (excluding unamortized discount) at
December 31, 2008, and maturities range from 2012 to 2097. Our
principal source of liquidity is an unsecured revolving credit facility that
matures December 9, 2012. 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. At December 31, 2008,
$1.606 billion in borrowings were outstanding under the credit facility, leaving
$494 million available for use. The weighted average interest rate applicable to
borrowings under the credit facility at December 31, 2008 was
0.80%.




The
credit facility contains customary representations and warranties and
affirmative and negative covenants. The credit facility requires that our total
debt to capitalization ratio (as defined in the credit agreement), expressed as
a percentage, not exceed 60% at any time. A violation of this covenant could
result in a default under the credit facility, which would permit the
participating banks to restrict our ability to access the credit facility and
require the immediate repayment of any outstanding advances under the credit
facility.




The
credit facility is with certain commercial lending institutions and is available
for general corporate purposes. Our bank group is
comprised of 24 commercial lending institutions, each holding between 1.0% and
7.0% of the total facility.  Dueto recent consolidation in the
banking sector resulting from heightened stress in the credit markets, the
number of lenders and their effective commitment levels within our credit
facility may be reallocated over time.




We also
have $639 million of fixed-rate debt outstanding at December 31, 2008 with a
weighted average interest rate of 6.92%. Maturities range from 2014 to
2097.




Short-Term Borrowings— 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
4.18% at December 31, 2008.




Our
committed credit facility has been 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. There were no amounts outstanding under
uncommitted credit lines at December 31, 2008 or 2007. Depending upon future
credit market conditions, these sources may or may not be available. However, we
are not dependent on them to fund our day-to-day operations.




Ratio of Debt-to-Book Capital—Our ratio
of debt-to-book capital has decreased from 28% at December 31, 2007 to 26%
at December 31, 2008. 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. Significant changes in our financial position causing a change in the
ratio of debt-to-book capital included the following:




·
            $1.4 billion
      increase in shareholders’ equity from current year net
    income;


offset
by


·
            $390 million
      increase in total debt from the balance at December 31, 2007;
      and


·
            $115
      million decrease in shareholders’ equity from dividends
    paid.




Interest Rate Locks—We
occasionally enter into forward contracts or swap agreements to hedge exposure
to interest rate risk. As of December 31, 2007, we had entered into
two 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 September2008. We settled the
locks in July 2008 at a total cost of $0.2 million.




Cash Interest Payments—We
made cash interest payments of $109 million in 2008, $122 million in 2007
and $119 million in 2006.




Exercise of Stock
Options—Proceeds from the exercise of stock options totaled $27 million
in 2008, $25 million in 2007 and $63 million in 2006. Proceeds
received from the exercise of stock options fluctuate primarily based on the
number of options exercised which is influenced by the price at which our common
stock trades on the NYSE in relation to the exercise price of the options
issued.




Dividends—We paid cash
dividends totaling 66.0 cents per common share in 2008, 43.5 cents per common
share in 2007 and 27.5 cents per common share in 2006. On January 27, 2009,
the Board of Directors declared a quarterly cash
dividend of $0.18 cents per common share, which will be paid February 23,
2009 to shareholders of record on February 9, 2009. The amount of future
dividends will be determined on a quarterly basis at the discretion of the Board
of Directors and will depend on earnings, financial condition, capital
requirements and other factors.







46
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Common Stock Repurchases—In
2008, we received from employees approximately 33,000 shares of common stock
with a total value of $3 million for the payment of withholding taxes due on the
vesting of restricted shares issued under stock-based compensation plans. In
2007, we completed a common stock repurchase program authorized by our Board of
Directors in 2006. We repurchased two million shares of our common stock at an
aggregate cost of $102 million in 2007 and 8.4 million shares of our common
stock at an aggregate cost of $399 million in 2006, resulting in a total of
10.4 million shares acquired at an average price of $48.17 per
share.




Off-Balance
Sheet Arrangements




We may
enter into off-balance sheet arrangements and transactions that can give rise to
material off-balance sheet obligations. As of December 31, 2008, the
material off-balance sheet arrangements and transactions that we have entered
into included drilling service contracts, operating lease agreements, and
undrawn letters of credit. Other than the off-balance sheet arrangements listed
above, we have no transactions, arrangements or other relationships with
unconsolidated entities or other persons that are reasonably likely to
materially affect our liquidity or availability of or requirements for capital
resources. See Contractual
Obligations below for more information regarding off-balance sheet
arrangements.




Contractual
Obligations




The
following table summarizes certain contractual obligations that are reflected in
the consolidated balance sheets and/or disclosed in the accompanying
notes.




Payments
      Due by Period2010
                                                
                                                
                                                2012
                                                
                                                
                                                2014
      andTotal
                                                
                                                
                                                2009
                                                
                                                
                                                and
      2011
                                                
                                                
                                                and
      2013
                                                
                                                
                                                Beyond(in
      millions)Long-term
      debt (excluding interest) (1)
                                                
                                                $
                                                2,270
                                                
                                                
                                                $
                                                25
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                1,606
                                                
                                                
                                                $
                                                639Drilling
      and equipment obligations: (2)United
      States
                                                
                                                
                                                752
                                                
                                                
                                                
                                                70
                                                
                                                
                                                
                                                613
                                                
                                                
                                                
                                                69
                                                
                                                
                                                
                                                -International
                                                
                                                
                                                480
                                                
                                                
                                                
                                                252
                                                
                                                
                                                
                                                225
                                                
                                                
                                                
                                                3
                                                
                                                
                                                
                                                -Purchase
      obligations (3)
                                                
                                                
                                                163
                                                
                                                
                                                
                                                163
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Throughput
      agreement (4)
                                                
                                                
                                                95
                                                
                                                
                                                
                                                14
                                                
                                                
                                                
                                                38
                                                
                                                
                                                
                                                38
                                                
                                                
                                                
                                                5Transportation
      and gathering (5)
                                                
                                                
                                                43
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                17
                                                
                                                
                                                
                                                10
                                                
                                                
                                                
                                                4Operating
      lease obligations (6)
                                                
                                                
                                                56
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                18
                                                
                                                
                                                
                                                8
                                                
                                                
                                                
                                                18Other
      long-term liabilities: (7)Asset
      retirement obligations (8)
                                                
                                                
                                                211
                                                
                                                
                                                
                                                27
                                                
                                                
                                                
                                                18
                                                
                                                
                                                
                                                29
                                                
                                                
                                                
                                                137Commodity
      derivative instruments (9)
                                                
                                                
                                                25
                                                
                                                
                                                
                                                23
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Total
      contractual obligations
                                                
                                                $
                                                4,095
                                                
                                                
                                                $
                                                598
                                                
                                                
                                                $
                                                931
                                                
                                                
                                                $
                                                1,763
                                                
                                                
                                                $
                                                803




(1)
            Based
      on the total debt balance, scheduled maturities and interest rates in
      effect at December 31, 2008, our cash payments for interest would be
      $58 million in 2009, $57 million in 2010, $57 million in 2011,
      $56 million in 2012, $44 million in 2013 and $878 million for the
      remaining years for a total of $1.2 billion. See Item 8. Financial
      Statements and Supplementary Data—Note
      8—Debt.


(2)
            Drilling
      and equipment obligations represent contractual agreements with third
      party service providers to procure drilling rigs and other related
      equipment for developmental and exploratory drilling
      activities.  See Item 8. Financial Statements and Supplementary
      Data—Note 17—Commitments and
      Contingencies.


(3)
            Purchase
      obligations represent agreements to purchase goods or services that are
      enforceable, are legally binding and specify all significant terms,
      including fixed and minimum quantities to be purchased; fixed, minimum or
      variable price provisions; and the approximate timing of the transaction.
      See Item 8. Financial Statements and Supplementary Data—Note
      17—Commitments and Contingencies.


(4)
              We
      have a five-year throughput agreement on a new interstate crude oil
      transportation pipeline system running from Weld County, Colorado to
      Cushing, Oklahoma, which is expected to become operational in 2009. See
      Item 8. Financial Statements and Supplementary Data—Note
      17—Commitments and Contingencies.(5)
              Transportation
      and gathering obligations represent minimum changes for our firm
      transportation and gathering agreements. See Item 8. Financial Statements
      and Supplementary Data —Note 17—Commitments and
      Contingencies.


(6)
            Operating
      lease obligations represent non-cancelable leases for office buildings and
      facilities and oil and gas operations equipment used in our daily
      operations. See Item 8. Financial Statements and Supplementary Data —Note 17—Commitments and
  Contingencies.





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(7)
            The
      table excludes deferred compensation liabilities of $159 million and
      accrued benefit costs of $81 million as specific payment dates are
      unknown. See Item 8. Financial Statements and Supplementary Data—Note 12—Benefit
Plans.


(8)
            Asset
      retirement obligations are discounted. See Item 8. Financial Statements
      and Supplementary Data—Note 10—Asset Retirement
      Obligations.


(9)
            Amount
      represents open commodity derivative instruments that were in a net
      payable position with the counterparty at December 31, 2008. Our remaining
      commodity derivative instruments were in a net receivable position at
      December 31, 2008. See Item 8. Financial Statements and Supplementary
      Data—Note 6—Derivative Instruments and Hedging
      Activities.




We
accrued approximately $20 million as of December 31, 2008, for an
insurance contingency due to our membership in Oil Insurance Limited (OIL). OIL
is a mutual insurance company which insures specific property, pollution
liability and other catastrophic risks. As part of our membership, we are
contractually committed to pay termination fees should we elect to withdraw from
OIL. We do not anticipate withdrawing from OIL; however, the potential
termination fee is calculated annually based on OIL’s past losses and the
liability reflecting this potential charge has been accrued.




In
addition, in the ordinary course of business, we maintain letters of credit in
support of certain performance obligations of our subsidiaries. Outstanding
letters of credit totaled approximately $5 million at December 31,
2008.




Other




Contributions to Pension and Other
Postretirement Benefit Plans—We made contributions to the pension and
other postretirement benefit plans totaling $38 million in 2008,
$12 million in 2007, and $36 million in 2006. The actual return on
plan assets was a loss of $43 million in 2008 and a gain of $13 million in 2007.
The investment return has tended to follow market performance. In
August 2006, the Pension Protection Act of 2006 (the Act) was signed into
law. Certain provisions of this Act changed the calculation related to the
maximum contribution amount deductible for income tax purposes and require that
defined benefit pension plans become fully funded over a seven-year period
beginning in 2008. As a result of previous contributions made to the pension
plan, the plan is adequately funded at the balance sheet date, and we expect the
plan would not be subject to any of the benefit limitations that would be
imposed by the Act if the plan were not adequately funded.  In
addition, due to the level of previous funding, we do not expect that there are
any contributions that will be required in 2009. However, we may make additional
contributions to our pension plan. In 2009, we expect to make contributions
pertaining to the restoration and medical and life plans of approximately $3
million, an amount which is estimated to be equal to the benefits expected to be
paid by those plans.




Income Taxes—We made cash
payments for income taxes, net of refunds, of $263 million in 2008, $149 million
in 2007, and $115 million in 2006.




Contingencies—We paid a total
of approximately $2 million to settle legal proceedings in 2008 and $56 million
to settle legal proceedings in 2007. These amounts had been accrued previously.
During 2006, no significant payments were made to settle any legal proceedings.
We regularly analyze current information and accrue for probable liabilities on
the disposition of certain matters, as necessary. Liabilities for loss
contingencies arising from claims, assessments, litigation or other sources are
recorded when it is probable that a liability has been incurred and the amount
can be reasonably estimated.




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




The
preparation of the consolidated financial statements requires our management to
make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. When alternatives exist among various
accounting methods, the choice of accounting method can have a significant
impact on reported amounts. The following is a discussion of the accounting
policies, estimates and judgments which management believes are most significant
in the application of generally accepted accounting principles used in the
preparation of the consolidated financial statements.




Reserves—All
of the reserve data in this Form 10-K are estimates. Estimates of our crude
oil and natural gas reserves are prepared by our engineers in accordance with
guidelines established by the SEC. Reservoir engineering is a subjective process
of estimating underground accumulations of crude oil and natural gas. There are
numerous uncertainties inherent in estimating quantities of proved crude oil and
natural gas reserves. Uncertainties include the projection of future production
rates and the expected timing of development expenditures. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, reserve
estimates may be different from the quantities of crude oil and natural gas that
are ultimately recovered. Estimates of proved crude oil and natural gas reserves
significantly affect our DD&A expense.







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For
example, if estimates of proved reserves decline, the DD&A rate will
increase, resulting in a decrease in net income. A decline in estimates of
proved reserves could also cause us to perform an impairment analysis to
determine if the carrying amount of crude oil and natural gas properties exceeds
fair value and could result in an impairment charge, which would reduce
earnings. In addition, a decline in estimates of proved reserves could prompt a
goodwill impairment analysis.




Oil and Gas
Properties—We account for crude oil and natural gas properties under the
successful efforts method of accounting. Under the successful efforts method,
costs to acquire mineral interests in crude oil and natural gas properties, to
drill and equip exploratory wells that find commercial quantities of proved
reserves, and to drill and equip development wells are capitalized. Proved
property acquisition costs are amortized to expense by the unit-of-production
method on a field-by-field basis based on total proved crude oil and natural gas
reserves as estimated by our engineers. Costs to drill and equip exploratory
wells that find proved reserves and to drill and equip development wells are
also amortized to expense by the unit-of-production method on a field-by-field
basis. These costs, along with support equipment and facilities, are amortized
based on proved developed crude oil and natural gas reserves. Costs of certain
gathering facilities or processing plants serving a number of properties or used
for third party processing are depreciated using the straight-line method over
the useful lives of the assets. Application of the successful efforts method
results in the expensing of certain costs including geological and geophysical
costs, exploratory dry holes and delay rentals, during the periods the costs are
incurred.




The
alternative method of accounting for crude oil and natural gas properties is the
full cost method. Under the full cost method, geological and geophysical costs,
exploratory dry holes and delay rentals are capitalized as assets and charged to
earnings in future periods as a component of DD&A expense. In addition,
under the full cost method, capitalized costs are accumulated in pools on a
country-by-country basis. DD&A is computed on a country-by-country basis,
and capitalized costs are limited on the same basis through the application of a
ceiling test. We believe the successful efforts method is the most appropriate
method to use in accounting for our crude oil and natural gas properties because
it provides a better representation of results of operations, especially during
periods of active exploration. If we had used the full cost method, our
financial position and results of operations could have been significantly
different.




Exploratory Well
Costs—In accordance with the successful efforts method of accounting, the
costs associated with drilling an exploratory well may be capitalized
temporarily, or “suspended,” pending a determination of whether commercial
quantities of crude oil or natural gas have been discovered. We carry the costs
of an exploratory well as an asset if the well has found a sufficient quantity
of reserves to justify its completion as a producing well and as long as we are
making sufficient progress assessing the reserves and the economic and operating
viability of the project. For certain capital-intensive deepwater Gulf of Mexico
or international projects, it may take several years to evaluate the future
potential of the exploration well and make a determination of its economic
viability. Our ability to move forward on a project may be dependent on gaining
access to transportation or processing facilities or obtaining permits and
government or partner approval, the timing of which is beyond our control. In
such cases, exploratory well costs remain suspended as long as we are actively
pursuing access to necessary facilities and access to such permits and approvals
and believe they will be obtained.




Management
assesses the status of suspended exploratory well costs on a quarterly basis.
These costs may be charged to exploration expense in future periods if we decide
not to pursue additional exploratory or development activities. At
December 31, 2008, the balance of property, plant and equipment
included $501 million of suspended exploratory well costs,
$245 million of which had been capitalized for a period greater than one
year. The wells relating to these suspended costs continue to be evaluated by
various means including additional seismic work, drilling additional wells, or
evaluating the potential of the exploration wells. For more information, see
Item 8. Financial Statements and Supplementary Data—Note
7—Capitalized Exploratory Well Costs.




Impairment of
Proved Oil and Gas Properties and Other Investments—We assess proved
crude oil and natural gas properties and other investments for possible
impairment when events or circumstances indicate that the recorded carrying
value of the assets may not be recoverable. We recognize an impairment loss as a
result of an event that causes us to consider the possibility that an impairment
may have occurred and when the estimated undiscounted future cash flows from a
property or other investment are less than the carrying value. If impairment is
indicated, the carrying values are written down to fair value, which, in the
absence of comparable market data, is estimated using a discounted cash flow
method. In our cash flow method, cash flows are discounted using a risk-adjusted
rate and compared to the carrying value for determining the amount of the
impairment loss to record. Estimated future cash flows are based on management’s
expectations for the future and include estimates of crude oil and natural gas
reserves and future commodity prices, revenues and operating and development
costs. Downward revisions in estimates of reserve quantities or expectations of
falling commodity prices or rising operating or development costs could result
in a reduction in undiscounted future cash flows and could indicate property
impairment.







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We
assessed the recoverability of our proved oil and gas properties and other
investments at December 31, 2008. As a result of this analysis, we determined
that certain of our assets were impaired. In addition, during third quarter
2008, we recorded an impairment charge related to an asset held for sale. For
2008 total pre-tax (non-cash) asset impairment charges, assessed under SFAS 144,
were approximately $219 million of which $149 million is related to our US
proved properties and $70 million related to our investment in Ecuador. These
assets were written down to their estimated fair values under a discounted cash
flows model. The discounted cash flows model included management’s estimates of
future oil and gas production; commodity prices based on December 31, 2008
commodity price strips; operating and development costs, as well as appropriate
discount rates. See Item 8. Financial Statements and Supplementary Data—Note 3—Asset Impairments. We recorded approximately
$4 million of impairments in 2007 and $9 million in 2006, primarily related
to downward reserve revisions on US properties and/or adjustment of the carrying
value of properties to their fair values.




Impairment of
Unproved Oil and Gas Properties—We also perform periodic assessments of
individually significant unproved crude oil and natural gas properties for
impairment on a quarterly basis and recognize a loss at the time of impairment
by providing an impairment allowance. In determining whether a significant
unproved property is impaired we consider numerous factors including, but not
limited to, current exploration plans, favorable or unfavorable exploratory
activity on adjacent leaseholds, our geologists' evaluation of the lease, and
the remaining months in the lease term.




When we
have allocated fair values to a significant unproved property as the result of a
business combination or other purchase of proved and unproved properties, we use
a future cash flow analysis to assess the property for
impairment.  Cash flows used in the impairment analysis are determined
based upon management’s estimates of natural gas and crude oil reserves, future
commodity prices and future costs to extract the reserves. Downward revisions in
estimated reserve quantities, reductions in commodity prices, or increases in
estimated costs could cause a reduction in the value of an unproved property
and, therefore, could also cause a reduction in the carrying amount of the
property. If undiscounted future net cash flows are less than the carrying value
of the property, indicating impairment, the cash flows are discounted using a
risk-adjusted rate and compared to the carrying value for determining the amount
of the impairment loss to record. The estimated prices used in the cash flow
analysis are determined by management based on forward price curves for the
related commodities, adjusted for average historical location and quality
differentials. Estimates of cash flows related to probable and possible reserves
are reduced by additional risk-weighting factors.




Due to
the volatility of natural gas and crude oil prices, these cash flow estimates
are inherently imprecise. Management’s assessment of the results of exploration
activities, availability of funds for future activities and the current and
projected political climate in areas in which we operate also impact the amounts
and timing of impairment provisions.




We
assessed the recoverability of our significant unproved oil and gas properties
at December 31, 2008. Due to the decrease in commodity prices, we recorded a
pre-tax (non-cash) impairment charge of $75 million related to our US unproved
properties. These impairments were primarily related to allocated fair value
attributable to probable and possible reserves acquired in previous business
combinations. We assessed these properties under a discounted cash flows model
based on management’s assumptions of future oil and gas production, commodity
prices, operating and development costs; as well as appropriate discount rates.
See Item 8. Financial Statements and Supplementary Data—Note
3—Asset Impairments.   We recorded impairments of significant
unproved oil and gas properties of $3 million in 2007 and $1 million in 2006 and
reported the amounts in exploration expense.




Purchase Price
Allocations—As a result of the Patina Merger in 2005 and the U.S.
Exploration acquisition in 2006, we acquired assets and assumed liabilities in
transactions accounted for as purchases. In connection with a purchase business
combination, the acquiring company must allocate the cost of the acquisition to
assets acquired and liabilities assumed based on fair values as of the
acquisition date. Deferred taxes must be recorded for any differences between
the assigned values and tax bases of assets and liabilities. Any excess of
purchase price over amounts assigned to assets and liabilities is recorded as
goodwill. The amount of goodwill recorded in any particular business combination
can vary significantly depending upon the value attributed to assets acquired
and liabilities assumed.




In
estimating the fair values of assets acquired and liabilities assumed we made
various assumptions. The most significant assumptions related to the estimated
fair values assigned to proved and unproved crude oil and natural gas
properties. To estimate the fair values of these properties, we prepared
estimates of crude oil and natural gas reserves. We estimated future prices to
apply to the estimated reserve quantities acquired, and estimated future
operating and development costs, to arrive at estimates of future net cash
flows. For estimated proved reserves, the future net cash flows were discounted
using a market-based weighted average cost of capital rate determined
appropriate at the time of the acquisition. The market-based weighted average
cost of capital rate was subjected to additional
project-specific risking factors. To compensate for the inherent risk of
estimating and valuing unproved reserves, the discounted future net cash flows
of probable and possible reserves were reduced by additional risk-weighting
factors.







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Estimated
deferred taxes were based on available information concerning the tax basis of
assets acquired and liabilities assumed and loss carryforwards at the merger
date, although such estimates may change in the future as additional information
becomes known.




Estimated
fair values assigned to assets acquired can have a significant effect on results
of operations in the future. A higher fair value assigned to a property results
in higher DD&A expense, which results in lower net earnings. Fair values are
based on estimates of future commodity prices, reserve quantities, operating
expenses and development costs. This increases the likelihood of impairment if
future commodity prices or reserve quantities are lower than those originally
used to determine fair value, or if future operating expenses or development
costs are higher than those originally used to determine fair value. Impairment
would have no effect on cash flows but would result in a decrease in net income
for the period in which the impairment is recorded.




Goodwill—As
of December 31, 2008, the consolidated balance sheet included
$759 million of goodwill, all of which has been assigned to the US
reporting unit. Goodwill is not amortized to earnings but is tested, at least
annually, for impairment at the reporting unit level. We conduct the goodwill
impairment test as of December 31 of each year. Other events and changes in
circumstances may require goodwill to be tested for impairment between annual
measurement dates. If the carrying value of goodwill is determined to be
impaired, the amount of goodwill is reduced and a corresponding charge is made
to earnings in the period in which the goodwill is determined to be
impaired.




A
two-step impairment test is used to identify potential goodwill impairment and
measure the amount of a goodwill impairment loss to be recognized. The first
step of the goodwill impairment test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired, and the second step of the test is
not required.  If necessary, the second step of the impairment test,
used to measure the amount of impairment loss, compares the implied fair value
of reporting unit goodwill with the carrying amount of that goodwill. If the
carrying amount of reporting unit goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount equal to the
excess.




The first
step of the impairment test requires management to make estimates regarding the
fair value of the reporting unit to which goodwill has been assigned. In
determining the fair value of the US reporting unit, we use a combination of the
income approach and the market approach.




Under the
income approach, the fair value of the US reporting unit is estimated based on
the present value of expected future cash flows.  The income approach
is dependent on a number of factors including estimates of forecasted revenue
and operating costs, proved reserves, as well as the success of future
exploration for and development of unproved reserves, appropriate discount rates
and other variables. Downward revisions of estimated reserve quantities,
increases in future cost estimates, divestiture of a significant component of
the reporting unit, or sustained decreases in natural gas or crude oil prices
could lead to a reduction in expected future cash flows and possibly an
impairment of all or a portion of goodwill in future periods.




Key
assumptions used in the discounted cash flows model described above include
estimated quantities of oil and gas reserves, including both proved reserves and
risk-adjusted unproved reserves; estimates of future commodity prices based on
the December 31, 2008 commodity price strips; and estimates of operating,
administrative and capital costs adjusted for inflation. We discounted the
resulting future cash flows using a peer company based weighted average cost of
capital of 9%.




Under the
market approach, we estimated the value of the US reporting unit by comparison
to similar businesses whose securities are actively traded in the public market.
This requires management to make certain judgments about the selection of
comparable companies and/or comparable recent company and asset transactions and
transaction premiums. At December 31, 2008, we used a peer company multiple
method for the market approach.  Market multiples represent market
estimates of fair value based on selected financial metrics, such as earnings
before interest, taxes, DD&A and exploration expense (also known as
“EBITDAX”).




Using the
range of US reporting unit fair values provided by the income and market
approaches as of December 31, 2008, we determined that the fair value of our US
reporting unit exceeded its carrying amount. Therefore, the second step of the
goodwill impairment test was unnecessary, and no goodwill impairment was
recognized.




Although
we have based the fair value estimate of the US reporting unit on assumptions we
believe to be reasonable, those assumptions are inherently unpredictable and
uncertain and actual results could differ from the estimate. In the event of
a prolonged global recession, commodity prices may stay depressed or decline
further, thereby causing the fair value of the US reporting unit to decline,
which could result in an impairment of goodwill.







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When we
dispose of a reporting unit or a portion of a reporting unit that constitutes a
business, we include goodwill associated with that business in the carrying
amount of the business in order to determine the gain or loss on disposal. The
amount of goodwill to be included in that carrying amount is based on the
relative fair value of the business to be disposed of and the portion of the
reporting unit that will be retained. During 2006, we allocated
$100 million of US reporting unit goodwill to the carrying amount of Gulf
of Mexico shelf properties sold. The amount of goodwill allocated to the
carrying amount of a business can significantly impact the amount of gain or
loss recognized on the sale of that business.




Commodity
Derivative Instruments and Hedging Activities—We use various derivative
instruments to minimize the impact of commodity price fluctuations on forecasted
sales of crude oil and natural gas production. We also use derivative
instruments in connection with purchases and sales of third-party production to
lock in profits or limit exposure to commodity price risk. In addition, we have
used derivative instruments in connection with acquisitions and certain
price-sensitive projects. Management exercises significant judgment in
determining types of instruments to be used, production volumes to be hedged,
prices at which to hedge and the counterparties’ creditworthiness. We account
for derivative instruments under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities, as amended”, and all derivative instruments
are reflected at fair value in our consolidated balance sheets.




Our open
commodity derivative instruments were in a net receivable position with a fair
value of $445 million at December 31, 2008. We estimated the fair values of our
commodity derivative instruments in accordance with SFAS 157, “Fair Value
Measurements” (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 published LIBOR
rates, Eurodollar futures rates and interest swap rates. The fair values of our
commodity derivative assets and liabilities include a measure of credit risk
based on current published credit default swap rates. 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.  We compare our estimates of fair
value with those provided by our counterparties. There have been no significant
differences.




Changes
in the fair values of our commodity derivative instruments have a significant
impact on our net income because we follow mark-to-market accounting and
recognize all gains and losses on such instruments in earnings in the period in
which they occur. For the year ended December 31, 2008, we reported a $440
million gain on commodity derivative instruments. See Item 8. Financial
Statements and Supplementary Data—Note 6—Derivative
Instruments and Hedging Activities.




Asset Retirement
Obligation—Our asset retirement obligations (ARO) consist of estimated
costs of dismantlement, removal, site reclamation and similar activities
associated with our oil and gas properties. SFAS No. 143, “Accounting for
Asset Retirement Obligations,” requires that the fair value of a liability for
an ARO be recognized in the period in which it is incurred with the associated
asset retirement cost capitalized as part of the carrying cost of the oil and
gas asset. The recognition of an ARO requires that management make numerous
estimates, assumptions and judgments regarding such factors as the existence of
a legal obligation for an ARO; estimated probabilities, amounts and timing of
settlements; the credit-adjusted risk-free rate to be used; and inflation rates.
In periods subsequent to initial measurement of the ARO, we recognize
period-to-period changes in the liability resulting from the passage of time and
revisions to either the timing or the amount of the original estimate of
undiscounted cash flows. Increases in the ARO liability due to passage of time
impact net income as accretion expense. The related capitalized cost, including
revisions thereto, is charged to expense through DD&A. Asset retirement
obligations totaled $211 million at December 31, 2008. See Item 8. Financial
Statements and Supplementary Data—Note 10—Asset Retirement
Obligations.




Involuntary
Conversions—When an involuntary conversion occurs, such as the
destruction of oil and gas producing assets by a hurricane, a loss is accrued by
a charge to income if the amount of loss can be reasonably estimated. An asset
relating to insurance recovery is recognized only when realization of the claim
for recovery of a loss recognized in the financial statements is deemed
probable. A gain (recovery of a loss not yet recognized in the financial
statements or an amount recovered in excess of a loss recognized in the
financial statements) is not recognized until the insurance reimbursement has
been received.




Management
must make a number of estimates and assumptions relating to these gain and loss
accruals. These include estimated costs of salvage, clean-up, restoration,
redevelopment or abandonment and estimated amounts of insurance
recoveries. The amount of an insurance recovery may be limited if total industry
claims are in excess of the insurance carrier’s ceiling limitation per event. A
significant amount of time may be necessary for an insurance carrier to review
all related claims for an event and determine the company-specific claim
limitation on the final recovery. In addition, we may continue to incur costs,
submit claims and receive reimbursements over a multi-year
period.







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The
estimates involved in this process can have significant effects on reported
amounts of net income. A decrease in the estimated amount of insurance
recoveries will result in an increase in the involuntary conversion loss, which
will result in a decrease in net income. An increase in estimated costs of
salvage, if not covered by insurance, will also result in an increase in the
involuntary conversion loss, which will result in a decrease in net income.
Unreimbursed losses will have a negative effect on our cash flows. During the
first half of 2007, several factors contributed to an increase in our estimated
cleanup costs for damage related to Hurricanes Ivan in 2004 and Katrina in
2005.  These factors included cost escalation due to weather delays
and an increase in effort for the design and construction of the deck lifting
barge and mooring system, as well as additional costs for the actual deck
lifting activities.  These increases caused the total project costs,
combined with net book value of the assets destroyed, to exceed certain
insurance coverage limitations.  As a result, we recorded $51 million
as a loss on involuntary conversion during 2007.  During 2008, we
recorded an additional $9 million loss on involuntary conversion upon resolution
of certain of our insurance claims related to the hurricane damage sustained in
2005. See Item 8. Financial Statements and Supplementary Data—Note 2—Summary of Significant Accounting
Policies.




Income Tax
Expense and Deferred Tax Assets—We are subject to income and other taxes
in numerous taxing jurisdictions worldwide. For financial reporting purposes, we
provide taxes at rates applicable for the appropriate tax jurisdictions.
Estimates of amounts of income tax to be recorded involve interpretation of
complex tax laws, assessment of the effects of foreign taxes on domestic taxes,
and estimates regarding the timing and amounts of future repatriation of
earnings from controlled foreign corporations.




The
consolidated balance sheets include deferred tax assets. Deferred tax assets
arise when expenses are recognized in the financial statements before they are
recognized in the tax returns or when income items are recognized in the tax
return before they are recognized in the financial statements. Deferred tax
assets also arise when operating losses or tax credits are available to offset
tax payments due in future years. Ultimately, realization of a deferred tax
asset depends on the existence of sufficient taxable income within the future
periods to absorb future deductible temporary differences, loss carryforwards or
credits. In assessing the realizability of deferred tax assets, management must
consider whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers all available
evidence (both positive and negative) in determining whether a valuation
allowance is required. Such evidence includes the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in
making this assessment, and judgment is required in considering the relative
weight of negative and positive evidence. We continue to monitor facts and
circumstances in the reassessment of the likelihood that operating loss
carryforwards, credits and other deferred tax assets will be utilized prior to
their expiration. As a result, we may determine, and we have determined in the
past, that a deferred tax asset valuation allowance should be established. Any
increases or decreases in a deferred tax asset valuation allowance would impact
net income through offsetting changes in income tax expense.




As of
December 31, 2008, the accumulated undistributed earnings of our
foreign subsidiaries on which no US taxes have been recorded totaled
approximately $1.1 billion. Management must consider numerous factors in
determining timing and amounts of possible future distribution of these earnings
to the parent company and whether a US deferred tax liability should be recorded
for these earnings. These factors include the future operating and capital
requirements of both the parent company and the subsidiaries, remittance
restrictions imposed by foreign governments or financial agreements and tax
consequences of the remittance, including possible application of US foreign tax
credits and limitations on foreign tax credits that may be imposed by the
Internal Revenue Service (IRS) or IRS regulations. We currently believe that the
repatriation of a portion of our international undistributed earnings is likely.
Therefore, as of December 31, 2008, we have recorded additional US deferred
income taxes of $9 million on the portion of undistributed earnings of our
foreign subsidiaries that we anticipate will be repatriated. Repatriation of
additional earnings in the future could result in a decrease in our net income
and cash flows.




Allowance for
Doubtful Accounts—Weassess the
recoverability of all material trade and other receivables to determine their
collectibility on a quarterly basis. We accrue a reserve on a receivable when,
based on management’s judgment, it is probable that a receivable will not be
collected and the amount of such reserve may be reasonably estimated. In
determining the amount of the reserve, management must analyze the aging of
accounts receivable at the date of the consolidated financial statements and
assess collectibility based on historic results, current collection trends and
an evaluation of economic conditions. If estimates are inaccurate, we may incur
gains or losses that could have a material effect on our results of
operations.







53
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The
allowance for doubtful accounts totaled $97 million at December 31, 2008. This
amount includes a $38 million reduction in the carrying value of a receivable
from SemCrude, L.P., a crude oil purchaser. We recognized an associated pre-tax
charge of $38 million during third quarter 2008. See Item 8. Financial
Statements and Supplementary Data—Note 17 – Commitments
and Contingencies.




In
addition, through December 31, 2008, we had recorded an allowance for doubtful
accounts of $57 million related to our Ecuador power operations. The allowance
was necessary to cover potentially uncollectible balances, as certain entities
purchasing electricity in Ecuador have been slow to pay amounts due us. As a
result of pursuing various strategies to protect our interests, including
international arbitration and litigation, we reached a settlement in fourth
quarter 2008. However, we have not yet received any funds related to the
settlement. We will reverse our allowance for doubtful accounts upon receipt of
payment from the Ecuadorian government. See Item 8. Financial Statements and
Supplementary Data—Note 2 – Summary of Significant
Accounting Policies – Allowance for Doubtful Accounts.




Benefit
Plans—We sponsor
a qualified defined benefit pension plan, a non-qualified defined benefit
pension plan (restoration plan), and other postretirement benefit plans. The
actuarial determination of the projected benefit obligations and related benefit
expense requires that certain assumptions be made regarding such variables as
expected return on plan assets, discount rates, rates of future compensation
increases, estimated future employee turnover rates and retirement dates,
distribution election rates, mortality rates, retiree utilization rates for
health care services and health care cost trend rates. The selection of
assumptions requires considerable judgment concerning future events and has a
significant impact on the amount of the obligations recorded in the consolidated
balance sheets and on the amount of expense included in the consolidated
statements of operations.




We base
our determination of the asset return component of pension expense on a
market-related valuation of assets, which reduces year-to-year volatility. This
market-related valuation recognizes investment gains or losses over a five-year
period from the year in which they occur. Investment gains or losses for this
purpose are the difference between the expected return calculated using the
market-related value of assets and the actual return based on the fair value of
assets. Since the market-related value of assets recognizes gains or losses over
a five-year period, the future value of assets will be impacted as previously
deferred gains or losses are recorded. As of January 1, 2008, cumulative asset
gains (losses) of approximately $3 million remained to be recognized in the
calculation of the market-related value of assets.




In
selecting the assumption for expected long-term rate of return on assets, we
consider the average rate of earnings expected on the funds invested or to be
invested to provide for plan benefits included in the projected benefit
obligations. This includes considering the returns being earned by the plan
assets and the rates of return expected to be available for reinvestment. We
assume that the long-term asset mix will be consistent with the target asset
allocation of 70% equity and 30% fixed income, with a range of plus or minus 10%
acceptable degree of variation in asset allocation. A 1% decrease in the
expected return on plan assets assumption would have increased 2008 net periodic
benefit cost by approximately $2 million. The fair value of plan assets was
$132 million at December 31, 2008. The expected return assumption used in the
calculation of 2008 net periodic benefit cost was 8.25%. The assumption will be
reduced to 8.00% for the calculation of 2009 net periodic benefit
cost.




In
selecting a discount rate, employers may look to rates of return on high quality
fixed-income investments available as of the year-end measurement date and
expected to be available during the period to maturity of the pension benefits.
In order to determine an appropriate December 31, 2008 discount rate, we
performed an analysis of the Citigroup Pension Discount Curve (the CPDC) for
each of our plans. The CPDC uses spot rates that represent the equivalent yield
on high quality, zero coupon bonds for specific maturities. We used these rates
to develop an equivalent single discount rate based on our plans’ expected
future benefit payment streams and duration of plan liabilities. A 1% increase
in the discount rate assumption would have decreased 2008 net periodic benefit
cost by $2 million and decreased the benefit obligation for the combined
plans by $20 million at December 31, 2008. A 1% decrease in the
discount rate assumption would have increased 2008 net periodic benefit cost by
$2 million and increased the benefit obligation for the combined plans by
$24 million at December 31, 2008. The assumed discount rate used to
determine net periodic benefit cost for 2008 was 6.50% for our defined benefit
pension and restoration plans and 6.25% for our medical and life plans. The
assumed discount rate used to determine the benefit obligations at
December 31, 2008 was 6.00% for our defined benefit pension plan and 6.25%
for our restoration and medical and life plans. The total accrued benefit
obligation for our defined benefit pension, restoration and medical and life
plans was $216 million at December 31, 2008.




Recently Issued
Pronouncements—See Item 8. Financial Statements and Supplementary Data—Note 18—Recently Issued Pronouncements.







54
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Item
7A.         
     Quantitative and Qualitative Disclosures About Market
Risk




Commodity
Price Risk




Derivative Instruments Held for
Non-Trading Purposes—We areexposed to market risk
in the normal course of business operations, and 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
December 31, 2008, we had entered into variable to fixed price commodity
swaps, costless collars and basis swaps related to crude oil and natural gas
sales. Our open commodity derivative instruments were in a net receivable
position with a fair value of $445 million. Based on the December 31, 2008
published forward commodity price curves for the underlying commodities, a price
increase of $1.00 per Bbl for crude oil would decrease the fair value of our net
commodity derivative receivable by approximately $9 million. A price increase of
$0.10 per MMBtu for natural gas would decrease the fair value of our net
commodity derivative receivable by approximately $7 million.  Our
derivative instruments are executed under master agreements which allow us, in
the event of default, to elect early termination of all contracts with the
defaulting counterparty. If we choose to elect early termination, all asset and
liability positions with the defaulting counterparty would be net settled at the
time of election. See Item 8. Financial Statements and Supplementary
Data—Note 6—Derivative Instruments and Hedging
Activities.




As of
December 31, 2008, a net unrealized loss of $48 million, net of
tax, is recorded in AOCL in the consolidated balance sheets.  We will
reclassify $36 million of the deferred loss to earnings during 2009 as
adjustments to revenue when the associated production occurs.  The
remaining $12 million of deferred loss will be reclassified to earnings during
2010.




Interest
      Rate Risk




Changes
in interest rates affect the amount of interest we pay on borrowings under our
revolving credit facility and other variable-rate debt and the amount of
interest we earn on our short-term investments.




At
December 31, 2008, we had $2.245 billion (excluding unamortized
discount) of long-term debt outstanding. Of this amount, $639 million was
fixed-rate debt with a weighted average interest rate of 6.92%. Although near
term changes in interest rates may affect the fair value of our fixed-rate debt,
they do not expose us to the risk of earnings or cash flow loss.




The
remainder of our long-term debt, $1.606 billion at December 31, 2008,
was variable-rate debt. We also had $25 million of short-term variable-rate debt
at December 31, 2008. Variable-rate debt exposes us to the risk of earnings or
cash flow loss due to increases in market interest rates. We estimate that a
hypothetical 25 basis point change in the floating interest rates applicable to
the December 31, 2008 balance of our variable-rate debt would result
in a change in annual interest expense of approximately
$4 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 December 31, 2008,
AOCL included $3 million, net of tax, related to interest rate locks. 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. See Item 8.
Financial Statements and Supplementary Data—Note
6—Derivative Instruments and Hedging Activities.




We are
also exposed to interest rate risk related to our short-term investments. As of
December 31, 2008, 58% of our cash was invested in US Treasury securities. A
hypothetical 25 basis point change in the floating interest rates applicable to
the December 31, 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 derivative instruments. 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 (income) expense,
net in the consolidated statements of operations.







55
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Item
8.                 
Financial Statements and Supplementary Data





INDEX
TO FINANCIAL STATEMENTS




Consolidated
      Financial Statements of Noble Energy, Inc.Management’s Report on Internal Control over
      Financial Reporting
            57Report of Independent Registered
      Public Accounting Firm (Financial Statements)
            58Report of Independent Registered Public
      Accounting Firm (Internal Control Over Financial
      Reporting)
            59Consolidated Statements of Operations
      for each of the three years in the period ended December 31,
      2008
            60Consolidated Balance Sheets as of
      December 31, 2008 and 2007
            61Consolidated Statements of Cash Flows for
      each of the three years in the period ended December 31,
      2008
            62Consolidated Statements of
      Shareholders’ Equity for each of the three years in the period ended
      December 31, 2008
            63Consolidated Statements of
      Comprehensive Income for each of the three years in the period ended
      December 31, 2008
            64Notes to Consolidated Financial
      Statements
            65Supplemental Oil and Gas Information
      (Unaudited)
            97Supplemental Quarterly Financial
      Information (Unaudited)
            107





56
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Management’s Report on Internal Control over
Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed under the supervision of our Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.




Because
of its inherent limitations, internal control over financial reporting may not
detect or prevent misstatements. Projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or processes may deteriorate.




As of
December 31, 2008, our management assessed the effectiveness of our
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in “Internal
Control—Integrated Framework,” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the assessment, management
determined that we maintained effective internal control over financial
reporting as of December 31, 2008, based on those criteria. Management
included in its assessment of internal control over financial reporting all
consolidated entities.




KPMG LLP,
the independent registered public accounting firm that audited our consolidated
financial statements included in this Annual Report on Form 10-K, has
issued an attestation report on the effectiveness of internal control over
financial reporting as of December 31, 2008 which is included
herein.




Noble
      Energy, Inc.







57
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Report of Independent Registered Public
Accounting Firm








The Board
of Directors and Shareholders


Noble
Energy, Inc.:




We have
audited the accompanying consolidated balance sheets of Noble Energy, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, shareholders’ equity, comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of the Alba Plant LLC (Alba), the investment
in which, as discussed in Note 11 of the consolidated financial statements, is
accounted for by the equity method of accounting. The Company’s investment in
Alba at December 31, 2008 and 2007 was $105.6 million and $142.5 million,
respectively, and its equity in earnings of Alba was $118.4 million, $128.1
million and $101.3 million for the years ended December 31, 2008, 2007, and
2006, respectively. The financial statements of Alba were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for Alba, is based solely on the reports of the
other auditors.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.




In our
opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Noble Energy, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.




As
discussed in Note 2 to the consolidated financial statements, effective December
31, 2006, the Company changed its method of accounting for defined benefit
pension and other postretirement plans.




We also
have audited, in accordance with standards of the Public Company Accounting
Oversight Board (United States), Noble Energy, Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
18, 2009 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.




/s/ KPMG
LLP




Houston,
Texas


February
18, 2009







58
 Table of Contents

















Report of Independent Registered Public Accounting
Firm




The Board
of Directors and Shareholders


Noble
Energy, Inc.:




We have
audited Noble Energy, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established inInternal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Noble Energy, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, Noble Energy, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Noble
Energy, Inc. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, shareholders’ equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated February 18, 2009
expressed an unqualified opinion on those consolidated financial
statements.




/s/ KPMG
LLP




Houston,
Texas


February
18, 2009







59
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Noble
      Energy, Inc. and SubsidiariesConsolidated Statements of
      Operations(in
      millions, except per share amounts)Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006RevenuesOil,
      gas and NGL sales
                            
                            $
                            3,651
                            
                            
                            $
                            2,966
                            
                            
                            $
                            2,701Income
      from equity method investees
                            
                            
                            174
                            
                            
                            
                            211
                            
                            
                            
                            139Other
      revenues
                            
                            
                            76
                            
                            
                            
                            95
                            
                            
                            
                            100Total
                            
                            
                            3,901
                            
                            
                            
                            3,272
                            
                            
                            
                            2,940Costs
      and ExpensesLease
      operating expense
                            
                            
                            371
                            
                            
                            
                            322
                            
                            
                            
                            317Production
      and ad valorem taxes
                            
                            
                            166
                            
                            
                            
                            114
                            
                            
                            
                            109Transportation
      expense
                            
                            
                            57
                            
                            
                            
                            52
                            
                            
                            
                            29Exploration
      expense
                            
                            
                            217
                            
                            
                            
                            219
                            
                            
                            
                            168Depreciation,
      depletion and amortization
                            
                            
                            791
                            
                            
                            
                            736
                            
                            
                            
                            633General
      and administrative
                            
                            
                            236
                            
                            
                            
                            206
                            
                            
                            
                            165Asset
      impairments
                            
                            
                            294
                            
                            
                            
                            4
                            
                            
                            
                            9Gain
      on sale of assets
                            
                            
                            (5
                            )
                            
                            
                            (12
                            )
                            
                            
                            (220
                            )Other
      operating expense, net
                            
                            
                            129
                            
                            
                            
                            145
                            
                            
                            
                            111Total
                            
                            
                            2,256
                            
                            
                            
                            1,786
                            
                            
                            
                            1,321Operating
      Income
                            
                            
                            1,645
                            
                            
                            
                            1,486
                            
                            
                            
                            1,619Other
      (Income) Expense(Gain)
      loss on commodity derivative instruments
                            
                            
                            (440
                            )
                            
                            
                            (2
                            )
                            
                            
                            392Interest,
      net of amount capitalized
                            
                            
                            69
                            
                            
                            
                            113
                            
                            
                            
                            117Other
      (income) expense, net
                            
                            
                            (45
                            )
                            
                            
                            7
                            
                            
                            
                            14Total
                            
                            
                            (416
                            )
                            
                            
                            118
                            
                            
                            
                            523Income
      Before Income Taxes
                            
                            
                            2,061
                            
                            
                            
                            1,368
                            
                            
                            
                            1,096Income
      Tax Provision
                            
                            
                            711
                            
                            
                            
                            424
                            
                            
                            
                            418Net
      Income
                            
                            $
                            1,350
                            
                            
                            $
                            944
                            
                            
                            $
                            678Earnings
      Per ShareBasic
                            
                            $
                            7.83
                            
                            
                            $
                            5.52
                            
                            
                            $
                            3.86Diluted
                            
                            
                            7.58
                            
                            
                            
                            5.45
                            
                            
                            
                            3.79Weighted
      average number of shares outstandingBasic
                            
                            
                            173
                            
                            
                            
                            171
                            
                            
                            
                            176Diluted
                            
                            
                            176
                            
                            
                            
                            173
                            
                            
                            
                            179The
      accompanying notes are an integral part of these financial
      statements.







60
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Noble
      Energy, Inc. and SubsidiariesConsolidated Balance
    Sheets(in
      millions)December
      31,2008
                              
                              
                              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
                              
                              $
                              1,140
                              
                              
                              $
                              660Accounts
      receivable, net
                              
                              
                              423
                              
                              
                              
                              594Commodity
      derivative instruments
                              
                              
                              437
                              
                              
                              
                              15Deferred
      income taxes
                              
                              
                              -
                              
                              
                              
                              131Asset
      held for sale
                              
                              
                              26
                              
                              
                              
                              82Other
      current assets
                              
                              
                              132
                              
                              
                              
                              87Total
      current assets
                              
                              
                              2,158
                              
                              
                              
                              1,569Property,
      plant and equipment:Oil
      and gas properties (successful efforts method of
    accounting)
                              
                              
                              11,963
                              
                              
                              
                              10,217Other
      property, plant and equipment
                              
                              
                              175
                              
                              
                              
                              112Total
      property, plant and equipment, net
                              
                              
                              12,138
                              
                              
                              
                              10,329Accumulated
      depreciation, depletion and amortization
                              
                              
                              (3,134
                              )
                              
                              
                              (2,384
                              )Total
      property, plant and equipment, net
                              
                              
                              9,004
                              
                              
                              
                              7,945Goodwill
                              
                              
                              759
                              
                              
                              
                              761Other
      noncurrent assets
                              
                              
                              463
                              
                              
                              
                              556Total
      Assets
                              
                              $
                              12,384
                              
                              
                              $
                              10,831LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable - trade
                              
                              $
                              579
                              
                              
                              $
                              781Income
      taxes payable
                              
                              
                              130
                              
                              
                              
                              52Commodity
      derivative instruments
                              
                              
                              23
                              
                              
                              
                              540Deferred
      income taxes
                              
                              
                              142
                              
                              
                              
                              -Other
      current liabilities
                              
                              
                              300
                              
                              
                              
                              263Total
      current liabilities
                              
                              
                              1,174
                              
                              
                              
                              1,636Long-term
      debt
                              
                              
                              2,241
                              
                              
                              
                              1,851Deferred
      income taxes
                              
                              
                              2,174
                              
                              
                              
                              1,984Other
      noncurrent liabilities
                              
                              
                              486
                              
                              
                              
                              551Total
      Liabilities
                              
                              
                              6,075
                              
                              
                              
                              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
                              
                              
                              2,193
                              
                              
                              
                              2,106Accumulated
      other comprehensive loss
                              
                              
                              (110
                              )
                              
                              
                              (284
                              )Treasury
      stock, at cost: 19 million shares
                              
                              
                              (614
                              )
                              
                              
                              (613
                              )Retained
      earnings
                              
                              
                              4,199
                              
                              
                              
                              2,964Total
      Shareholders’ Equity
                              
                              
                              6,309
                              
                              
                              
                              4,809Total
      Liabilities and Shareholders’ Equity
                              
                              $
                              12,384
                              
                              
                              $
                              10,831The
      accompanying notes are an integral part of these financial
      statements.







61
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Noble
      Energy, Inc. and SubsidiariesConsolidated Statements of Cash
      Flows(in
      millions)Year
      Ended December 31,2008
                                
                                
                                2007
                                
                                
                                2006Cash
      Flows from Operating ActivitiesNet
      income
                                
                                $
                                1,350
                                
                                
                                $
                                944
                                
                                
                                $
                                678Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion and amortization
                                
                                
                                791
                                
                                
                                
                                736
                                
                                
                                
                                633Dry
      hole expense
                                
                                
                                84
                                
                                
                                
                                90
                                
                                
                                
                                70Impairment
      of assets
                                
                                
                                294
                                
                                
                                
                                4
                                
                                
                                
                                9Gain
      on sale of assets
                                
                                
                                (5
                                )
                                
                                
                                (12
                                )
                                
                                
                                (220
                                )Deferred
      income taxes
                                
                                
                                359
                                
                                
                                
                                292
                                
                                
                                
                                194Income
      from equity method investees
                                
                                
                                (174
                                )
                                
                                
                                (211
                                )
                                
                                
                                (139
                                )Dividends
      from equity method investees
                                
                                
                                221
                                
                                
                                
                                227
                                
                                
                                
                                37Unrealized
      (gain) loss on commodity derivative instruments
                                
                                
                                (522
                                )
                                
                                
                                (2
                                )
                                
                                
                                9Settlement
      of previously recognized hedge losses
                                
                                
                                (194
                                )
                                
                                
                                (183
                                )
                                
                                
                                406Allowance
      for doubtful accounts
                                
                                
                                49
                                
                                
                                
                                14
                                
                                
                                
                                19Loss
      on involuntary conversion
                                
                                
                                9
                                
                                
                                
                                51
                                
                                
                                
                                -Other
                                
                                
                                26
                                
                                
                                
                                91
                                
                                
                                
                                82Changes
      in operating assets and liabilities, net of acquisition:Decrease
      (increase) in accounts receivable
                                
                                
                                121
                                
                                
                                
                                (22
                                )
                                
                                
                                (32
                                )(Increase)
      decrease in other current assets
                                
                                
                                (37
                                )
                                
                                
                                8
                                
                                
                                
                                (5
                                )Decrease
      in probable insurance claims
                                
                                
                                20
                                
                                
                                
                                108
                                
                                
                                
                                140(Decrease)
      increase in accounts payable
                                
                                
                                (142
                                )
                                
                                
                                19
                                
                                
                                
                                (11
                                )Increase
      (decrease) in other current liabilities
                                
                                
                                35
                                
                                
                                
                                (137
                                )
                                
                                
                                (140
                                )Net
      Cash Provided by Operating Activities
                                
                                
                                2,285
                                
                                
                                
                                2,017
                                
                                
                                
                                1,730Cash
      Flows From Investing ActivitiesAdditions
      to property, plant and equipment
                                
                                
                                (1,971
                                )
                                
                                
                                (1,414
                                )
                                
                                
                                (1,357
                                )Acquisitions,
      net of cash acquired
                                
                                
                                (292
                                )
                                
                                
                                -
                                
                                
                                
                                (412
                                )Proceeds
      from sale of property, plant and equipment
                                
                                
                                131
                                
                                
                                
                                9
                                
                                
                                
                                520Distributions
      from equity method investees, net
                                
                                
                                -
                                
                                
                                
                                2
                                
                                
                                
                                151Net
      Cash Used in Investing Activities
                                
                                
                                (2,132
                                )
                                
                                
                                (1,403
                                )
                                
                                
                                (1,098
                                )Cash
      Flows From Financing ActivitiesExercise
      of stock options
                                
                                
                                27
                                
                                
                                
                                25
                                
                                
                                
                                63Excess
      tax benefits from stock-based awards
                                
                                
                                24
                                
                                
                                
                                20
                                
                                
                                
                                26Cash
      dividends paid
                                
                                
                                (115
                                )
                                
                                
                                (75
                                )
                                
                                
                                (49
                                )Purchase
      of treasury stock
                                
                                
                                (3
                                )
                                
                                
                                (102
                                )
                                
                                
                                (399
                                )Proceeds
      from credit facilities
                                
                                
                                951
                                
                                
                                
                                280
                                
                                
                                
                                480Repayment
      of credit facilities
                                
                                
                                (525
                                )
                                
                                
                                (255
                                )
                                
                                
                                (605
                                )Repurchase
      of senior debentures
                                
                                
                                (7
                                )
                                
                                
                                -
                                
                                
                                
                                -Repayment
      of installment notes
                                
                                
                                (25
                                )
                                
                                
                                -
                                
                                
                                
                                -Repayment
      of term loans
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (105
                                )Net
      Cash Provided by (Used in) Financing Activities
                                
                                
                                327
                                
                                
                                
                                (107
                                )
                                
                                
                                (589
                                )Increase
      in Cash and Cash Equivalents
                                
                                
                                480
                                
                                
                                
                                507
                                
                                
                                
                                43Cash
      and Cash Equivalents at Beginning of Period
                                
                                
                                660
                                
                                
                                
                                153
                                
                                
                                
                                110Cash
      and Cash Equivalents at End of Period
                                
                                $
                                1,140
                                
                                
                                $
                                660
                                
                                
                                $
                                153The
      accompanying notes are an integral part of these financial
      statements.







62
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Noble
      Energy, Inc. and SubsidiariesConsolidated Statements of
      Shareholders' Equity(in
      millions)Year
      Ended December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Common
      StockBalance,
      beginning of year
                                  
                                  $
                                  636
                                  
                                  
                                  $
                                  629
                                  
                                  
                                  $
                                  616Exercise
      of stock options
                                  
                                  
                                  4
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  13Restricted
      stock awards, net
                                  
                                  
                                  1
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  -Balance,
      end of year
                                  
                                  
                                  641
                                  
                                  
                                  
                                  636
                                  
                                  
                                  
                                  629Capital
      in Excess of Par ValueBalance,
      beginning of year
                                  
                                  
                                  2,106
                                  
                                  
                                  
                                  2,041
                                  
                                  
                                  
                                  1,945Stock-based
      compensation expense
                                  
                                  
                                  39
                                  
                                  
                                  
                                  27
                                  
                                  
                                  
                                  12Exercise
      of stock options
                                  
                                  
                                  23
                                  
                                  
                                  
                                  20
                                  
                                  
                                  
                                  50Tax
      benefits related to exercise of stock options
                                  
                                  
                                  24
                                  
                                  
                                  
                                  20
                                  
                                  
                                  
                                  26Restricted
      stock awards, net
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  (2
                                  )
                                  
                                  
                                  -Rabbi
      trust shares sold
                                  
                                  
                                  2
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  13Adoption
      of SFAS 123(R), net of tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (5
                                  )Balance,
      end of year
                                  
                                  
                                  2,193
                                  
                                  
                                  
                                  2,106
                                  
                                  
                                  
                                  2,041Accumulated
      Other Comprehensive LossBalance,
      beginning of year
                                  
                                  
                                  (284
                                  )
                                  
                                  
                                  (140
                                  )
                                  
                                  
                                  (784
                                  )Oil
      and gas cash flow hedges:Realized
      amounts reclassified into earnings
                                  
                                  
                                  207
                                  
                                  
                                  
                                  33
                                  
                                  
                                  
                                  145Unrealized
      amounts reclassified into earnings
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  265Unrealized
      change in fair value
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (184
                                  )
                                  
                                  
                                  250Net
      change in other
                                  
                                  
                                  (33
                                  )
                                  
                                  
                                  7
                                  
                                  
                                  
                                  17Adoption
      of SFAS 158, net of tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (33
                                  )Balance,
      end of year
                                  
                                  
                                  (110
                                  )
                                  
                                  
                                  (284
                                  )
                                  
                                  
                                  (140
                                  )Treasury
      Stock at CostBalance,
      beginning of year
                                  
                                  
                                  (613
                                  )
                                  
                                  
                                  (511
                                  )
                                  
                                  
                                  (148
                                  )Purchases
      of treasury stock
                                  
                                  
                                  (3
                                  )
                                  
                                  
                                  (102
                                  )
                                  
                                  
                                  (399
                                  )Rabbi
      trust shares sold
                                  
                                  
                                  2
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  36Balance,
      end of year
                                  
                                  
                                  (614
                                  )
                                  
                                  
                                  (613
                                  )
                                  
                                  
                                  (511
                                  )Deferred
      Compensation - Restricted StockBalance,
      beginning of year
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (5
                                  )Adoption
      of SFAS 123(R), net of tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5Balance,
      end of year
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Retained
      EarningsBalance,
      beginning of year
                                  
                                  
                                  2,964
                                  
                                  
                                  
                                  2,095
                                  
                                  
                                  
                                  1,466Net
      income
                                  
                                  
                                  1,350
                                  
                                  
                                  
                                  944
                                  
                                  
                                  
                                  678Cash
      dividends ($0.660, $0.435, and $0.275 per share,
    respectively)
                                  
                                  
                                  (115
                                  )
                                  
                                  
                                  (75
                                  )
                                  
                                  
                                  (49
                                  )Balance,
      end of year
                                  
                                  
                                  4,199
                                  
                                  
                                  
                                  2,964
                                  
                                  
                                  
                                  2,095Total
      Shareholders' Equity
                                  
                                  $
                                  6,309
                                  
                                  
                                  $
                                  4,809
                                  
                                  
                                  $
                                  4,114The
      accompanying notes are an integral part of these financial
      statements.






63
 Table of Contents


Noble
      Energy, Inc. and SubsidiariesConsolidated Statements of
      Comprehensive Income(in
      millions)Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Net
      income
                            
                            $
                            1,350
                            
                            
                            $
                            944
                            
                            
                            $
                            678Other
      items of comprehensive income (loss)Oil
      and gas cash flow hedges:Realized
      amounts reclassified into earnings
                            
                            
                            331
                            
                            
                            
                            54
                            
                            
                            
                            232Less
      tax provision
                            
                            
                            (124
                            )
                            
                            
                            (21
                            )
                            
                            
                            (87
                            )Unrealized
      change in fair value
                            
                            
                            -
                            
                            
                            
                            (295
                            )
                            
                            
                            352Less
      tax provision
                            
                            
                            -
                            
                            
                            
                            111
                            
                            
                            
                            (102
                            )Unrealized
      amounts reclassified into earnings
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            424Less
      tax provision
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (159
                            )Net
      change in other
                            
                            
                            (52
                            )
                            
                            
                            11
                            
                            
                            
                            25Less
      tax provision
                            
                            
                            19
                            
                            
                            
                            (4
                            )
                            
                            
                            (8
                            )Other
      comprehensive income (loss)
                            
                            
                            174
                            
                            
                            
                            (144
                            )
                            
                            
                            677Comprehensive
      income
                            
                            $
                            1,524
                            
                            
                            $
                            800
                            
                            
                            $
                            1,355The
      accompanying notes are an integral part of these financial
      statements.







64
 Table of Contents





Noble
Energy, Inc.




Notes to Consolidated Financial
Statements









Note
1—Nature of Operations




Noble
Energy, Inc. (Noble Energy, we or us) is an independent energy company
engaged in worldwide crude oil, natural gas and natural gas liquids (NGLs)
exploration and production. We operate primarily in the Rocky Mountains,
Mid-continent, and deepwater Gulf of Mexico areas in the US, with key
international operations offshore Israel, the North Sea and West
Africa.




Note 2—Summary
of Significant Accounting Policies




Basis of Presentation and
Consolidation—Accounting policies used by us and our subsidiaries conform
to accounting principles generally accepted in the US. Significant policies are
discussed below. Our consolidated accounts include our accounts and the accounts
of our wholly-owned subsidiaries. We use the equity method of accounting for
investments in entities that we do not control but over which we exert
significant influence. We carry equity method investments at our share of net
assets of the equity investees plus our loans and advances. Differences in the
basis of the investment and the separate net asset value of the investee, if
any, are amortized into income over the remaining useful life of the underlying
assets. See Note 11—Equity Method
Investments.  All significant intercompany balances and transactions
have been eliminated upon consolidation.




Use of Estimates—The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the US (GAAP) requires us to make a number of
estimates and assumptions relating to the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period.




Estimates
of crude oil and natural gas reserves are the most significant of our estimates.
All of the reserve data in this Form 10-K are estimates. Reservoir
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas. There are numerous uncertainties inherent in
estimating quantities of proved crude oil and natural gas reserves. The accuracy
of any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, reserve
estimates may be different from the quantities of crude oil and natural gas that
are ultimately recovered. Engineers in our Houston, Denver and London offices
prepare all reserve estimates for our different geographical regions. These
reserve estimates are reviewed and approved by senior engineering staff and
division management with final approval by the vice president in charge of
corporate reserves and certain members of senior management. See Supplemental
Oil and Gas Information.




Other
items subject to estimates and assumptions include the carrying amounts of
property, plant and equipment and goodwill, asset retirement obligations,
valuation allowances for receivables and deferred income tax assets, valuation
of derivative instruments, and obligations related to employee benefits, among
others. Management evaluates estimates and assumptions on an ongoing basis using
historical experience and other factors, including the current economic and
commodity price environment. The current illiquid credit market combined with
volatile commodity prices has resulted in increased uncertainty inherent in such
estimates and assumptions. As future events and their effects cannot be
determined accurately, actual results could differ significantly from our
estimates.




Reclassification—Certain
reclassifications have been made to the 2007 and 2006 consolidated financial
statements to conform to the 2008 presentation. These reclassifications were not
material to the financial statements.




Property, Plant and
Equipment—Significant accounting policies for our property, plant and
equipment are as follows:




Successful Efforts
Method—We
account for crude oil and natural gas properties under the successful efforts
method of accounting. Under this method, costs to acquire mineral interests in
crude oil and natural gas properties, to drill and equip exploratory wells that
find proved reserves and to drill and equip development wells are capitalized.
Capitalized costs of producing crude oil and natural gas properties, along with
support equipment and facilities, are amortized to expense by the
unit-of-production method based on proved crude oil and natural gas reserves on
a field-by-field basis as estimated by our engineers. Costs of certain gathering
facilities or processing plants serving a number of properties or used for third
party processing are depreciated using the straight-line method over the useful
lives of the assets ranging from 7 to 14 years. Upon sale or retirement of
depreciable or depletable property, the cost and related accumulated DD&A
are eliminated from the accounts and the resulting gain or loss is recognized.
Repairs and maintenance are expensed as incurred.




Proved Property
Impairment—In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” we review proved oil and gas properties and
other long-lived assets for impairment when events
and circumstances indicate a decline in the recoverability of the carrying value
of such properties, such as a downward revision of the reserve estimates or
sustained decrease in commodity prices. We estimate the future cash flows
expected in connection with the properties and compare such future cash flows to
the carrying amount of the properties to determine if the carrying amount is
recoverable. When the carrying amounts of the properties exceed their estimated
undiscounted future cash flows, the carrying amount of the properties is reduced
to their estimated fair value. The factors used to determine fair value include,
but are not limited to, estimates of proved reserves, available market data
associated with the property or similar properties, future commodity prices and
operating expenses, timing of future production, future capital expenditures and
a risk-adjusted discount rate.







65
 Table of Contents





During
fourth quarter, 2008, due to declines in commodity prices, we assessed the
recoverability of our proved oil and gas properties and other long-lived assets
and recorded impairment charges. See Note 3 – Asset
Impairments. It is reasonably possible that other proved oil and gas properties
or long-lived assets could become impaired in the future if commodity prices
continue to decline.




We
recorded impairments of $4 million in 2007 and $9 million in 2006,
primarily related to downward reserve revisions on US properties and/or
adjustment of the carrying value of properties to their fair
values.




Unproved Property
Impairment—We
assess individually significant unproved properties for impairment of value on a
quarterly basis and recognize a loss at the time of impairment by providing an
impairment allowance. In determining whether a significant unproved property is
impaired we consider numerous factors including, but not limited to, current
exploration plans, favorable or unfavorable exploratory activity on adjacent
leaseholds, our geologists' evaluation of the lease, and the remaining months in
the lease term.




When we
have allocated fair values to a significant unproved property as the result of a
business combination or other purchase of proved and unproved properties, we use
a future cash flow analysis to assess the property for impairment. Cash flows
used in the impairment analysis are determined based on management’s estimates
of crude oil and natural gas reserves, future commodity prices and future costs
to extract the reserves. Cash flow estimates related to probable and possible
reserves are reduced by additional risk-weighting factors. Other individually
insignificant unproved properties are amortized on a composite method based on
our experience of successful drilling and average holding period.




During
fourth quarter 2008, due to declines in commodity prices, we assessed the
recoverability of our individually significant unproved oil and gas properties
and recorded impairment charges. See Note 3 – Asset
Impairments. It is reasonably possible that other individually significant
unproved oil and gas properties could become impaired in the future if commodity
prices continue to decline.




We
recorded impairments of individually significant unproved properties of
$3 million in 2007 and $1 million in 2006 and included the amounts in
exploration expense.




Properties Acquired in
Business Combinations—In determining the fair
values of proved and unproved properties acquired in business combinations, we
prepare estimates of crude oil and natural gas reserves. We estimate future
prices to apply to the estimated reserve quantities acquired, and estimate
future operating and development costs, to arrive at estimates of future net
cash flows. For the fair value assigned to proved reserves, the future net cash
flows are discounted using a market-based weighted average cost of capital rate
determined appropriate at the time of the business combination. To compensate
for the inherent risk of estimating and valuing unproved reserves, the
discounted future net cash flows of probable and possible reserves are reduced
by additional risk-weighting factors.




Exploration
Costs—Geological
and geophysical costs, delay rentals, amortization of unproved leasehold costs,
and costs to drill exploratory wells that do not find proved reserves are
expensed as oil and gas exploration. We carry the costs of an exploratory well
as an asset if the well finds a sufficient quantity of reserves to justify its
capitalization as a producing well and as long as we are making sufficient
progress assessing the reserves and the economic and operating viability of the
project. For certain capital-intensive deepwater Gulf of Mexico or international
projects, it may take us more than one year to evaluate the future potential of
the exploration well and make a determination of its economic viability. Our
ability to move forward on a project may be dependent on gaining access to
transportation or processing facilities or obtaining permits and government or
partner approval, the timing of which is beyond our control. In such cases,
exploratory well costs remain suspended as long as we are actively pursuing
access to necessary facilities and access to such permits and approvals and
believe they will be obtained. We assess the status of suspended exploratory
well costs on a quarterly basis. See Note 7—Capitalized Exploratory Well
Costs.




Other Property—Other property includes
autos, trucks, airplane, office furniture and computer equipment and other fixed
assets such as building and leasehold improvements. These items are recorded at
cost and are depreciated on the straight-line method based on expected lives of
the individual assets or group of assets, which range from three to ten
years.







66
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Capitalization of
Interest—We
capitalize interest costs associated with the development and construction of
significant properties or projects to bring them to a condition and location
necessary for their intended use, which for crude oil and natural gas assets is
at first production from the field. Interest is capitalized using an interest
rate equivalent to the average rate we pay on long-term debt, including the
credit facility and bonds. Capitalized interest is included in the cost of oil
and gas assets and amortized with other costs on a unit-of-production basis.
Capitalized interest totaled $33 million in 2008, $17 million in 2007, and
$13 million in 2006.




Revenue Recognition and
Imbalances—We record revenues from the sales of crude oil, natural gas
and NGLs when the product is delivered at a fixed or determinable price, title
has transferred and collectibility is reasonably assured.




When we
have an interest with other producers in properties from which natural gas is
produced, we use the entitlements method to account for any imbalances.
Imbalances occur when we sell more or less product than we are entitled to under
our ownership percentage. Revenue is recognized only on the entitlement
percentage of volumes sold. Any amount that we sell in excess of our entitlement
is treated as a liability and is not recognized as revenue. Any amount of
entitlement in excess of the amount we sell is recognized as revenue and a
receivable is accrued.




Revenues
derived from electricity generation are recognized when power is transmitted or
delivered, the price is fixed and determinable and collectibility is reasonably
assured.




We also
engage in the purchase and sale of third-party crude oil and natural gas. We
record third-party sales, net of cost of goods sold, as gathering, marketing and
processing revenues when the product is delivered or the contract is net settled
at a fixed or determinable price, title has transferred and collectibility is
reasonably assured. Gathering, marketing and processing revenues are included in
other revenues in the consolidated statements of operations.




Derivative Instruments and Hedging
Activities—We use various derivative instruments in connection with
anticipated crude oil and natural gas sales to minimize the impact of commodity
price fluctuations. Such instruments include variable to fixed price commodity
swaps, costless collars and variable to fixed price 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). SFAS 133 established accounting and reporting standards
requiring every derivative instrument (including certain derivative instruments
embedded in other contracts) to be recorded on the balance sheet as either an
asset or liability measured at fair value. SFAS 133 requires that changes in the
derivative instrument’s fair value be recognized currently in earnings unless
the derivative instrument has been designated as a cash flow hedge and specific
cash flow hedge accounting criteria are met. Under cash flow hedge accounting,
unrealized gains and losses are reflected in shareholders’ equity as AOCL until
the forecasted transaction occurs. The derivative’s gains and losses are then
offset against related results on the hedged transaction in the statements of
operations. Gains and losses from derivative instruments related to crude oil
and natural gas sales and which qualify for hedge accounting treatment are
recorded in oil and gas sales in the consolidated statements of operations upon
sale of the associated commodity.




SFAS 133
also requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. Only derivative
instruments that are expected to be highly effective in offsetting anticipated
gains or losses on the hedged cash flows and that are subsequently documented to
have been highly effective can qualify for hedge accounting. Effectiveness must
be assessed both at inception of the hedge and on an ongoing basis. Any
ineffectiveness in hedging instruments whereby gains or losses do not exactly
offset anticipated gains or losses of hedged cash flows is measured and
recognized in earnings in the period in which it occurs. When using hedge
accounting, we assess hedge effectiveness quarterly based on total changes in
the derivative instrument’s fair value and using regression analysis. A hedge is
considered effective if certain statistical tests are met. We record hedge
ineffectiveness in (gain) loss on commodity derivative instruments. See Note 6—Derivative Instruments and Hedging
Activities.




Through
December 31, 2007, we elected to designate the majority of our crude oil and
natural gas derivative instruments as cash flow hedges. Effective
January 1, 2008, we voluntarily 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. Net derivative losses that were
deferred in AOCL as of December 31, 2007, as a result of previous cash flow
hedge accounting, are 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.







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Goodwill—Goodwill
represents the excess of the cost of an acquired entity over the net amounts
assigned to assets acquired and liabilities assumed. We account for goodwill in
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS
142). Goodwill is not amortized to earnings but is tested annually during the
fourth quarter or whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Nogoodwill impairment was
indicated as of December 31, 2008. However, it is reasonably possible that
goodwill could become impaired in the future if commodity prices continue to
decline. Changes in the carrying amount of goodwill are as follows:
  Year
      Ended December 31,2008
                              
                              
                              2007(in
      millions)Balance,
      beginning of period
                              
                              $
                              761
                              
                              
                              $
                              781Tax
      adjustments related to acquisitions
                              
                              
                              -
                              
                              
                              
                              (15
                              )Tax
      benefits on stock options exercised
                              
                              
                              (2
                              )
                              
                              
                              (5
                              )Balance,
      end of period
                              
                              $
                              759
                              
                              
                              $
                              761




We reduce
the amount of goodwill originally recorded for deferred tax assets associated
with the exercise of fully-vested stock options assumed in conjunction with the
Patina Merger to the extent that the stock-based compensation expense reported
for tax purposes does not exceed the fair value of the awards recognized as part
of the total purchase price.




Income Taxes—Income taxes are
accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized when items of income and expense are recognized in
the financial statements in different periods than when recognized in the
applicable tax return. Deferred tax assets arise when expenses are recognized in
the financial statements before the tax returns or when income items are
recognized in the tax return prior to the financial statements. Deferred tax
assets also arise when operating losses or tax credits are available to offset
tax payments due in future years. Deferred tax liabilities arise when income
items are recognized in the financial statements before the tax returns or when
expenses are recognized in the tax return prior to the financial statements.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the date when the change in the tax rate was
enacted.




Statement of Operations Information-Additional statement of operations information is as
follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions)Other
      RevenuesElectricity
      sales (1)
                            
                            $
                            56
                            
                            
                            $
                            71
                            
                            
                            $
                            72Gathering,
      marketing and processing
                            
                            
                            20
                            
                            
                            
                            24
                            
                            
                            
                            28Total
                            
                            $
                            76
                            
                            
                            $
                            95
                            
                            
                            $
                            100Other
      Operating Expense, netElectricity
      generation(1)
                            
                            $
                            57
                            
                            
                            $
                            57
                            
                            
                            $
                            59Gathering,
      marketing and processing
                            
                            
                            19
                            
                            
                            
                            17
                            
                            
                            
                            19Loss
      on involuntary conversion of assets (2)
                            
                            
                            9
                            
                            
                            
                            51
                            
                            
                            
                            -Other
      operating (income) expense, net (3)
                            
                            
                            44
                            
                            
                            
                            20
                            
                            
                            
                            33Total
                            
                            $
                            129
                            
                            
                            $
                            145
                            
                            
                            $
                            111Other
      Expense, netDeferred
      compensation (income) expense (4)
                            
                            $
                            (32
                            )
                            
                            $
                            33
                            
                            
                            $
                            16Interest
      income
                            
                            
                            (20
                            )
                            
                            
                            (19
                            )
                            
                            
                            (3
                            )Other
      (income) expense, net
                            
                            
                            7
                            
                            
                            
                            (7
                            )
                            
                            
                            1Total
                            
                            $
                            (45
                            )
                            
                            $
                            7
                            
                            
                            $
                            14




(1)
            Includes amountsrelated to our 100%-owned Ecuador integrated power project. The
      project includes the Amistad natural gas field, offshore Ecuador, which
      supplies natural gas to fuel the Machala power plant located in Machala,
      Ecuador. Electricity generation expense includes DD&A and increases in
      the allowance for doubtful accounts of $11 million in 2008, $14 million in
      2007 and $15 million in 2006. See Allowance for Doubtful
      Accountsbelow.


(2)
            See
      Note 4 – Acquisitions and Divestitures – Main Pass
  Asset.


(3)
            Includes
      $38 million write-down of SemCrude, L.P. receivable in third quarter 2008.
      See Note 17– Commitments and
      Contingencies.


(4)
            Amount
      represents increases (decreases) in the fair value of Noble Energy common
      stock held in a rabbi trust. See Note 12– Benefit
      Plans.







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




December
      31,2008
                            
                            
                            2007(in
      millions)Other
      Current AssetsInventories
                            
                            $
                            105
                            
                            
                            $
                            60Prepaid
      expenses and other
                            
                            
                            27
                            
                            
                            
                            27Total
                            
                            $
                            132
                            
                            
                            $
                            87Other
      Noncurrent AssetsEquity
      method investments
                            
                            $
                            311
                            
                            
                            $
                            357Mutual
      fund investments
                            
                            
                            84
                            
                            
                            
                            124Commodity
      derivative instruments
                            
                            
                            33
                            
                            
                            
                            5Other
      assets
                            
                            
                            35
                            
                            
                            
                            70Total
                            
                            $
                            463
                            
                            
                            $
                            556Other
      Current LiabilitiesAccrued
      and other current liabilities
                            
                            $
                            215
                            
                            
                            $
                            207Short-term
      borrowings
                            
                            
                            25
                            
                            
                            
                            25Asset
      retirement obligations
                            
                            
                            27
                            
                            
                            
                            13Interest
      payable
                            
                            
                            9
                            
                            
                            
                            18Deferred
      gain on asset sale
                            
                            
                            24
                            
                            
                            
                            -Total
                            
                            $
                            300
                            
                            
                            $
                            263Other
      Noncurrent LiabilitiesDeferred
      compensation liabilities
                            
                            $
                            159
                            
                            
                            $
                            225Commodity
      derivative instruments
                            
                            
                            2
                            
                            
                            
                            83Asset
      retirement obligations
                            
                            
                            184
                            
                            
                            
                            131Accrued
      benefit costs
                            
                            
                            81
                            
                            
                            
                            51Other
      noncurrent liabilities
                            
                            
                            60
                            
                            
                            
                            61Total
                            
                            $
                            486
                            
                            
                            $
                            551




Statements of Cash Flows and
Supplementary Disclosures of Cash Flow Information— For purposes of
reporting cash flows, cash and cash equivalents include unrestricted cash on
hand and investments with original maturities of three months or less at the
time of purchase. Additional cash flow information is as follows:




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)Cash
      paid during the year forInterest,
      net of amount capitalized
                          
                          $
                          76
                          
                          
                          $
                          105
                          
                          
                          $
                          106Income
      taxes paid, net
                          
                          
                          263
                          
                          
                          
                          149
                          
                          
                          
                          115Non-cash
      financing and investing activitiesIssuance
      of notes for property interests
                          
                          
                          -
                          
                          
                          
                          50
                          
                          
                          
                          -




Allowance for Doubtful
Accounts—We routinely assess the recoverability of all material trade and
other receivables to determine their collectibility. We accrue a reserve on a
receivable when, based on management’s judgment, it is probable that a
receivable will not be collected and the amount of such reserve may be
reasonably estimated.




Changes
in the allowance for doubtful accounts are as follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions)Balance,
      beginning of period
                            
                            $
                            50
                            
                            
                            $
                            35
                            
                            
                            $
                            19Charged
      to expense
                            
                            
                            49
                            
                            
                            
                            14
                            
                            
                            
                            19Deductions
      and other
                            
                            
                            (2
                            )
                            
                            
                            1
                            
                            
                            
                            (3
                            )Balance,
      end of period
                            
                            $
                            97
                            
                            
                            $
                            50
                            
                            
                            $
                            35




During
third quarter 2008, we increased the allowance by $38 million for the probable
loss on a receivable from SemCrude, L.P., a crude oil purchaser. See Note 17 - Commitments and Contingencies.







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Through
December 31, 2008, we had recorded an allowance for doubtful accounts of $57
million related to our Ecuador power operations. The allowance was necessary to
cover potentially uncollectible balances, as certain entities purchasing
electricity in Ecuador have been slow to pay amounts due us. As a result of
pursuing various strategies to protect our interests, including international
arbitration and litigation, we reached a settlement in fourth quarter 2008.
However, we have not yet received any funds related to the settlement. We will
reverse our allowance for doubtful accounts upon receipt of payment from the
Ecuadorian government.




Amounts
charged to expense include $11 million in 2008, $14 million in 2007 and
$15 million in 2006 to cover potentially uncollectible balances related to
the Ecuador power operations. The allowance was also increased by
$2 million in 2006 to record various provisions related to our US
business.




Inventories— Inventories
consist primarily of tubular goods and production equipment used in our oil and
gas operations and crude oil produced but not yet sold. Materials and supplies
inventories are stated at the lower of average cost or market. The cost of crude
oil inventory includes production costs and DD&A expense. Inventories
consisted of the following at December 31, 2008:




December
      31,2008
                            
                            
                            2007(in
      millions)Materials
      and supplies
                            
                            $
                            92
                            
                            
                            $
                            56Crude
      oil
                            
                            
                            13
                            
                            
                            
                            4Total
      inventories
                            
                            $
                            105
                            
                            
                            $
                            60




Basic  and Diluted
Earnings Per Share—Basic earnings per share (EPS) of common stock have
been computed on the basis of the weighted average number of shares outstanding
during each period. The diluted EPS of common stock includes the effect of
outstanding common stock equivalents. See Note 14 – Earnings Per
Share.




Related Party Transactions—We
entered into a consulting agreement with a former officer of Patina who now
serves as a member of our Board of Directors. Pursuant to the consulting
agreement, the Board member served as a consultant to the combined company for a
period of 12 months following the merger (May 16, 2005) in exchange
for a monthly retainer of $50,000. In 2007, we reimbursed his office space rent
of $42,000. In 2006, we paid consulting fees of $225,806 and reimbursed his
office space rent of $72,000.




Contingencies—We are subject
to legal proceedings, claims and liabilities that arise in the ordinary course
of business. We accrue for losses associated with legal claims when such losses
are considered probable and the amounts can be reasonably estimated. See Note 17 – Commitments and Contingencies.




We
self-insure the medical and dental coverage provided to certain employees,
certain workers’ compensation and the first $1 million of general liability
coverage. Liabilities are accrued for self-insured claims, or when estimated
losses exceed coverage limits, and when sufficient information is available to
reasonably estimate the amount of the loss.




Concentration of Market
Risk—During 2008, Suncor Energy Marketing was the largest single
non-affiliated purchaser of production and accounted for 22% of crude oil sales,
or 13% of total oil, gas and NGL sales. In 2007, Marathon Petroleum Supply
Company was the largest single non-affiliated purchaser of production and
accounted for 18% of crude oil sales, or 10% of total oil, gas and NGL sales.
During 2006, Trafigura Beheer B.V. was the largest single non-affiliated
purchaser of production and accounted for 28% of crude oil sales, or 15% of
total oil, gas and NGL sales. Shell Trading (US) Company accounted for 18% of
2006 crude oil sales or 10% of 2006 total oil, gas and NGL sales. We believe the
loss of any one purchaser would not have a material effect on our financial
position or results of operation since there are numerous potential purchasers
of our production.




Concentration of Credit
Risk—Certain of our financial instruments, including cash equivalents,
trade and joint interest receivables and derivative instruments, may expose us
to credit risk.  Substantially all of our cash at December 31, 2008 is
located in our foreign subsidiaries. The cash is denominated in US dollars and
invested in highly liquid, investment-grade securities, US Treasury securities
and short term deposits with original maturities of three months or less at the
time of purchase. Although our cash and cash equivalents are deposited with
major international banks and financial institutions, concentrations of cash in
certain foreign locations may increase credit risk. We monitor the
creditworthiness of the banks and financial institutions with which we invest
and review the securities underlying our investment accounts. We believe that
losses from nonperformance are unlikely to occur; however, we are not able to
predict sudden changes in creditworthiness.




Our
accounts receivable result primarily from sales of crude oil, natural gas and
NGL production and joint interest billings to our partners. The receivables
reflect a broad national and international customer base, which limits our
exposure to concentrations of credit risk.  The majority of these
receivables have payment terms of 30 days or less.







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We
continually monitor the creditworthiness of the counterparties, some of
which are not as creditworthy as we are and may experience liquidity
problems.  We have obtained credit enhancements from some parties in
the way of parental guarantees or letters of credit, including from our largest
international crude oil purchaser. However, we do not have all of our trade
credit enhanced through guarantees or credit support. Nonperformance by a
trade creditor could result in losses. In third quarter 2008, we reduced the
carrying value of a receivable from SemCrude, L.P., a crude oil purchaser, and
recognized a pre-tax charge of $38 million for a probable loss. See Note 17 – Commitments and Contingencies.




We use
crude oil and natural gas derivative instruments to mitigate the effects of
commodity price fluctuations and these derivative instruments expose us to
counterparty credit risk. Our counterparties are major banks or financial
institutions. Our derivative instruments are executed under master agreements
which allow us, in the event of default, to elect early termination of all
contracts with the defaulting counterparty. If we choose to elect early
termination, all asset and liability positions with the defaulting counterparty
would be net settled at the time of election. We monitor the creditworthiness of
our counterparties. However, we are not able to predict sudden changes in
counterparties’ creditworthiness. Should one of these financial counterparties
not perform, we may not realize the benefit of some of our derivative
instruments under lower commodity prices as well as incur a loss. See Note 6 – Derivative Instruments and Hedging Activities –
Receivables/Payables Related to Commodity Derivative Instruments.




Treasury Stock—We record
treasury stock purchases at cost, which includes incremental direct transaction
costs.Amounts are
recorded as reductions in shareholders’ equity.




Foreign Currency—The US
dollar is considered the functional currency for each of our international
operations. Transactions that are completed in foreign currencies are remeasured
into US dollars and recorded in the financial statements at prevailing foreign
exchange rates. Transaction gains or losses were not material in any of the
periods presented and are included in other (income) expense, net on the
statements of operations.




Adoption of SFAS 123(R)—We
adopted SFAS No. 123(R), “Share-Based Payment” (SFAS 123(R)) as of January
1, 2006. SFAS 123(R) revised SFAS No. 123, “Accounting for Stock-Based
Compensation” and nullified APB 25 and its related implementation guidance.
SFAS 123(R) requires companies to measure the grant-date fair value of
stock options and other stock-based compensation issued to employees and expense
the fair value over the requisite service period of the award. SFAS
123(R) became effective for interim or annual periods beginning
January 1, 2006. See Note 13—Stock-Based
Compensation.




Adoption of SFAS 157 – We
adopted SFAS 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 began incorporating a credit risk
assumption into the measurement of certain assets and liabilities. Adoption of
SFAS 157 did not have a significant impact on our consolidated financial
statements. See Note 5 – Fair Value
Measurements.




As of
January 1, 2009, we adopted SFAS 157 as it relates to nonfinancial assets and
liabilities, including nonfinancial assets and liabilities measured at fair
value in a business combination; impaired property, plant and equipment;
goodwill; and initial recognition of asset retirement obligations. Adoption of
SFAS 157 for our existing nonfinancial assets and liabilities did not have a
significant impact on our consolidated financial statements.




Adoption of SFAS 158—We
adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106, and 132(R)” (SFAS 158) as of December 31, 2006. SFAS 158 requires plan
sponsors of defined benefit pension and other postretirement benefit plans to
recognize the funded status of their postretirement benefit plans in the
statement of financial position, measure the fair value of plan assets and
benefit obligations as of the date of the fiscal year-end statement of financial
position, and provide additional disclosures. The effect of adoption on our
financial position at December 31, 2006 was included in our consolidated
balance sheets. Adoption of SFAS 158 had no effect on our results of operations
for the year ended December 31, 2006. See Note
12—Benefit Plans.




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.”
FSP 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 December 31, 2008 and 2007, we had
no significant cash collateral obligations.







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Adoption of FIN 48 – We
adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109” (FIN 48) as of January 1, 2007. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes”. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. We also adopted FASB Staff Position
No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN
48-1) as of January 1, 2007. FSP FIN 48-1 provides that a company’s tax position
will be considered settled if the taxing authority has completed its
examination, the company does not plan to appeal, and it is remote that the
taxing authority would reexamine the tax position in the future. The adoption of
FIN 48 and FSP FIN 48-1 had no effect on our financial position or results of
operations. See Note 9—Income Taxes.




Note
      3 – Asset
Impairments




As a
result of the depressed economic environment, coupled with a severe decrease in
commodity prices during the fourth quarter of 2008, we assessed the
recoverability of our oil and gas properties and other investments as of
December 31, 2008. As a result of this analysis we determined that certain of
our assets were impaired.  In addition, during third quarter 2008, we
recorded an impairment charge related to an asset held for
sale.  Total pre-tax (non-cash) impairments for 2008 were $294
million.




Total
asset impairment charges assessed under FAS 144 for 2008 were $219 million, of
which $149 million related to our US proved properties and $70 million related
to our investment in Ecuador. These assets were written down to their estimated
fair values which were determined using discounted cash flow models. The
discounted cash flow models included management’s estimates of future oil and
gas production, commodity prices based on December 31, 2008 commodity price
strips, operating and development costs, as well as appropriate discount
rates.




We also
perform periodic assessments related to our individually significant unproved
properties.  We recorded an impairment charge of $75 million related
to our US unproved properties. These impairments were primarily related to
allocated fair values attributable to probable and possible reserves acquired in
previous business combinations. We assessed these properties using discounted
cash flow models based on management’s assumptions of future production,
commodity prices, operating and development costs, as well as appropriate
discount rates.




Note 4—Acquisitions and
  Divestitures




Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $292
million in cash. The total purchase price has been preliminarily allocated to
the proved and unproved properties acquired based on fair values at the
acquisition date. Approximately $254 million was allocated to proved properties
and $38 million to unproved properties.




Main Pass Asset– We have
initiated a process to sell our remaining operated non-core Gulf of Mexico shelf
asset. This asset, located at Main Pass, suffered significant hurricane damage
in 2004 and 2005 and has undergone cleanup activities that were completed in the
third quarter of 2007. During the first half of 2007, several factors
contributed to an increase in our estimated cleanup costs for damage and
included cost escalation due to weather delays and an increase in effort for the
design and construction of the deck lifting barge and mooring system, as well as
additional costs for the actual deck lifting activities.  These
increases caused the total project costs, combined with net book value of the
assets destroyed, to exceed certain insurance coverage
limitations.  As a result, we recorded $51 million as a loss on
involuntary conversion.




In 2008,
in anticipation of the sale, we recorded an impairment loss of $38 million
(based on anticipated proceeds less costs to sell) related to the Main Pass
asset. We also recorded a loss on involuntary conversion of $9 million upon
resolution of our insurance claims related to the hurricane damage sustained in
2005. An asset held for sale of $26 million is included in current assets and
associated asset retirement obligations of $15 million are included in current
liabilities in our consolidated balance sheets at December 31,
2008.




Through
December 31, 2008, we received $330 million of insurance recoveries related to
damage caused by Hurricanes Ivan and Katrina. As of December 31, 2008, we
recorded probable insurance claims of $10 million. Insurance reimbursements
received for cleanup and repair costs are included in cash flows from operating
activities.




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, which has not been received.







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Accordingly,
the gain on sale of approximately $24 million has been deferred in other current
liabilities until approval is obtained. We are currently unable to predict when
government approval will be obtained.




Sale of Gulf of Mexico Shelf
Properties—In 2006, we completed the sale of essentially all of our Gulf
of Mexico shelf properties except for the Main Pass asset which required repairs
related to hurricane damage at the time. Pretax cash proceeds from the sale
totaled $506 million including proceeds received from parties who exercised
preferential rights to purchase certain minor properties. We recorded a pretax
gain of $211 million from the sale. The net book value of properties sold
totaled $229 million. Asset retirement obligations of $45 million,
related to the Gulf of Mexico shelf properties, were also included in the sale.
In accordance with SFAS 142, we allocated $100 million of our US reporting
unit goodwill to the sale. The property disposition did not qualify for
accounting as discontinued operations, in accordance with EITF 03-13, “Applying
the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining
Whether to Report Discontinued Operations”. This is due to the migration of our
investment and operations to the deepwater Gulf of Mexico which we believe is an
area of higher potential.




As a
result of the sale, we recognized a pretax charge of $399 million related
to cash flow hedge losses which were reclassified from AOCL to earnings. This
reclassification reflected the mark-to-market value of the cash flow hedges that
related to Gulf of Mexico shelf production. See Note
6—Derivative Instruments and Hedging Activities.




Purchase of U.S. Exploration
Holdings, Inc.—In 2006, we purchased the common stock of U.S.
Exploration, a privately held corporation, for a cash purchase price of
$412 million plus liabilities assumed. U.S. Exploration’s reserves and
production are located in Colorado’s Wattenberg field. The total purchase price
was allocated to the assets acquired and liabilities assumed based on fair
values at the acquisition date as follows:




·
            $413 million
      to proved oil and gas properties;


·
            $131 million
      to unproved oil and gas properties;


·
            $34 million
      to goodwill; and


·
            $172 million
      to deferred income taxes.




Note 5 –
Fair Values ofFinancial
Instruments




Certain
of our assets and liabilities are reported at fair value in our consolidated
balance sheets.  The following methods and assumptions were used to
estimate the fair values for each class of financial instruments:




Cash, Cash Equivalents, Accounts
Receivable and Accounts Payable – The carrying amounts
approximate fair value due to the short-term nature or maturity of the
instruments.




Mutual Fund Investments – Our
mutual fund investments, which primarily include assets held in a rabbi trust,
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
commodity 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 is based on published LIBOR rates,
Eurodollar futures rates and interest swap rates. The fair values also include a
measure of counterparty credit risk or our own nonperformance risk based on the
current published credit default swap rates. 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 6 – Derivative Instruments
and Hedging Activities.















































73
 Table of Contents





Fair
value information for financial assets and liabilities that are measured at fair
value each reporting period is as follows at December 31, 2008:




Fair
      Value Measurements UsingQuoted
      Prices
                                                                                                                
                                                                                                                
                                                                                                                Significant
      Other
                                                                                                                
                                                                                                                Significantin
      Active
                                                                                                                
                                                                                                                
                                                                                                                Observable
                                                                                                                
                                                                                                                Unobservable
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                FairMarkets
                                                                                                                
                                                                                                                
                                                                                                                Inputs
                                                                                                                
                                                                                                                Inputs
                                                                                                                
                                                                                                                Netting
                                                                                                                
                                                                                                                Value(Level
      1)
                                                                                                                
                                                                                                                
                                                                                                                (Level
      2)
                                                                                                                
                                                                                                                (Level
      3)
                                                                                                                
                                                                                                                Adjustment
      (1)
                                                                                                                
                                                                                                                Measurement(in
      millions)Financial
      assetsMutual
      fund investments
                                                                                                                
                                                                                                                $
                                                                                                                84
                                                                                                                
                                                                                                                $
                                                                                                                -
                                                                                                                
                                                                                                                $
                                                                                                                -
                                                                                                                
                                                                                                                $
                                                                                                                -
                                                                                                                
                                                                                                                $
                                                                                                                84Commodity
      derivative instruments
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                492
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                (22
                                                                                                                )
                                                                                                                
                                                                                                                470Financial
      liabilitiesCommodity
      derivative instruments
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                (47
                                                                                                                )
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                22
                                                                                                                
                                                                                                                
                                                                                                                (25
                                                                                                                )







(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, which
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.




Debt –The fair value of
fixed-rate debt is estimated based on the published market prices for the same
or similar issues.  The fair value of floating-rate debt is estimated
using the carrying amounts because the interest rates paid on such debt are set
for periods of three months or less. See Note 8—Debt.




Additional
information regarding our debt is as follows:




December
      31,2008
                                                
                                                
                                                2007Carrying
                                                
                                                
                                                Fair
                                                
                                                
                                                Carrying
                                                
                                                
                                                FairAmount
                                                
                                                
                                                Value
                                                
                                                
                                                Amount
                                                
                                                
                                                Value(in
      millions)Total
      debt, net of unamortized discount
                                                $
                                                2,266
                                                
                                                $
                                                2,172
                                                
                                                $
                                                1,876
                                                
                                                $
                                                1,920




Note
      6—Derivative Instruments and Hedging
  Activities




Commodity Derivative
Instruments—We use various derivative instruments in connection with
anticipated crude oil and natural gas sales to minimize the impact of commodity
price fluctuations on cash flows. Such instruments include variable to fixed
price commodity swaps, costless collars and basis swaps. While these instruments
mitigate the cash flow risk of future reductions in commodity prices they may
also curtail benefits from future increases in commodity prices. We account for
derivative instruments and hedging activities in accordance with SFAS 133 and
all derivative instruments are reflected at fair value on our consolidated
balance sheets. We elected to designate the majority of our commodity derivative
instruments as cash flow hedges through December 31, 2007. As discussed in Note 2—Summary of Significant Accounting Policies, we
voluntarily discontinued cash flow hedge accounting for our commodity derivative
instruments effective January 1, 2008. See Note 5 –
Fair Values of Financial Instruments for a discussion of methods and assumptions
used to estimate the fair values of our commodity derivative
instruments.







74
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The
components of (gain) loss on commodity derivative instruments included in the
consolidated statements of operations include the following:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions)Unrealized
      gain on commodity derivative instruments
                            
                            $
                            (522
                            )
                            
                            $
                            -
                            
                            
                            $
                            -Realized
      (gain) loss on commodity derivative instruments
                            
                            
                            82
                            
                            
                            
                            -
                            
                            
                            
                            (41
                            )Reclassified
      from AOCL (1)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            424Ineffectiveness
      (gain) loss
                            
                            
                            -
                            
                            
                            
                            (2
                            )
                            
                            
                            9(Gain)
      loss on commodity derivative instruments
                            
                            $
                            (440
                            )
                            
                            $
                            (2
                            )
                            
                            $
                            392




(1)
            Under
      our previous cash flow hedge accounting, if it became probable that the
      hedging instrument was no longer highly effective, the hedging instrument
      lost hedge accounting treatment. All current mark-to-market gains and
      losses were recorded in earnings and all accumulated gains or losses
      recorded in AOCL related to the hedging instrument were also reclassified
      to earnings. During 2006, we reclassified a pretax charge of $399 million
      from AOCL to earnings when it became probable that forecasted crude oil
      and natural gas sales would not occur due to the sale of Gulf of Mexico
      shelf properties. A mark-to-market gain of $39 million and the
      reclassification of a pretax charge of $25 million from AOCL to earnings
      due to the impacts of Hurricanes Katrina and Rita on the timing of
      forecasted Gulf of Mexico production were also included in
      2006.




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




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)(Decrease)
      in crude oil sales
                          
                          $
                          (365
                          )
                          
                          $
                          (223
                          )
                          
                          $
                          (191
                          )Increase
      (decrease) in natural gas sales
                          
                          
                          34
                          
                          
                          
                          169
                          
                          
                          
                          (41
                          )Total
      (decrease) in crude oil and natural gas sales
                          
                          $
                          (331
                          )
                          
                          $
                          (54
                          )
                          
                          $
                          (232
                          )




As of
December 31, 2008 and 2007, the balance in AOCL included net deferred
losses of $48 million and $255 million, respectively, related to the fair
value of crude oil and natural gas derivative instruments accounted for as cash
flow hedges. The net deferred losses are net of deferred income tax benefits of
$29 million and $153 million, respectively. Approximately $36 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 December 31, 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 of approximately $57 million before tax. All forecasted
transactions currently being hedged are expected to occur by
December 2010.




As of
December 31, 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
      Price2009
                                                                                                    
                                                                                                    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
                                                                                                    
                                                                                                    
                                                                                                    87.932009
      Average
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    11,000
                                                                                                    
                                                                                                    
                                                                                                    88.35
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    11,774
                                                                                                    
                                                                                                    
                                                                                                    75.79
                                                                                                    
                                                                                                    
                                                                                                    89.452010
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    NYMEX
      WTI
                                                                                                    
                                                                                                    5,500
                                                                                                    
                                                                                                    
                                                                                                    69.00
                                                                                                    
                                                                                                    
                                                                                                    85.65




From
January 1, 2009 to February 18, 2009, we entered into additional NYMEX WTI
costless collars covering 2,000 Bbls per day for calendar year
2010.












75
 Table of Contents










As of
December 31, 2008, we had entered into the following natural gas derivative
instruments:




Costless
      CollarsWeighted
                                                        
                                                        WeightedProduction
                                                        
                                                        
                                                        
                                                        MMBtu
                                                        
                                                        
                                                        Average
                                                        
                                                        AveragePeriod
                                                        
                                                        Index
                                                        
                                                        Per
      Day
                                                        
                                                        
                                                        Floor
      Price
                                                        
                                                        Ceiling
      Price2009
                                                        
                                                        NYMEX
      HH
                                                        
                                                        170,000
                                                        
                                                        $
                                                        9.15
                                                        
                                                        $
                                                        10.812009
                                                        
                                                        IFERC
      CIG (1)
                                                        
                                                        15,000
                                                        
                                                        
                                                        6.00
                                                        
                                                        
                                                        9.902009
      Average
                                                        
                                                        
                                                        
                                                        185,000
                                                        
                                                        
                                                        8.90
                                                        
                                                        
                                                        10.732010
                                                        
                                                        IFERC
      CIG
                                                        
                                                        15,000
                                                        
                                                        
                                                        6.25
                                                        
                                                        
                                                        8.10




(1)
            Colorado
      Interstate Gas – Northern System




As of
December 31, 2008, we had entered into the following natural gas basis
swaps:




Basis
      SwapsWeightedProduction
                                    
                                    
                                    
                                    Index
      Less
                                    
                                    MMBtu
                                    
                                    
                                    AveragePeriod
                                    
                                    Index
                                    
                                    Differential
                                    
                                    Per
      Day
                                    
                                    
                                    Differential2009
                                    
                                    IFERC
      CIG
                                    
                                    NYMEX
      HH
                                    
                                    
                                    140,000
                                    
                                    
                                    $
                                    2.492010
                                    
                                    IFERC
      CIG
                                    
                                    NYMEX
      HH
                                    
                                    
                                    20,000
                                    
                                    
                                    
                                    1.99




From
January 1, 2009 to February 18, 2009, we entered into additional IFERC CIG basis
swaps covering 30,000 MMBtu per day for calendar year 2010.




The
costless collar, fixed price swap and basis swap contracts entitle us (floating
price payor) to receive settlement from the counterparty (fixed price payor) for
each calculation period in amounts, if any, by which the settlement price for
the scheduled trading days applicable for each calculation period is less than
the fixed price or floor price. We would pay the counterparty if the settlement
price for the scheduled trading days applicable for each calculation period is
more than the fixed price or ceiling price. The amount payable by us, if the
floating price is above the fixed or ceiling price, is the product of the
notional quantity per calculation period and the excess, if any, of the floating
price over the fixed or ceiling price in respect of each calculation period. The
amount payable by the counterparty, if the floating price is below the fixed or
floor price, is the product of the notional quantity per calculation period and
the excess, if any, of the fixed or floor price over the floating price in
respect of each calculation period.




Other Derivative
Instruments—In addition to the derivative instruments described above, we
may employ derivative instruments in connection with purchases and sales of
production in order to establish a fixed margin and mitigate the risk of price
volatility. Most of the purchases are on an index basis. However, purchasers in
the markets in which we sell often require fixed or NYMEX-related pricing. We
may use a derivative instrument to convert the fixed or NYMEX sale to an index
basis thereby determining the margin and minimizing the risk of price
volatility.




Receivables/Payables Related to
Commodity Derivative Instruments—The fair values of derivative
instruments included in the consolidated balance sheets are as
follows:




December
      31,2008
                        
                        
                        2007(in
      millions)Commodity
      derivative instrumentsCurrent
      asset
                        
                        $
                        437
                        
                        
                        $
                        15Long-term
      asset
                        
                        
                        33
                        
                        
                        
                        5Current
      liability
                        
                        
                        (23
                        )
                        
                        
                        (540
                        )Long-term
      liability
                        
                        
                        (2
                        )
                        
                        
                        (83
                        )




InterestRate Lock—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 over the term of the related notes.
At December 31, 2008 and 2007, AOCL included deferred losses, net of tax,
of $3 million and $4 million, respectively, related to interest rate swaps.
This amount is being reclassified into earnings, at the rate of $0.8 million per
year, as an adjustment to interest expense over the term of our 51⁄4% senior notes
due 2014.







76
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As of
December 31, 2007, we had entered into two additional 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 settled the locks in July 2008 at a
total cost of $0.2 million.




Note
      7—Capitalized Exploratory Well
Costs




We
capitalize exploratory well costs until a determination is made that the well
has found proved reserves or is deemed noncommercial, in which case the well
costs are immediately charged to exploration expense.




Changes
in capitalized exploratory well costs are as follows and exclude amounts that
were capitalized and subsequently expensed in the same period:




Year
      Ended December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006(in
      millions)Capitalized
      exploratory well costs, beginning of period
                                  
                                  $
                                  249
                                  
                                  
                                  $
                                  80
                                  
                                  
                                  $
                                  35Additions to
      capitalized exploratory well costs pending determination of proved
      reserves
                                  
                                  
                                  253
                                  
                                  
                                  
                                  182
                                  
                                  
                                  
                                  63Reclassified to
      proved oil and gas properties based on determination of proved
      reserves
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (7
                                  )
                                  
                                  
                                  (17
                                  )Capitalized
      exploratory well costs charged to expense
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  (6
                                  )
                                  
                                  
                                  (1
                                  )Capitalized
      exploratory well costs, end of period
                                  
                                  $
                                  501
                                  
                                  
                                  $
                                  249
                                  
                                  
                                  $
                                  80




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:




December
      31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006(in
      millions)Exploratory
      well costs capitalized for a period of one year or less
                                    
                                    $
                                    256
                                    
                                    
                                    $
                                    187
                                    
                                    
                                    $
                                    58Exploratory well
      costs capitalized for a period greater than one year after
      completion of drilling
                                    
                                    
                                    245
                                    
                                    
                                    
                                    62
                                    
                                    
                                    
                                    22Balance,
      end of period
                                    
                                    $
                                    501
                                    
                                    
                                    $
                                    249
                                    
                                    
                                    $
                                    80Number
      of projects with exploratory well costs that have been capitalized
      for a period greater than one year after completion of
      drilling
                                    
                                    
                                    6
                                    
                                    
                                    
                                    5
                                    
                                    
                                    
                                    4




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 December 31, 2008:




Suspended
      SinceTotal
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005(in
      millions)ProjectWest
      Africa
                                
                                $
                                160
                                
                                
                                $
                                140
                                
                                
                                $
                                1
                                
                                
                                $
                                19Raton
      South (deepwater Gulf of Mexico)
                                
                                
                                28
                                
                                
                                
                                5
                                
                                
                                
                                23
                                
                                
                                
                                -Redrock
      (deepwater Gulf of Mexico)
                                
                                
                                17
                                
                                
                                
                                -
                                
                                
                                
                                17
                                
                                
                                
                                -Flyndre
      (North Sea)
                                
                                
                                15
                                
                                
                                
                                12
                                
                                
                                
                                3
                                
                                
                                
                                -Selkirk
      (North Sea)
                                
                                
                                22
                                
                                
                                
                                22
                                
                                
                                
                                -
                                
                                
                                
                                -Other
                                
                                
                                3
                                
                                
                                
                                -
                                
                                
                                
                                3
                                
                                
                                
                                -Total exploratory
      well costs capitalized for a period greater than one year after
      completion of drilling
                                
                                $
                                245
                                
                                
                                $
                                179
                                
                                
                                $
                                47
                                
                                
                                $
                                19




Exploratory
well costs capitalized for more than one year at December 31, 2008 include six
projects, one of which includes activity in West Africa. We incurred exploratory
well costs of $160 million in West Africa for Blocks O and I offshore Equatorial
Guinea and the PH-77 license offshore Cameroon. Since drilling the initial well
for this 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.
Accordingly, a development plan for the Benita discovery on Block I was
submitted to the Equatorial Guinean government in December 2008, and we await
their approval. In addition to the amount of exploratory well costs that have
been capitalized for a period greater than one year for the West Africa project,
we have incurred $108 million in suspended costs related to additional drilling
activity in West Africa through December 31, 2008.







77
 Table of Contents







Additionally,
we incurred exploratory well costs related to two projects in the deepwater Gulf
of Mexico.  One project relates to Raton South (Mississippi Canyon
Block 292) and includes $28 million of suspended exploratory well costs. A
successful sidetrack well was recently completed on this prospect and tie-back
to a host facility is anticipated in late 2009. The other project relates to
Redrock (Mississippi Canyon Block 204) and includes $17 million of suspended
exploratory well costs. Tie-back of Redrock is anticipated to occur following
the tie-back of Raton South.




The
Flyndre and Selkirk projects are located in the UK sector of the North Sea and
incurred exploratory well costs of $15 million and $22 million,
respectively.  We successfully completed an exploratory appraisal well
at each project in 2007 and are working with the co-venturers to formulate
development plans.




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




Note
8—Debt




Our debt
consists of the following:




December
      31,2008
                                          
                                          
                                          2007Debt
                                          
                                          Interest
      Rate
                                          
                                          
                                          Debt
                                          
                                          Interest
      Rate(in
      millions, except percentages)Credit
      facility
                                          
                                          $
                                          1,606
                                          
                                          
                                          0.80
                                          %
                                          
                                          $
                                          1,180
                                          
                                          
                                          5.28
                                          %5
      1⁄4% Senior Notes, due April 15, 2014
                                          
                                          
                                          200
                                          
                                          
                                          5.25
                                          %
                                          
                                          
                                          200
                                          
                                          
                                          5.25
                                          %7
      1⁄4% Notes, due October 15, 2023
                                          
                                          
                                          100
                                          
                                          
                                          7.25
                                          %
                                          
                                          
                                          100
                                          
                                          
                                          7.25
                                          %8%
      Senior Notes, due April 1, 2027
                                          
                                          
                                          250
                                          
                                          
                                          8.00
                                          %
                                          
                                          
                                          250
                                          
                                          
                                          8.00
                                          %7
      1⁄4% Senior Debentures, due August 1, 2097
                                          
                                          
                                          89
                                          
                                          
                                          7.25
                                          %
                                          
                                          
                                          100
                                          
                                          
                                          7.25
                                          %Installment
      payments, due May 11, 2009
                                          
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          
                                          
                                          25
                                          
                                          
                                          5.53
                                          %Long-term
      debt
                                          
                                          
                                          2,245
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,855Installment
      payments - current portion
                                          
                                          
                                          25
                                          
                                          
                                          4.18
                                          %
                                          
                                          
                                          25
                                          
                                          
                                          5.53
                                          %Total
      debt
                                          
                                          
                                          2,270
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,880Unamortized
      discount
                                          
                                          
                                          (4
                                          )
                                          
                                          
                                          
                                          
                                          
                                          (4
                                          )Total
      debt, net of discount
                                          
                                          $
                                          2,266
                                          
                                          
                                          
                                          
                                          
                                          $
                                          1,876




All of
our long-term debt is senior unsecured debt and is, therefore, pari passu with respect to
the payment of both principal and interest. The indenture documents of each of
the 71⁄4% Notes, the 8% Senior Notes and the 71⁄4% Senior Debentures provide that we
may prepay the instruments by creating a defeasance trust. The defeasance
provisions require that the trust be funded with securities sufficient, in the
opinion of a nationally recognized accounting firm, to pay all scheduled
principal and interest due under the respective agreements. Interest on each of
these issues is payable semi-annually. Debt issuance costs of approximately
$6 million (including $2 million related to the credit facility) remain and
are being amortized to expense over the life of the related debt
issue.




Credit Facility—In November
2007, we extended our bank revolving credit facility (the credit facility) until
December 9, 2012.  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
requires that our total debt to capitalization ratio (as defined in the credit
agreement), expressed as a percentage, not exceed 60% at any time. A violation
of this covenant could result in a default under the credit facility, which
would permit the participating banks to restrict our ability to access the
credit facility and require the immediate repayment of any outstanding advances
under the credit facility. As of December 31, 2008, we were in full compliance
with our debt covenants. The credit facility is with certain commercial lending
institutions and is available for general corporate purposes.







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Certain
lenders that are a party to the credit facility have in the past performed
investment banking, financial advisory, lending or commercial banking services
for us, for which they have received customary compensation and reimbursement of
expenses.




The
credit facility does not restrict the payment of dividends on our common stock,
except, if after giving effect thereto, an Event of Default shall have occurred
and be continuing or been caused thereby.




Installment Payment Due
2009—During 2007, we purchased working interests in oil and gas
properties in the Piceance basin of western Colorado for $75 million. After
making cash payments of $25 million at closing and $25 million during 2008, we
owe $25 million to the seller. The final $25 million installment is due on May
11, 2009.  The amount due is included in short-term borrowings in our
consolidated balance sheets. Interest on the unpaid amount is due quarterly and
accrues at a LIBOR rate plus .30%. The interest rate was 4.18% at December 31,
2008.




Debt Repurchase— During 2008,
we repurchased $11 million of our 71⁄4% Senior Debentures due August 1, 2097,
recognizing a debt extinguishment gain of $4 million.




Annual Maturities—Annual
maturities of outstanding debt are as follows:




(in
      millions)2009
                      
                      $
                      252010
                      
                      
                      -2011
                      
                      
                      -2012
                      
                      
                      1,6062013
                      
                      
                      -Thereafter
                      
                      
                      639Total
                      
                      $
                      2,270




Short-Term Borrowings—Our
credit agreement 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 payments discussed above, no
short-term borrowings were outstanding at December 31, 2008 or
2007.




Note
      9—Income Taxes




Components
of income before income taxes are as follows:




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)Domestic
                          
                          $
                          1,032
                          
                          
                          $
                          480
                          
                          
                          $
                          402Foreign
                          
                          
                          1,029
                          
                          
                          
                          888
                          
                          
                          
                          694Total
                          
                          $
                          2,061
                          
                          
                          $
                          1,368
                          
                          
                          $
                          1,096






The
income tax provision consists of the following:




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)Current
      taxesFederal
                          
                          $
                          45
                          
                          
                          $
                          6
                          
                          
                          $
                          80State
                          
                          
                          1
                          
                          
                          
                          1
                          
                          
                          
                          6Foreign
                          
                          
                          306
                          
                          
                          
                          125
                          
                          
                          
                          138Total
      current
                          
                          
                          352
                          
                          
                          
                          132
                          
                          
                          
                          224Deferred
      taxesFederal
                          
                          
                          363
                          
                          
                          
                          186
                          
                          
                          
                          144State
                          
                          
                          4
                          
                          
                          
                          6
                          
                          
                          
                          5Foreign
                          
                          
                          (8
                          )
                          
                          
                          100
                          
                          
                          
                          45Total
      deferred
                          
                          
                          359
                          
                          
                          
                          292
                          
                          
                          
                          194Total
      income tax provision
                          
                          $
                          711
                          
                          
                          $
                          424
                          
                          
                          $
                          418












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A
reconciliation of the federal statutory tax rate to the effective tax rate is as
follows:




Year
      Ended December 31,2008
                                
                                2007
                                
                                2006(amounts
      in percentages)Federal
      statutory rate
                                
                                
                                35.0
                                
                                
                                35.0
                                
                                
                                35.0Effect
      ofEarnings
      of equity method investees
                                
                                
                                (2.9
                                )
                                
                                (5.4
                                )
                                
                                (4.2
                                )State
      taxes, net of federal benefit
                                
                                
                                0.2
                                
                                
                                0.5
                                
                                
                                1.3Difference
      between US and foreign rates
                                
                                
                                1.8
                                
                                
                                1.6
                                
                                
                                2.2Nondeductible
      goodwill
                                
                                
                                -
                                
                                
                                -
                                
                                
                                3.1Other,
      net
                                
                                
                                0.4
                                
                                
                                (0.7
                                )
                                
                                0.7Effective
      rate
                                
                                
                                34.5
                                
                                
                                31.0
                                
                                
                                38.1




Deferred
tax assets and liabilities resulted from the following:




December
      31,2008
                            
                            
                            2007(in
      millions)Deferred
      tax assetsLoss
      carryforwards
                            
                            $
                            36
                            
                            
                            $
                            21Ecuador
      investment
                            
                            
                            18
                            
                            
                            
                            -Accrued
      expenses
                            
                            
                            32
                            
                            
                            
                            26Allowance
      for doubtful accounts
                            
                            
                            20
                            
                            
                            
                            4Fair
      value of derivative instruments
                            
                            
                            -
                            
                            
                            
                            177AOCL
      - pension asset/obligation
                            
                            
                            20
                            
                            
                            
                            -Postretirement
      benefits
                            
                            
                            31
                            
                            
                            
                            10Deferred
      compensation
                            
                            
                            63
                            
                            
                            
                            61Foreign
      tax credits
                            
                            
                            51
                            
                            
                            
                            82Other
                            
                            
                            27
                            
                            
                            
                            14Total
      deferred tax assets
                            
                            
                            298
                            
                            
                            
                            395Valuation
      allowance - foreign loss carryforwards
                            
                            
                            (35
                            )
                            
                            
                            (18
                            )Valuation
      allowance - foreign tax credits
                            
                            
                            (51
                            )
                            
                            
                            (57
                            )Valuation
      allowance - Ecuador
      investment
                            
                            
                            (18
                            )
                            
                            
                            -Net
      deferred tax assets
                            
                            
                            194
                            
                            
                            
                            320Deferred
      tax liabilitiesProperty, plant and
      equipment, principally due todifferences
      in depreciation, amortization, lease impairment and
      abandonments
                            
                            
                            (2,388
                            )
                            
                            
                            (2,184
                            )Commodity
      derivative assets
                            
                            
                            (122
                            )
                            
                            
                            -Other
                            
                            
                            -
                            
                            
                            
                            11Total
      deferred tax liability
                            
                            
                            (2,510
                            )
                            
                            
                            (2,173
                            )Net
      deferred tax liability
                            
                            $
                            (2,316
                            )
                            
                            $
                            (1,853
                            )




Net
deferred tax liabilities were classified in the consolidated balance sheet as
follows:




December
      31,2008
                        
                        
                        2007(in
      millions)Deferred
      income tax asset
                        
                        $
                        -
                        
                        
                        $
                        131Deferred
      income tax liability - current
                        
                        
                        (142
                        )
                        
                        
                        -Deferred
      income tax liability - noncurrent
                        
                        
                        (2,174
                        )
                        
                        
                        (1,984
                        )Net
      deferred tax liability
                        
                        $
                        (2,316
                        )
                        
                        $
                        (1,853
                        )




In
assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income in the appropriate tax
jurisdictions during the periods in which those temporary differences become
deductible. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, we believe it is more likely than not that
we will realize the benefits of these deductible differences at
December 31, 2008. The amount of the deferred tax assets considered
realizable could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced.







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We have
recognized deferred tax assets associated with foreign loss carryforwards. The
tax effect of these carryforwards decreased from $90 million in 2006 to
$18 million in 2007 and increased to $35 million in 2008. These losses
continue to be incurred on our projects in Suriname and other new venture
activities which are not yet commercial. Therefore, a valuation allowance was
provided against the full amount of the deferred tax assets. In 2006, we
incurred a large taxable loss in the UK from accelerated write-offs allowed on
our Dumbarton field development. No valuation allowance was provided against
this loss carryforward, and it was fully utilized in 2007.




Starting
in 2005, we were able to claim a foreign tax credit for US federal income tax
purposes. As of December 31, 2007, we had recorded a deferred tax asset of $11
million for certain foreign taxes related primarily to 2005. Because it was
uncertain whether a credit could be claimed for those taxes under limitations
imposed by the Internal Revenue Code, a valuation allowance of $11 million was
provided against the deferred tax asset. However, this uncertainty was favorably
resolved when we amended our 2005 and 2006 federal income tax returns in 2008.
Therefore, both the deferred tax asset and the valuation allowance have been
eliminated as of December 31, 2008. We have also recorded a deferred tax asset
of $51 million for the future foreign tax credits associated with deferred
tax liabilities recorded by foreign branch operations. A valuation allowance of
$51 million has been provided against this deferred tax asset. Finally, a
deferred tax asset of $18 million was recorded in 2008 for the future tax
benefit of an impairment of a foreign asset. However, this was fully offset by a
valuation allowance.




Our
effective tax rate increased in 2008 compared to 2007 primarily due to the fact
that pre-tax earnings increased by a proportionately greater amount than our
excludible permanent differences. In addition, there was a rate increase due to
(1) a partial shift of taxable income from lower rate jurisdictions such as
Equatorial Guinea and Israel to higher rate jurisdictions, (2) the recording of
US deferred taxes on the anticipated repatriation of foreign earnings as
described below, and (3) the recording of an impairment of a foreign asset on
which the tax benefit was offset by a valuation allowance.




Several
factors resulted in a decrease in our effective tax rate for 2007. The major
factor was that, in 2006, $100 million of goodwill write-off associated
with the sale of Gulf of Mexico shelf properties was not deductible, which
increased the rate for that year. Other factors were an increase in deferred tax
assets arising from foreign tax credits, a decrease in the Chinese tax rate, and
the realization of additional income from equity method investees which is a
favorable permanent difference in calculating the income tax
expense.




We are
currently reviewing the possibility of repatriating a portion of our
international undistributed earnings. Therefore, as of December 31, 2008, we
have recorded additional US deferred income taxes of $9 million on the portion
of undistributed earnings of our foreign subsidiaries that are likely to be
repatriated. Repatriation of additional earnings in the future could result in a
decrease in our net income and cash flows. As of December 31, 2008,
the accumulated undistributed earnings of the foreign subsidiaries on which no
US taxes have been recorded were approximately $1.1 billion. Upon
distribution of additional earnings in the form of dividends or otherwise, we
would likely be subject to US income taxes and foreign withholding taxes. It is
not practicable, however, to estimate the amount of taxes that may be payable on
the eventual remittance of these earnings because of the possible application of
US foreign tax credits. Although we are currently claiming foreign tax credits,
we may not be in a credit position when any future remittance of foreign
earnings takes place, or the limitations imposed by the Internal Revenue Code
and IRS Regulations may not allow the credits to be utilized during the
applicable carryback and carryforward periods.




During
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.  The deferred tax liability
for China as of December 31, 2006 was revised during 2007 to reflect the new
rate, which decreased deferred tax expense by $2 million.




Adoption of FIN 48 and FSP FIN
48-1—As discussed in Note 2—Significant Accounting Policies, we adopted
FIN 48 and FSP FIN 48-1 as of January 1, 2007. The adoption had no effect on our
financial position or results of operations. We do not have significant
unrecognized tax benefits resulting from differences between positions taken in
tax returns and amounts recognized in the financial statements as of December
31, 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 December 31, 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. We do not expect that the total amount of unrecognized
tax benefits will significantly increase or decrease during the next 12
months.







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In our
major tax jurisdictions, the earliest years remaining open to examination are as
follows:




Earliest
      YearRemaining
      OpenTax
      Jurisdiction
                    to
      ExaminationUnited
      States
                    2005Equatorial
      Guinea
                    2006China
                    2006Israel
                    2000UK
                    2006the
      Netherlands
                    2005




Note
10—Asset Retirement Obligations




Asset
retirement obligations consist of estimated costs of dismantlement, removal,
site reclamation and similar activities associated with our oil and gas
properties. An asset retirement obligation and the related asset retirement cost
are recorded when an asset is first constructed or purchased. The asset
retirement cost is determined and discounted to present value using a
credit-adjusted risk-free rate. After initial recording the liability is
increased for the passage of time, with the increase being reflected as
accretion expense in the statement of operations. Subsequent adjustments in the
cost estimate are reflected in the liability and the amounts continue to be
amortized over the useful life of the related long-lived asset.




Changes
in asset retirement obligations are as follows:




Year
      EndedDecember
      31,2008
                                                        
                                                        
                                                        2007(in
      millions)Asset
      retirement obligations, beginning of year
                                                        
                                                        $
                                                        144
                                                        
                                                        $
                                                        196Liabilities
      incurred in current period
                                                        
                                                        
                                                        15
                                                        
                                                        
                                                        9Liabilities
      settled in current period
                                                        
                                                        
                                                        (33
                                                        )
                                                        
                                                        (177
                                                        )Revisions
                                                        
                                                        
                                                        75
                                                        
                                                        
                                                        108Accretion
      expense
                                                        
                                                        
                                                        10
                                                        
                                                        
                                                        8Asset
      retirement obligations, end of year
                                                        
                                                        $
                                                        211
                                                        
                                                        $
                                                        144Current
      portion
                                                        
                                                        $
                                                        27
                                                        
                                                        $
                                                        13Noncurrent
      portion
                                                        
                                                        
                                                        184
                                                        
                                                        
                                                        131




For the year ended
December 31, 2008, liabilities settled relate primarily to onshore US and
Gulf of Mexico assets. Revisions
include $15 million related to our Main Pass asset held for sale at December 31,
2008. The remaining revisions resulted from changes in estimated timing of
actual abandonment and overall cost increases for the North Sea assets ($18
million), onshore US and Gulf of Mexico assets ($38 million) and Israel and
other locations ($4 million).




For the
year ended December 31, 2007, approximately $125 million of liabilities settled
and $64 million of revisions related to hurricane damage to the Gulf of Mexico
Main Pass assets. The remainder of the liabilities settled and revisions
resulted primarily from changes in estimated timing of actual abandonment and
overall cost increases for Gulf of Mexico assets.




Accretion
expense is included in depreciation, depletion and amortizationexpense in the
consolidated statements ofoperations.




Note
      11—Equity Method
Investments




Investments
accounted for under the equity method consist primarily of the
following:




·
            45%
      interest in Atlantic Methanol Production Company, LLC (AMPCO), which owns
      and operates a methanol plant and related facilities in Equatorial Guinea;
      and


·
            28%
      interest in Alba Plant LLC (Alba Plant), which owns and operates a
      liquefied petroleum gas processing plant in Equatorial
    Guinea.




Equity
method investments are included in other noncurrent assets in the consolidated
balance sheets, and our share of earnings is reported as income from equity
method investees in the consolidated statements of operations. Our share of
income taxes incurred directly by the equity method investees is reported in
income from equity method investments and is not included in our income tax
provision in our consolidated statements of operations. At December 31,
2008, our retained earnings included $114 million related to the
undistributed earnings of equity method investees.







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The
carrying value of our AMPCO investment is $25 million higher than the
underlying net assets of the investee.  $13 million of the difference
relates to capitalized interest which is being amortized into earnings over the
remaining useful life of the plant.  The remaining $12 million relates
to a note receivable from our funding a portion of the local government’s share
of the plant’s development.  The note receivable is being recovered
through distributions from AMPCO.




Equity
method investments are as follows:




December
      31,2008
                              
                              2007(in
      millions)Equity
      method investmentsAMPCO
                              
                              $
                              190
                              
                              $
                              200Alba
      Plant
                              
                              
                              106
                              
                              
                              142Other
                              
                              
                              15
                              
                              
                              15Total
      equity method investments
                              
                              $
                              311
                              
                              
                              357




Summarized,
100% combined financial information for equity method investees is as
follows:




December
      31,2008
                                                        
                                                        2007(in
      millions)Balance
      sheet informationCurrent
      assets
                                                        
                                                        
                                                        
                                                        $
                                                        283
                                                        
                                                        $
                                                        408Noncurrent
      assets
                                                        
                                                        
                                                        
                                                        
                                                        783
                                                        
                                                        
                                                        814Current
      liabilities
                                                        
                                                        
                                                        
                                                        
                                                        248
                                                        
                                                        
                                                        273Noncurrent
      liabilities
                                                        
                                                        
                                                        
                                                        
                                                        43
                                                        
                                                        
                                                        31Year
      Ended December 31,2008
                                                        
                                                        2007
                                                        
                                                        2006(in
      millions)Statements
      of operations informationOperating
      revenues
                                                        
                                                        $
                                                        1,022
                                                        
                                                        $
                                                        934
                                                        
                                                        $
                                                        702Less
      cost of goods sold
                                                        
                                                        
                                                        250
                                                        
                                                        
                                                        220
                                                        
                                                        
                                                        202Gross
      margin
                                                        
                                                        
                                                        772
                                                        
                                                        
                                                        714
                                                        
                                                        
                                                        500Less
      other expense
                                                        
                                                        
                                                        37
                                                        
                                                        
                                                        36
                                                        
                                                        
                                                        48Less income tax expense(1)
                                                        
                                                        
                                                        183
                                                        
                                                        
                                                        44
                                                        
                                                        
                                                        23Net
      income
                                                        
                                                        $
                                                        552
                                                        
                                                        $
                                                        634
                                                        
                                                        $
                                                        429




(1)
            The
      increase in income tax expense in 2008 is due to the expiration of the
      Alba Plant tax holiday.





Note
12– Benefit
Plans




Pension Plan and Other
Postretirement Benefit Plans—We have a noncontributory, tax-qualified
defined benefit pension plan covering employees who were hired prior to May 1,
2006.  The benefits are based on an employee’s years of service and
average earnings for the 60 consecutive calendar months of highest compensation.
Our funding policy has been to make annual contributions equal to at least the
minimum required contribution, but no greater than the maximum deductible for
federal income tax purposes. We also have an unfunded, nonqualified restoration
plan that provides the pension plan formula benefits that cannot be provided by
the 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. We sponsor other plans for the benefit of our employees and
retirees, which include medical and life insurance benefits. We use a
December 31 measurement date for the plans.




Former
Patina employees began participation in the pension plan and the restoration
plan on January 1, 2006, with vesting service from their original Patina
hire date and credited service for benefit accruals starting January 1,
2006. Additionally, all former Patina employees were covered under the medical
and life insurance plans effective January 1, 2006.




On
December 31, 2006, we adopted SFAS 158, which required us to recognize the
funded status (the difference between the fair value of plan assets and the
benefit obligation) of our defined benefit pension, restoration and other
postretirement benefit plans in the consolidated balance sheet, with a
corresponding adjustment to AOCL, net of tax.







83
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The
adjustment to AOCL at adoption represented the unrecognized net actuarial loss,
unrecognized prior service cost, and unrecognized net transition obligation
remaining from the initial adoption of SFAS No. 87, “Employers’ Accounting
for Pensions” and SFAS No. 106, “Employers’ Accounting for Post-Retirement
Benefits Other Than Pensions”. These amounts are currently being recognized as
net periodic benefit cost pursuant to our historical accounting policy for
amortizing such amounts. Further, actuarial gains and losses that arise in
periods subsequent to adoption and are not recognized as net periodic benefit
cost in the same periods are recognized as a component of AOCL. The adoption of
SFAS 158 had no effect on our consolidated statements of operations for the year
ended December 31, 2006, for any prior period presented, or for any periods
subsequent to adoption.




Changes
in the benefit obligation and plan assets of the pension, restoration and other
postretirement benefit plans are as follows at December 31:




Retirement
      and
                                                        
                                                        
                                                        Medical
      andRestoration
      Plans
                                                        
                                                        
                                                        Life
      Plans2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2007(in
      millions)Change
      in benefit obligationBenefit
      obligation at beginning of year
                                                        
                                                        $
                                                        188
                                                        
                                                        
                                                        $
                                                        175
                                                        
                                                        
                                                        $
                                                        22
                                                        
                                                        
                                                        $
                                                        22Service
      cost
                                                        
                                                        
                                                        12
                                                        
                                                        
                                                        
                                                        12
                                                        
                                                        
                                                        
                                                        2
                                                        
                                                        
                                                        
                                                        2Interest
      cost
                                                        
                                                        
                                                        12
                                                        
                                                        
                                                        
                                                        10
                                                        
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        1Amendments
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        8
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Benefits
      paid
                                                        
                                                        
                                                        (17
                                                        )
                                                        
                                                        
                                                        (6
                                                        )
                                                        
                                                        
                                                        (1
                                                        )
                                                        
                                                        
                                                        (1
                                                        )Actuarial
      (gain) loss
                                                        
                                                        
                                                        (1
                                                        )
                                                        
                                                        
                                                        (11
                                                        )
                                                        
                                                        
                                                        (2
                                                        )
                                                        
                                                        
                                                        (2
                                                        )Benefit
      obligation at end of year
                                                        
                                                        
                                                        194
                                                        
                                                        
                                                        
                                                        188
                                                        
                                                        
                                                        
                                                        22
                                                        
                                                        
                                                        
                                                        22Change
      in plan assetsFair
      value of plan assets at beginning of year
                                                        
                                                        
                                                        155
                                                        
                                                        
                                                        
                                                        137
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Actual
      return on plan assets
                                                        
                                                        
                                                        (43
                                                        )
                                                        
                                                        
                                                        13
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Employer
      contributions
                                                        
                                                        
                                                        37
                                                        
                                                        
                                                        
                                                        11
                                                        
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        1Benefits
      paid
                                                        
                                                        
                                                        (17
                                                        )
                                                        
                                                        
                                                        (6
                                                        )
                                                        
                                                        
                                                        (1
                                                        )
                                                        
                                                        
                                                        (1
                                                        )Fair
      value of plan assets at end of year
                                                        
                                                        
                                                        132
                                                        
                                                        
                                                        
                                                        155
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Funded
      statusFunded
      status at end of year
                                                        
                                                        
                                                        (62
                                                        )
                                                        
                                                        
                                                        (33
                                                        )
                                                        
                                                        
                                                        (22
                                                        )
                                                        
                                                        
                                                        (22
                                                        )Net amount
      recognized in consolidated balance sheets (after adoption of FAS
      158)
                                                        
                                                        
                                                        (62
                                                        )
                                                        
                                                        
                                                        (33
                                                        )
                                                        
                                                        
                                                        (22
                                                        )
                                                        
                                                        
                                                        (22
                                                        )Amounts
      recognized in consolidated balance sheets consist of:Current
      liabilities
                                                        
                                                        
                                                        (2
                                                        )
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        (1
                                                        )
                                                        
                                                        
                                                        (1
                                                        )Noncurrent
      liabilities
                                                        
                                                        
                                                        (60
                                                        )
                                                        
                                                        
                                                        (30
                                                        )
                                                        
                                                        
                                                        (21
                                                        )
                                                        
                                                        
                                                        (21
                                                        )Net amount
      recognized in consolidated balance sheets (after adoption of FAS
      158)
                                                        
                                                        
                                                        (62
                                                        )
                                                        
                                                        
                                                        (33
                                                        )
                                                        
                                                        
                                                        (22
                                                        )
                                                        
                                                        
                                                        (22
                                                        )Amounts
      not yet reflected in net periodic benefit cost and included in
      AOCLTransition
      obligation
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Prior
      service (cost) credit
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        5
                                                        
                                                        
                                                        
                                                        6Accumulated
      loss
                                                        
                                                        
                                                        (86
                                                        )
                                                        
                                                        
                                                        (34
                                                        )
                                                        
                                                        
                                                        (10
                                                        )
                                                        
                                                        
                                                        (14
                                                        )AOCL
                                                        
                                                        
                                                        (89
                                                        )
                                                        
                                                        
                                                        (38
                                                        )
                                                        
                                                        
                                                        (5
                                                        )
                                                        
                                                        
                                                        (8
                                                        )Cumulative
      employer contributions in excess of net periodic benefit
    cost
                                                        
                                                        
                                                        27
                                                        
                                                        
                                                        
                                                        5
                                                        
                                                        
                                                        
                                                        (17
                                                        )
                                                        
                                                        
                                                        (14
                                                        )Net
      amount recognized in consolidated balance sheet (after adoption of FAS
      158)
                                                        
                                                        $
                                                        (62
                                                        )
                                                        
                                                        
                                                        (33
                                                        )
                                                        
                                                        $
                                                        (22
                                                        )
                                                        
                                                        
                                                        (22
                                                        )








84
 Table of Contents





Net
periodic benefit cost recognized for the pension, restoration and other
postretirement benefit plans is provided in the table below:




Retirement
      and
                                                                                              
                                                                                              
                                                                                              Medical
      andRestoration
      Plans
                                                                                              
                                                                                              
                                                                                              Life
      PlansYear
      Ended December 31,
                                                                                              
                                                                                              
                                                                                              Year
      Ended December 31,2008
                                                                                              
                                                                                              
                                                                                              2007
                                                                                              
                                                                                              
                                                                                              2006
                                                                                              
                                                                                              
                                                                                              2008
                                                                                              
                                                                                              
                                                                                              2007
                                                                                              
                                                                                              
                                                                                              2006(in
      millions)Components
      of net periodic benefit costService
      cost
                                                                                              
                                                                                              $
                                                                                              12
                                                                                              
                                                                                              
                                                                                              $
                                                                                              12
                                                                                              
                                                                                              
                                                                                              $
                                                                                              12
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2Interest
      cost
                                                                                              
                                                                                              
                                                                                              12
                                                                                              
                                                                                              
                                                                                              
                                                                                              10
                                                                                              
                                                                                              
                                                                                              
                                                                                              9
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1Expected
      return on plan assets
                                                                                              
                                                                                              
                                                                                              (12
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (11
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (9
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Amortization
      of prior  service (credit) cost
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -Amortization
      of net loss
                                                                                              
                                                                                              
                                                                                              2
                                                                                              
                                                                                              
                                                                                              
                                                                                              3
                                                                                              
                                                                                              
                                                                                              
                                                                                              3
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1Net
      periodic benefit cost
                                                                                              
                                                                                              $
                                                                                              14
                                                                                              
                                                                                              
                                                                                              $
                                                                                              14
                                                                                              
                                                                                              
                                                                                              $
                                                                                              15
                                                                                              
                                                                                              
                                                                                              $
                                                                                              3
                                                                                              
                                                                                              
                                                                                              $
                                                                                              3
                                                                                              
                                                                                              
                                                                                              $
                                                                                              4Other
      changes recognized in AOCLPrior
      service cost arising during period
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8
                                                                                              
                                                                                              
                                                                                              
                                                                                              *
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              *Net
      loss (gain) arising during period
                                                                                              
                                                                                              
                                                                                              53
                                                                                              
                                                                                              
                                                                                              
                                                                                              (13
                                                                                              )
                                                                                              
                                                                                              
                                                                                              *
                                                                                              
                                                                                              
                                                                                              
                                                                                              (3
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (3
                                                                                              )
                                                                                              
                                                                                              
                                                                                              *Amortization
      of prior service credit
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              *
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              *Amortization
      of net loss
                                                                                              
                                                                                              
                                                                                              (2
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (3
                                                                                              )
                                                                                              
                                                                                              
                                                                                              *
                                                                                              
                                                                                              
                                                                                              
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              
                                                                                              *Total
      recognized in  AOCL
                                                                                              
                                                                                              $
                                                                                              51
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (8
                                                                                              )
                                                                                              
                                                                                              
                                                                                              *
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (3
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (3
                                                                                              )
                                                                                              
                                                                                              
                                                                                              *Expected
      amortizations for next fiscal yearAmortization
      of prior service cost (credit)
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (1
                                                                                              )Amortization
      of net loss
                                                                                              
                                                                                              
                                                                                              2
                                                                                              
                                                                                              
                                                                                              
                                                                                              2
                                                                                              
                                                                                              
                                                                                              
                                                                                              3
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              1Weighted-average
      assumptions used to determine benefit obligationsDiscount
      rate (1)
                                                                                              
                                                                                              
                                                                                              6.00%
      / 6.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              6.50
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.75
                                                                                              %
                                                                                              
                                                                                              
                                                                                              6.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              6.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.75
                                                                                              %Rate
      of compensation increase
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Weighted-average
      assumptions used to determine net periodic benefit costsDiscount rate
      (2)
                                                                                              
                                                                                              
                                                                                              6.50
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.75
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.50%
      / 6.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              6.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.75
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.50%
      / 6.25
                                                                                              %Expected
      long-term rate of return on plan assets
                                                                                              
                                                                                              
                                                                                              8.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              8.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              8.25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Rate
      of compensation increase
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -


*
            Not
      applicable due to change in method of accounting for defined benefit and
      other post retirement plans.


(1)
            The
      discount rate was 6.00% for the retirement plan and 6.25% for the
      restoration plan at December 31,
2008.


(2)
            The
      net periodic benefit cost was remeasured at May 1, 2006 using a
      discount rate of 6.25%, due to changes in plan
  provisions.




Additional
disclosures are as follows:




Retirement
      andRestoration
      Plans2008
                                          
                                          2007(in
      millions)Accumulated
      benefit obligation
                                          
                                          $
                                          169
                                          
                                          $
                                          163Information for
      pension plans with projected benefit obligations in excess of plan
      assetsProjected
      benefit obligation
                                          
                                          
                                          194
                                          
                                          
                                          188Fair
      value of plan assets
                                          
                                          
                                          132
                                          
                                          
                                          155Information
      for pension plans with accumulated benefit obligations in excess of plan
      assetsAccumulated
      benefit obligation
                                          
                                          
                                          169
                                          
                                          
                                          25Fair
      value of plan assets
                                          
                                          
                                          132
                                          
                                          
                                          -












85
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In
selecting the assumption for expected long-term rate of return on assets, we
consider the average rate of earnings expected on the funds to be invested to
provide for plan benefits. This includes considering the plan’s assetallocation, historical returns on these types of assets, the current
economic environment and the expected returns likely to be earned over the life
of the plan. We assume the long-term asset mix will be consistent with a target
asset allocation of 70% equity and 30% fixed income, with a range of plus or
minus 10% acceptable degree of variation in the plan’s asset allocation. Based
on these factors we assumed an average of 8.25% per annum over the life of the
plan for the calculation of 2008 net periodic benefit cost. The assumption will
be reduced to 8.00% for the calculation of 2009 net periodic benefit cost. No
plan assets are expected to be returned to us during 2009.




In order
to determine an appropriate discount rate at December 31, 2008, we
performed an analysis of the Citigroup Pension Discount Curve (the CPDC) as of
that date for each of our plans. The CPDC uses spot rates that represent the
equivalent yield on high quality, zero coupon bonds for specific maturities. We
used these rates to develop an equivalent single discount rate based on our
plans’ expected future benefit payment streams and duration of plan liabilities.
A 1% increase in the discount rate would have resulted in a decrease in net
periodic benefit cost of approximately $2 million in 2008. A 1% decrease in
the discount rate would have resulted in an increase in net periodic benefit
cost of approximately $2 million in 2008.




Assumed
health care cost trend rates were as follows at December 31:




2008
                          
                          
                          2007Health
      care cost trend rate assumed for next year
                          
                          8%
                          
                          
                          9%Rate
      to which the cost trend rate is assumed to decline (ultimate trend
      rate)
                          
                          5%
                          
                          
                          5%Year
      rate reaches ultimate trend rate
                          
                          2012
                          
                          
                          2012




Assumed
health care cost trend rates have a significant effect on the amounts reported
for health care plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:




1%
      Increase
                          
                          
                          1%
      Decrease(in
      millions)Effect
      on total service and interest cost components for 2008
                          
                          $
                          -
                          
                          
                          $
                          -Effect
      on year-end 2008 postretirement benefit obligation
                          
                          
                          2
                          
                          
                          
                          (2
                          )





Weighted-average
asset allocations for the tax-qualified defined benefit pension plan are as
follows:




TargetAllocation
                          
                          
                          Plan
      Assets2009
                          
                          
                          2008
                          
                          
                          2007Asset
      CategoryEquity
      securities
                          
                          
                          70%
                          
                          
                          
                          65%
                          
                          
                          
                          70%Fixed
      income
                          
                          
                          30%
                          
                          
                          
                          35%
                          
                          
                          
                          30%Total
                          
                          
                          100%
                          
                          
                          
                          100%
                          
                          
                          
                          100%





The
investment policy for the tax-qualified defined benefit pension plan is
determined by an employee benefits committee (the committee) with input from a
third-party investment consultant. Based on a review of historical rates of
return achieved by equity and fixed income investments in various combinations
over multi-year holding periods and an evaluation of the probabilities of
achieving acceptable real rates of return, the committee has determined the
target asset allocation deemed most appropriate to meet the immediate and future
benefit payment requirements for the plan and to provide a diversification
strategy which reduces market and interest rate risk. A 1% increase (decrease)
in the expected return on plan assets would have resulted in a (decrease)
increase, respectively, in net periodic benefit cost of approximately
$2 million in 2008.




We base
our determination of the asset return component of pension expense on a
market-related valuation of assets, which reduces year-to-year volatility. This
market-related valuation recognizes investment gains or losses over a five-year
period from the year in which they occur. Investment gains or losses for this
purpose are the difference between the expected return calculated using the
market-related value of assets and the actual return based on the fair value of
assets. Since the market-related value of assets recognizes gains or losses over
a five-year period, the future value of assets will be impacted as previously
deferred gains or losses are recorded. As of January 1, 2008, we had
cumulative asset gains of approximately $3 million, which remain to be
recognized in the calculation of the market-related value of
assets.




Contributions—As a result of
previous contributions made to the pension plan, there are no required
contributions expected during 2009. During January 2009, we made a voluntary
contribution of $1 million to the pension plan. We may make additional
contributions to our pension plan during the year. We expect to make cash
contributions of approximately $2 million to the unfunded restoration plan
and $1 million to the medical and life plans during 2009.







86
 Table of Contents





The
amounts expected to be contributed to the unfunded restoration and medical and
life plans equal expected benefit payments from those plans.
(unaudited).




Estimated Future Benefit
Payments—As of December 31, 2008, the following future benefit
payments are expected to be paid:




Retirement
      and
                        
                        
                        Medical
      andRestoration
      Plans
                        
                        
                        Life
      Plans(in
      millions)2009
                        
                        $
                        18
                        
                        
                        $
                        12010
                        
                        
                        13
                        
                        
                        
                        22011
                        
                        
                        16
                        
                        
                        
                        22012
                        
                        
                        17
                        
                        
                        
                        22013
                        
                        
                        16
                        
                        
                        
                        2Years
      2014 to 2018
                        
                        
                        99
                        
                        
                        
                        14




The
estimate of expected future benefit payments is based on the same assumptions
used to measure the benefit obligation at December 31, 2008 and
includes estimated future employee service.




401(k) Plan—We sponsor a
401(k) savings plan. All regular employees are eligible to participate. We
make contributions to match employee contributions up to the first 6% of
compensation deferred into the plan, and certain profit sharing contributions
for employees hired on or after May 1, 2006, based upon their ages and salaries.
We made cash contributions of $7 million in 2008, $6 million in 2007, and
$4 million in 2006.




Deferred Compensation
Plans—In connection with the Patina Merger, we acquired the assets and
assumed the liabilities related to a Patina shareholder-approved non-qualified
deferred compensation plan. This plan was available to officers and certain
managers of Patina and allowed participants to defer all or a portion of their
salary and annual bonuses (either in cash or common stock). Participant-directed
investments are held in a rabbi trust and are available to satisfy the claims of
our creditors in the event of bankruptcy or insolvency. Participants may elect
to receive distributions in either cash or shares of our common stock. We
account for the deferred compensation plan in accordance with EITF 97-14,
“Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held
in a Rabbi Trust and Invested” (EITF 97-14). Components of the rabbi trust are
as follows:




December
      31,2008
                          
                          
                          2007(in
      millions, except share amounts)Rabbi
      trust assetsMutual
      fund investments
                          
                          $
                          71
                          
                          
                          $
                          107Noble
      Energy common stock (at market value) (1)
                          
                          
                          52
                          
                          
                          
                          87Total
      rabbi trust assets
                          
                          
                          123
                          
                          
                          
                          194Liability
      under Patina deferred compensation plan
                          
                          $
                          123
                          
                          
                          $
                          194Number
      of shares of Noble Energy common stock held by rabbi trust
                          
                          
                          1,051,032
                          
                          
                          
                          1,101,032




(1)
            Shares
      of Noble Energy common stock are accounted for as treasury stock and
      recorded at cost in the consolidated balance
  sheets.




Assets of
the rabbi trust, other than our common stock, are invested in certain mutual
funds that cover an investment spectrum ranging from equities to money market
instruments. These mutual funds have published market prices and are reported at
market value. We account for these investments in accordance with SFAS
No. 115, “Accounting for Certain Investments in Debt and Equity
Securities.” The mutual funds are included in the mutual funds account in other
noncurrent assets in the consolidated balance sheets.




Shares of
our common stock held by the rabbi trust are accounted for as treasury stock
(recorded at cost) in the shareholders’ equity section of the consolidated
balance sheets. The amounts payable to the plan participants are included in
other noncurrent liabilities in the consolidated balance sheets and include the
market value of the shares of our common stock. Approximately one million
shares, or 95%, of our common stock held in the plan at December 31, 2008
were attributable to a member of our Board of Directors. Plan participants sold
50,000 shares of common stock during 2008, no shares during 2007, and 1,067,948
shares during 2006. Proceeds were invested in mutual funds. Distributions to
plan participants totaled $1 million in 2008, $2 million in 2007, and
$0.5 million in 2006.







87
 Table of Contents





In
accordance with EITF 97-14, all fluctuations in market value of the deferred
compensation liability have been reflected in other expense, net in the
consolidated statements of operations. We recognized deferred compensation
income of $32 million in 2008 and deferred compensation expense of $33 million
in 2007 and $16 million in 2006.




We also
maintain an unfunded deferred compensation plan for the benefit of certain of
our employees. A deferred compensation liability of $36 million was outstanding
at December 31, 2008 under the unfunded plan.





Note 13 –
Stock-Based Compensation




As
discussed in Note 2—Summary of Significant Accounting
Policies, effective January 1, 2006, we adopted the fair value recognition
provisions for stock-based awards granted to employees.
SFAS 123(R) requires companies to recognize in the statement of
operations the grant-date fair value of stock options and other stock-based
compensation issued to employees. We recognize the expense of all stock-based
awards on a straight-line basis over the employee’s requisite service period
(generally the vesting period of the award).




We
recognized total stock-based compensation expense as follows:




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(in
      millions)Stock-based
      compensation expense included inGeneral
      and administrative expense
                            
                            $
                            38
                            
                            
                            $
                            25
                            
                            
                            $
                            11Exploration
      expense and other
                            
                            
                            1
                            
                            
                            
                            2
                            
                            
                            
                            1Total
      stock-based compensation expense
                            
                            $
                            39
                            
                            
                            $
                            27
                            
                            
                            $
                            12Tax
      benefit recognized
                            
                            $
                            (15
                            )
                            
                            $
                            (10
                            )
                            
                            $
                            (4
                            )




Stock Option and Restricted Stock
Plans and Incentive Plan—Our stock option
and restricted stock plans and incentive plan are described below.




1992 Stock Option and
      Restricted Stock Plan




Under the
Noble Energy, Inc. 1992 Stock Option and Restricted Stock Plan, as amended
(the 1992 Plan), the Compensation, Benefits and Stock Option Committee of the
Board of Directors (the Committee) may grant stock options and award restricted
stock to our officers or other employees and those of our subsidiaries. During
2007, our stockholders approved an amendment to the 1992 Plan that increased the
maximum number of shares of our common stock that may be issued from 18,500,000
to 22,000,000 shares. At December 31, 2008, 10,469,623 shares of common
stock were reserved for issuance, including 4,698,788 shares available for
future grants and awards, under the 1992 Plan.




1992 Plan Stock Options—Stock
options are issued with an exercise price equal to the market price of our
common stock on the date of grant, and are subject to such other terms and
conditions as may be determined by the Committee. Unless granted by the
Committee for a shorter term, the options expire ten years from the grant date.
Option grants generally vest ratably over a three-year period.




1992 Plan Restricted
Stock—Restricted stock awards made under the 1992 Plan are subject to
such restrictions, terms and conditions, including forfeitures, if any, as may
be determined by the Committee. Restricted stock awards generally vest over
three years.




2004 Long-Term
      Incentive Plan




Under the
Noble Energy, Inc. 2004 Long-Term Incentive Plan (the 2004 LTIP), the
Committee may make incentive awards to our key employees and those of our
subsidiaries. Incentive compensation is based upon the attainment of specific
market and performance goals established by the Committee. Awards may be in the
form of stock options or restricted stock or in the form of performance units or
other incentive measurements providing
for the payment of bonuses in cash, or in any combination thereof, as determined
by the Committee in its discretion. Stock options granted and restricted stock
awarded under the 2004 LTIP are granted and awarded pursuant to the terms of the
1992 Plan. These awards are accounted for in accordance with the provisions of
SFAS 123(R) which provides for the grant-date fair value of the awards to
be recognized in the statement of operations over the service period. Our cash
based performance units are accounted for under SFAS No. 5, “Accounting for
Contingencies” and are excluded from the provisions of SFAS 123(R).







88
 Table of Contents





2005
Stock Plan for Non-Employee Directors




The 2005
Stock Plan for Non-Employee Directors of Noble Energy, Inc. (the 2005 Plan)
provides for grants of stock options and awards of restricted stock to our
non-employee directors. The 2005 Plan superseded and replaced the 1988
Nonqualified Stock Option Plan for Non-Employee Directors. The total number of
shares of common stock that may be issued under the 2005 Plan is 800,000. At
December 31, 2008, 739,204 shares of common stock were reserved for
issuance, including 620,675 shares available for future grants and awards under
the 2005 Plan.




2005 Plan Stock Options—The
2005 Plan provides for the granting to a non-employee director of up to a
maximum of 11,200 stock options on the date of election to the Board of
Directors, annual grants of 2,800 options per non-employee director on
February 1 of each year, and discretionary grants by the Board of Directors
(with the February 1 annual and the discretionary grants made to a non-employee
director during any calendar year being limited to a combined maximum of 11,200
options). Options are issued with an exercise price equal to the market price of
our common stock on the date of grant and may be exercised one year after the
date of grant. The options expire ten years from the date of grant.




2005 Plan Restricted
Stock—The 2005 Plan also provides for the awarding to a non-employee
director of up to a maximum of 4,800 shares of restricted stock on the date of
election to the Board of Directors, annual awards of 1,200 shares of restricted
stock per non-employee director on February 1 of each year, and
discretionary awards by the Board of Directors (with the February 1 annual and
the discretionary awards made to a non-employee director during any calendar
year being limited to a combined maximum of 4,800 shares of restricted stock).
Restricted stock is restricted for a period of at least one year from the date
of award.




1988 Nonqualified
      Stock Option Plan for Non-Employee
  Directors




The 1988
Nonqualified Stock Option Plan for Non-Employee Directors of Noble
Energy, Inc., as amended, (the 1988 Plan) provided for the issuance of
stock options to our non-employee directors. Options issued under the 1988 Plan
may be exercised one year after grant and expire ten years from the grant date.
The 1988 Plan provided for the granting of a fixed number of stock options to
each non-employee director annually (10,000 stock options for the first calendar
year of service and 5,000 stock options for each year thereafter) on
February 1 of each year. The 1988 Plan was terminated in 2005, and no
additional options can be granted thereunder.




Patina Stock Option
      Plans




Patina
maintained a shareholder approved stock option plan for employees (the Patina
Employee Plan) that provided for the issuance of options at prices not less than
fair market value at the date of grant. Patina also maintained a shareholder
approved stock grant and option plan for non-employee directors (the Patina
Directors’ Plan). The Patina Directors’ Plan provided for stock options to be
granted to each non-employee director upon appointment and upon annual
re-election thereafter. Upon completion of the Patina Merger, all unvested stock
options outstanding under the Patina Employee Plan and the Patina Directors’
Plan became fully vested, and all outstanding options were converted into
options to purchase our common stock. The Patina options expire five years from
the date of grant.




Stock Option Grants—The fair value of
each stock option granted was estimated on the date of grant using a
Black-Scholes-Merton option valuation model that used the assumptions described
below:




·
            Expected term
      -The
      expected term represents the period of time that options granted are
      expected to be outstanding, which is the grant date to the date of
      expected exercise or other expected settlement for options granted. The
      hypothetical midpoint scenario we use considers our actual exercise and
      post-vesting cancellation history and expectations for future periods,
      which assumes that all vested, outstanding options are settled halfway
      between their vesting date and their expiration
  date.


·
            Expected
      volatility - The expected volatility represents the extent to which
      our stock price is expected to fluctuate between the grant date and the
      expected term of the award. We use the historical volatility of our common
      stock for a period equal to the expected term of the option prior to the
      date of grant. We believe that historical volatility produces an estimate
      that is representative of our expectations about the future volatility of
      our common stock over the expected
term.


·
            Risk-free
      rate-The
      risk-free rate is the implied yield available on US Treasury securities
      with a remaining term equal to the expected term of the option. We base
      our risk-free rate on a weighting of five and seven year US Treasury
      securities as of the date of grant to arrive at an approximated 5.5-year
      risk free rate of return.


·
            Dividend
      yield-The
      dividend yield represents the value of our stock’s annualized dividend as
      compared to our stock’s average price for the three-year period ended
      prior to the date of grant. It is calculated by dividing one full year of
      our expected dividends by our average stock price over the three-year
      period ended prior to the date of
grant.





89
 Table of Contents





The
      assumptions used in valuing stock options were as
  follows:




Year
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006(weighted
      averages)Expected
      term (in years)
                        
                        
                        5.5
                        
                        
                        
                        5.5
                        
                        
                        
                        5.5Expected
      volatility
                        
                        
                        27.7
                        %
                        
                        
                        29.6
                        %
                        
                        
                        31.8
                        %Risk-free
      rate
                        
                        
                        2.9
                        %
                        
                        
                        4.7
                        %
                        
                        
                        4.7
                        %Expected
      dividend yield
                        
                        
                        1.0
                        %
                        
                        
                        0.6
                        %
                        
                        
                        0.8
                        %






Stock
option activity was as follows:




WeightedWeighted
                                                      
                                                      
                                                      AverageAverage
                                                      
                                                      
                                                      Remaining
                                                      
                                                      
                                                      AggregateExercise
                                                      
                                                      
                                                      Contractual
                                                      
                                                      
                                                      IntrinsicOptions
                                                      
                                                      
                                                      Price
                                                      
                                                      
                                                      Term
                                                      
                                                      
                                                      Value(per
      share)
                                                      
                                                      
                                                      (in
      years)
                                                      
                                                      
                                                      (in
      millions)Outstanding
      at December 31, 2007
                                                      
                                                      
                                                      6,175,061
                                                      
                                                      
                                                      $
                                                      32.98Granted
                                                      
                                                      
                                                      1,139,758
                                                      
                                                      
                                                      
                                                      73.14Exercised
                                                      
                                                      
                                                      (1,080,116
                                                      )
                                                      
                                                      
                                                      24.31Forfeited
                                                      
                                                      
                                                      (152,328
                                                      )
                                                      
                                                      
                                                      61.22Outstanding
      at December 31, 2008
                                                      
                                                      
                                                      6,082,375
                                                      
                                                      
                                                      $
                                                      41.41
                                                      
                                                      
                                                      5.6
                                                      
                                                      $
                                                      80Exercisable
      at December 31, 2008
                                                      
                                                      
                                                      3,927,682
                                                      
                                                      
                                                      $
                                                      29.80
                                                      
                                                      
                                                      3.9
                                                      
                                                      $
                                                      79




The
weighted-average grant-date fair value of options granted was $20.40 in 2008,
$18.77 in 2007, and $16.09 in 2006. The total intrinsic value of options
exercised was $67 million in 2008, $68 million in 2007, and $118 million in
2006.




As of
December 31, 2008, $24 million of compensation cost related to
unvested stock options granted under the Plans remained to be recognized. The
cost is expected to be recognized over a weighted-average period of 1.3 years.
We issue new shares of common stock to settle option exercises. Dividends are
not paid on unexercised options.




Restricted Stock Awards—Restricted stock
activity was as follows:




Shares
                      
                      
                      Weighted
                      
                      
                      Shares
                      
                      
                      WeightedSubject
      to
                      
                      
                      Average
                      
                      
                      Subject
      to
                      
                      
                      AverageService
                      
                      
                      Grant
      Date
                      
                      
                      Market
                      
                      
                      Grant
      DateConditions
                      
                      
                      Fair
      Value
                      
                      
                      Conditions
                      
                      
                      Fair
      Value(per
      share)
                      
                      
                      
                      
                      
                      (per
      share)Outstanding
      at December 31, 2007
                      
                      
                      567,590
                      
                      
                      $
                      52.33
                      
                      
                      
                      124,137
                      
                      
                      $
                      33.11Granted
                      
                      
                      462,917
                      
                      
                      
                      73.92
                      
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (80,347
                      )
                      
                      
                      52.46
                      
                      
                      
                      (54,199
                      )
                      
                      
                      29.87Forfeited
                      
                      
                      (59,133
                      )
                      
                      
                      61.78
                      
                      
                      
                      (1,445
                      )
                      
                      
                      45.94Outstanding
      at December 31, 2008
                      
                      
                      891,027
                      
                      
                      $
                      62.91
                      
                      
                      
                      68,493
                      
                      
                      $
                      35.40




The total
fair value of restricted stock that vested was $10 million in 2008, $6 million
in 2007, and $2 million in 2006.




Awards of
time-vested restricted stock (shares subject to service conditions) were valued
at the price of our common stock at the date of award.




In 2006,
we awarded restricted stock with market-based vesting criteria. The fair value
of the market-based restricted stock awards was estimated on the date of award
using a Monte Carlo valuation model that used the assumptions in the following
table. The Monte Carlo model is based on random projections of stock price paths
and must be repeated numerous times to achieve a probabilistic assessment.
Expected volatility represents the extent to which our stock price is expected
to fluctuate between the award date and the award’s anticipated term. We used
the historical volatility of our common stock for the three-year period ended
prior to the date of award. The risk-free rate was based on a three-year period
from US Treasury securities as of the year ended prior to the date of
award.











90
 Table of Contents


The
assumptions used in valuing the market-based restricted stock awards were as
follows:





Year
      EndedDecember
      31,2006Number
      of simulations
                      
                      
                      100,000Expected
      volatility
                      
                      
                      28.4
                      %Risk-free
      rate
                      
                      
                      4.4
                      %




As of
December 31, 2008, $30 million of compensation cost related to all of
our unvested restricted stock awarded under the Plans remained to be recognized.
The cost is expected to be recognized over a weighted-average period of 1.8
years. Common stock dividends accrue on restricted stock grants and are paid
upon vesting. We issue new shares of common stock when awarding restricted
stock.




Note 14 –
Earnings Per Share




Basic
earnings 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 may include the effect of Noble Energy shares held in
a rabbi trust, outstanding stock options or shares of restricted stock,
except in periods in which there is a net loss. The following table summarizes
the calculation of basic and diluted earnings per share:




Year
      Ended December 31,2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2006Income
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Income
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Income
                                                    
                                                    Shares(in
      millions, except share and per share amounts)Net
      income
                                                    
                                                    $
                                                    1,350
                                                    
                                                    
                                                    
                                                    173
                                                    
                                                    
                                                    $
                                                    944
                                                    
                                                    
                                                    
                                                    171
                                                    
                                                    
                                                    $
                                                    678
                                                    
                                                    
                                                    176Basic
      Earnings per Share
                                                    
                                                    $
                                                    7.83
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    5.52
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    3.86Net
      income
                                                    
                                                    $
                                                    1,350
                                                    
                                                    
                                                    
                                                    173
                                                    
                                                    
                                                    $
                                                    944
                                                    
                                                    
                                                    
                                                    171
                                                    
                                                    
                                                    $
                                                    678
                                                    
                                                    
                                                    176Effect
      of dilutive stock options and restricted stock awards
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    3Effect
      of shares of Noble Energy common stock held in rabbi
      trust
                                                    
                                                    
                                                    (20
                                                    )
                                                    
                                                    
                                                    1
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    -Net
      income available to common shareholders
                                                    
                                                    $
                                                    1,330
                                                    
                                                    
                                                    
                                                    176
                                                    
                                                    
                                                    $
                                                    944
                                                    
                                                    
                                                    
                                                    173
                                                    
                                                    
                                                    $
                                                    678
                                                    
                                                    
                                                    179Diluted
      Earnings per Share (1)
                                                    
                                                    $
                                                    7.58
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    5.45
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    3.79




(1)
            The
      diluted earnings per share calculation for 2008 includes a decrease to net
      income of $20 million (net of tax) related to a deferred compensation gain
      from Noble Energy shares held in a rabbi trust. When dilutive, the
      deferred compensation gain or loss (net of tax) is excluded from net
      income while the Noble Energy shares held in the rabbi trust are included
      in the diluted share count.







91
 Table of Contents





Options,
restricted stock and shares of our common stock held in a rabbi trust excluded
from the EPS calculation above as they were antidilutive are as
follows:




Weighted
      OutstandingAwards and Shares
                                        
                                        Weighted
      Average Exercise Price(in
      millions, except per share amounts)Year
      Ended December 31, 2008Stock
      options
                                        
                                        1
                                        
                                        $
                                        67.64Total
      excluded from diluted EPS calculation
                                        
                                        1Year
      Ended December 31, 2007Stock
      options
                                        
                                        1
                                        
                                        $
                                        52.41Noble
      Energy common stock held in rabbi trust and shares of restricted
      stock
                                        
                                        1Total
      excluded from diluted EPS calculation
                                        
                                        2Year
      Ended December 31, 2006Stock
      options
                                        
                                        1
                                        
                                        $
                                        45.19Noble
      Energy common stock held in rabbi trust and shares of restricted
      stock
                                        
                                        1Total
      excluded from diluted EPS calculation
                                        
                                        2




Note 15 –
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 crude oil and natural gas exploration and production: the United
States; West Africa; the North Sea; Israel; and Other International, Corporate
and Marketing. Other International includes Argentina (through February 2008),
China, Ecuador and Suriname.




Accounting
policies for geographical segments are the same as those described in the
summary of significant accounting policies. Transfers between segments are
accounted for at market value. We do not consider interest income and expense or
income tax benefit or expense in our evaluation of the performance of
geographical segments.







92
 Table of Contents





Other
      Int'l,United
                                                                                                                                                                                          
                                                                                                                                                                                          West
                                                                                                                                                                                          
                                                                                                                                                                                          North
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          Corporate
      &Total
                                                                                                                                                                                          
                                                                                                                                                                                          States
                                                                                                                                                                                          
                                                                                                                                                                                          Africa
                                                                                                                                                                                          
                                                                                                                                                                                          Sea
                                                                                                                                                                                          
                                                                                                                                                                                          Israel
                                                                                                                                                                                          
                                                                                                                                                                                          Marketing(in
      millions)Year
      Ended December 31, 2008Revenues
      from third parties
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          4,058
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          2,315
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          541
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          410
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          157
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          635Amount
      reclassified from AOCL (1)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (331
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (290
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (41
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Intersegment
      revenue
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          434
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (434
                                                                                                                                                                                          )Income
      from equity method investees
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          174
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          174
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Total
      Revenues
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          3,901
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          2,459
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          674
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          410
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          157
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          201DD&A
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          791
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          646
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          34
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          55
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          24
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          32Loss
      on involuntary conversion of assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Impairment
      of assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          294
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          224
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          70Gain
      on derivative instruments
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (440
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (363
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (77
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Income
      (loss) before income taxes
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          2,061
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,333
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          689
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          284
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          122
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (367
                                                                                                                                                                                          )Equity
      method investments
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          311
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          311
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Additions
      to long-lived assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          2,179
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,842
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          143
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          94
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          39
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          61Total
      assets at December 31, 2008(2)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          12,384
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9,212
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,614
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          775
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          366
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          417Year
      Ended December 31, 2007Revenues
      from third parties
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          3,115
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          1,651
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          418
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          364
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          113
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          569Amount
      reclassified from AOCL (1)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (54
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (42
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (12
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Intersegment
      revenue
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          343
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (343
                                                                                                                                                                                          )Income
      from equity method investees
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          211
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          211
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Total
      Revenues
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          3,272
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,952
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          617
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          364
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          113
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          226DD&A
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          736
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          580
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          25
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          81
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          18
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          32Loss
      on involuntary conversion of assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          51
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          51
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Impairment
      of assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          4
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          4
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Gain
      on derivative instruments
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (2
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (2
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Income
      (loss) before income taxes
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,368
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          810
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          517
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          221
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          86
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (266
                                                                                                                                                                                          )Equity
      method investments
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          357
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          357
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Additions
      to long-lived assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,623
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,285
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          151
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          83
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          26
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          78Total
      assets at December 31, 2007(2)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          10,831
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          7,918
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,355
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          562
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          268
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          728Year
      Ended December 31, 2006Revenues
      from third parties
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          3,033
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          1,743
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          414
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          115
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          92
                                                                                                                                                                                          
                                                                                                                                                                                          $
                                                                                                                                                                                          669Amount
      reclassified from AOCL (1)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (232
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          (232
                                                                                                                                                                                          )
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Intersegment
      revenue
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          426
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (426
                                                                                                                                                                                          )Income
      from equity method investees
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          139
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          139
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Total
      Revenues
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          2,940
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,937
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          553
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          115
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          92
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          243DD&A
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          633
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          552
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          24
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          14
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          34Impairment
      of assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Loss
      on derivative instruments
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          392
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          392
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Income
      (loss) before income taxes
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,096
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          631
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          494
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          73
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          71
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          (173
                                                                                                                                                                                          )Equity
      method investments
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          373
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          373
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          -Additions
      to long-lived assets
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,895
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          1,456
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          46
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          336
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          15
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          42Total
      assets at December 31, 2006 (2)
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          9,589
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          7,225
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          961
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          343
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          257
                                                                                                                                                                                          
                                                                                                                                                                                          
                                                                                                                                                                                          803




(1)
            Revenues
      include decreases resulting from hedging activities. The decreases
      resulted from hedge gains and losses that were deferred in AOCL, as a
      result of previous cash flow hedge accounting, and subsequently
      reclassified to revenues.




(2)
            The
      US reporting unit includes goodwill of $759 million at December 31, 2008,
      $761 million at December 31, 2007, and $781 million at December 31,
      2006.







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Note 16 –
Additional Shareholders’ Equity Information




Activity
in shares of our common stock and treasury stock was as follows:




Year
      Ended December 31,2008
                            
                            
                            2007Common
      stock shares issuedShares,
      beginning of period
                            
                            
                            190,814,309
                            
                            
                            
                            188,808,087Exercise
      of common stock options
                            
                            
                            1,080,116
                            
                            
                            
                            1,479,040Restricted
      stock awards, net of forfeitures
                            
                            
                            402,339
                            
                            
                            
                            527,182Shares,
      end of period
                            
                            
                            192,296,764
                            
                            
                            
                            190,814,309Treasury
      stockShares,
      beginning of period
                            
                            
                            18,580,865
                            
                            
                            
                            16,574,384Shares received from
      employees in payment of withholding taxes due on vesting of shares
      of restricted stock
                            
                            
                            32,544
                            
                            
                            
                            -Shares
      purchased pursuant to share buyback program
                            
                            
                            -
                            
                            
                            
                            2,006,481Shares,
      end of period
                            
                            
                            18,613,409
                            
                            
                            
                            18,580,865




During
2007, we completed a $500 million common stock repurchase program begun in
2006.




Accumulated
other comprehensive loss in the shareholders’ equity section of the balance
sheet included:




Accumulated
      Other Comprehensive LossOil
      and Gas Cash Flow Hedges
                        
                        
                        Pension-Related
      and Other
                        
                        
                        Total(in
      millions)December
      31, 2005
                        
                        $
                        (764
                        )
                        
                        $
                        (20
                        )
                        
                        $
                        (784
                        )Cash
      flow hedgesRealized
      amounts reclassified into earnings
                        
                        
                        145
                        
                        
                        
                        1
                        
                        
                        
                        146Unrealized
      change in fair value
                        
                        
                        250
                        
                        
                        
                        -
                        
                        
                        
                        250Unrealized
      amounts reclassified into earnings
                        
                        
                        265
                        
                        
                        
                        -
                        
                        
                        
                        265Net
      change in minimum pension liability and other
                        
                        
                        -
                        
                        
                        
                        16
                        
                        
                        
                        16Adoption
      of SFAS 158
                        
                        
                        -
                        
                        
                        
                        (33
                        )
                        
                        
                        (33
                        )December
      31, 2006
                        
                        
                        (104
                        )
                        
                        
                        (36
                        )
                        
                        
                        (140
                        )Cash
      flow hedgesRealized
      amounts reclassified into earnings
                        
                        
                        33
                        
                        
                        
                        3
                        
                        
                        
                        36Unrealized
      change in fair value
                        
                        
                        (184
                        )
                        
                        
                        (1
                        )
                        
                        
                        (185
                        )Net
      change in  other
                        
                        
                        -
                        
                        
                        
                        5
                        
                        
                        
                        5December
      31, 2007
                        
                        
                        (255
                        )
                        
                        
                        (29
                        )
                        
                        
                        (284
                        )Cash
      flow hedgesRealized
      amounts reclassified into earnings
                        
                        
                        207
                        
                        
                        
                        3
                        
                        
                        
                        210Unrealized
      change in fair value
                        
                        
                        -
                        
                        
                        
                        (4
                        )
                        
                        
                        (4
                        )Net
      change in  other
                        
                        
                        -
                        
                        
                        
                        (32
                        )
                        
                        
                        (32
                        )December
      31, 2008
                        
                        $
                        (48
                        )
                        
                        $
                        (62
                        )
                        
                        $
                        (110
                        )




All
amounts in the table above are reported net of tax. The effective income tax
rate applied to AOCL increased from 35% at December 31, 2005 to 37.6% at
December 31, 2006 and remained 37.6% at December 31, 2007 and
2008.




Note
17– Commitments and
Contingencies




Purchaser Bankruptcy–We have an 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 22,
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
December 31, 2008, we had a receivable of approximately $71 million from
SemCrude. We have determined that it is probable that a portion of the
receivable is uncollectible. Therefore, during third quarter 2008, we reduced
the carrying value of the SemCrude receivable and recognized a pre-tax charge of
$38 million for the probable loss.







94
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We are
pursuing various legal remedies to protect our interests. We believe that
ultimate disposition of this matter will not have a material adverse affect on
our financial position, results of operations, or cash flows.




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 April 27, 2009.  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.




Non-Cancelable Leases and Other
Commitments—Wehold leases and other
commitments for drilling rigs, buildings, equipment and other properties. Rental
expense for office buildings and oil and gas operations equipment was
approximately $20 million in 2008, $13 million in 2007, and
$12 million in 2006.




Minimum
commitments as of December 31, 2008 consist of the following:




Drilling,
      Equipment, and Purchase Obligations
                                                            
                                                            Throughput
      Agreement
                                                            
                                                            
                                                            Transportation
      and Gathering
                                                            
                                                            
                                                            Operating
      Lease Obligations
                                                            
                                                            
                                                            Total(in
      millions)2009
                                                            $
                                                            485
                                                            
                                                            $
                                                            14
                                                            
                                                            $
                                                            12
                                                            
                                                            $
                                                            12
                                                            
                                                            $
                                                            5232010
                                                            
                                                            439
                                                            
                                                            
                                                            19
                                                            
                                                            
                                                            9
                                                            
                                                            
                                                            10
                                                            
                                                            
                                                            4772011
                                                            
                                                            399
                                                            
                                                            
                                                            19
                                                            
                                                            
                                                            8
                                                            
                                                            
                                                            8
                                                            
                                                            
                                                            4342012
                                                            
                                                            72
                                                            
                                                            
                                                            19
                                                            
                                                            
                                                            5
                                                            
                                                            
                                                            7
                                                            
                                                            
                                                            1032013
                                                            
                                                            -
                                                            
                                                            
                                                            19
                                                            
                                                            
                                                            5
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            252014
      and thereafter
                                                            
                                                            -
                                                            
                                                            
                                                            5
                                                            
                                                            
                                                            4
                                                            
                                                            
                                                            18
                                                            
                                                            
                                                            27Total
                                                            $
                                                            1,395
                                                            
                                                            $
                                                            95
                                                            
                                                            $
                                                            43
                                                            
                                                            $
                                                            56
                                                            
                                                            $
                                                            1,589




Note 18 –
Recently Issued Pronouncements




SFAS 141(R) and SFAS 160 –In
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.
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 adopted SFAS
141(R) and SFAS 160 as of January 1, 2009. There were no non-controlling
interests at adoption date. Adoption had no effect on our financial position and
results of operations.




Adoption
of SFAS 159—In
2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities” (SFAS 159). SFAS 159 provides companies with an
option to report selected financial assets and liabilities at fair value. SFAS
159 was effective as of the beginning of an entity’s first fiscal year beginning
after November 15, 2007. We adopted SFAS 159 as of January 1, 2008.
Adoption had no effect on our financial position or results of operations as we
made no elections to report selected financial assets or liabilities at fair
value.




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 derivative instruments, 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 adopted SFAS 161 as of January 1,
2009. The statement provides only for enhanced disclosures. Therefore, adoption
had no impact on our financial position or results of operations.









95
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FSP
FAS 132(R) –    In December 2008, the FASB issued FSP
FAS 132(R), “Employers’ Disclosures About Postretirement Benefit Plan Assets”
(FSP FAS 132(R)). FSP FAS 132(R) requires employers to make additionaldisclosures about plan assets for defined benefit pension and other
postretirement benefit plans beginning with annual periods ending after December
15, 2009. The requirements apply to entities that are subject to the
disclosure requirements of FAS 132R. Disclosures are to provide an understanding
of how investment allocation decisions are made, the major categories of plan
assets, the inputs and valuation techniques used to measure the fair value of
plan assets, the effect of fair-value measurements using significant
unobservable inputs on changes inplan
assets for the period, and significant concentrations of risk within plan
assets. We adopted FSP FAS 132(R) as of January 1, 2009. The statement provides
only for enhanced disclosures. Therefore, adoption had no impact on our
financial position or results of operations.




EITF
08-06–In
November 2008, the FASB ratified the consensus reached in EITF 08-06, “Equity
Method Investment Accounting Considerations” (EITF 08-06). EITF 08-06 was issued
to address questions that arose regarding the application of the equity method
subsequent to the issuance of FAS 141(R). EITF 08-06 concluded that equity
method investments should continue to be recognized using a cost accumulation
model, thus continuing to include transaction costs in the carrying amount of
the equity method investment. In addition, EITF 08-06 clarifies that an
impairment assessment should be applied to the equity method investment as a
whole, rather than to the individual assets underlying the investment. EITF
08-06 is effective for fiscal years beginning on or after December 15, 2008. We
adopted EITF 08-06 as of January 1, 2009. Adoption had no effect on our
financial position and results of operations.







96
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Supplemental Oil and Gas Information
(Unaudited)




In
accordance with SFAS No. 69, “Disclosures about Oil and Gas Producing
Activities” (SFAS 69), and regulations of the SEC, we are making the following
supplemental disclosures about our crude oil and natural gas exploration and
production operations.




There are
numerous uncertainties inherent in estimating quantities of proved crude oil and
natural gas reserves. Crude oil and natural gas reserve engineering is a
subjective process of estimating underground accumulations of crude oil and
natural gas that cannot be precisely measured. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment.




Engineers
in our Houston, Denver and London offices prepare all reserve estimates for our
different geographical regions. These reserve estimates are reviewed and
approved by senior engineering staff and division management with final approval
by the vice president in charge of corporate reserves and certain members of
senior management. During each of the years 2008, 2007 and 2006, we retained
Netherland, Sewell & Associates, Inc. (NSAI), independent
third-party reserve engineers, to perform reserve audits of proved reserves. The
reserve audit for 2008 included a detailed review of 18 of our major
international, deepwater Gulf of Mexico and US onshore fields, which covered
approximately 79% of US proved reserves and 97% of international proved reserves
(86% of total proved reserves). The reserve audit for 2007 included a detailed
review of 16 of our major international, deepwater Gulf of Mexico and US onshore
fields, which covered approximately 71% of US proved reserves and 96% of
international proved reserves (81% of total proved reserves). The reserve audit
for 2006 included a detailed review of 14 of our major international, deepwater
Gulf of Mexico and US onshore fields, which covered approximately 80% of our
total proved reserves. See Items 1 and 2. Business and Properties—Proved
Reserves.




Results
of drilling, testing and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of crude oil and natural gas that are ultimately
recovered.




Our
supplemental disclosures are grouped by geographic area and include the United
States, West Africa (Equatorial Guinea and Cameroon), Israel, Ecuador, North Sea
and Other International (Argentina, China and Suriname). Operations in
Equatorial Guinea, Cameroon, Ecuador, China, Cyprus and Suriname are conducted
in accordance with the terms of production sharing contracts. Operations in
other foreign locations are conducted in accordance with concession agreements
or licenses.




The
following definitions apply to the terms used in the paragraphs
above:




Reserve
Estimate.The determination of an
estimate of a quantity of oil or gas reserves that are thought to exist at a
certain date, considering existing prices and reservoir conditions.




Reserve Audit.The process involving
an independent third-party engineering firm’s visits, collection of any and all
required geologic, geophysical, engineering and economic data, and such firm’s
complete external preparation of reserve estimates.




The
following definitions apply to our categories of proved reserves:




Proved Reserves.
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.




Proved Developed
Reserves. Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing equipment and
operating methods.




Proved Undeveloped
Reserves. Proved undeveloped oil and gas reserves are reserves that are
expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for
recompletion.




For
complete definitions of proved natural gas, natural gas liquids and crude oil
reserves, refer to SEC Regulation S-X, Rule 4-10(a)(2), (3) and
(4).






















97
 Table of Contents





Supplemental Oil and Gas
Information (Unaudited)




Recent SEC Rule-Making Activity– In December 2008, the SEC announced that it had approved revisions
designed to modernize the oil and gas company reserve reporting requirements.
The most significant amendments to the requirements include the
following:




·
            Commodity
      Prices - Economic producibility of reserves and discounted cash flows will
      be based on a 12-month average commodity price unless contractual
      arrangements designate the price to be
used.


·
            Disclosure
      of Unproved Reserves - Probable and possible reserves may be disclosed
      separately on a voluntary basis.


·
            Proved
      Undeveloped Reserve Guidelines – Reserves may be classified as proved
      undeveloped if there is a high degree of confidence that the quantities
      will be recovered.


·
            Reserve
      Estimation Using New Technologies - Reserves may be estimated through the
      use of reliable technology in addition to flow tests and production
      history.


·
            Reserve
      Personnel and Estimation Process - Additional disclosure is required
      regarding the qualifications of the chief technical person who oversees
      our reserves estimation process.  We will also be required to
      provide a general discussion of our internal controls used to assure the
      objectivity of the reserves
estimate.


·
            Disclosure
      by Geographic Area - Reserves in foreign countries or continents must be
      presented separately if they represent more than 15% of our total oil and
      gas proved reserves.


·
            Non-Traditional
      Resources–The
      definition of oil and gas producing activities will expand and focus on
      the marketable product rather than the method of
    extraction.




The rules
are effective for fiscal years ending on or after December 31, 2009, and early
adoption is not permitted.  We are currently evaluating the new rules
and assessing the impact they will have on our reported oil and gas
reserves.  The SEC is coordinating with the Financial Accounting
Standards Board to obtain the revisions necessary to SFAS 19, “Financial
Accounting and Reporting by Oil and Gas Producing Companies”, and SFAS 69 to
provide consistency with the new rules. In the event that consistency is not
achieved in time for companies to comply with the new rules, the SEC will
consider delaying the compliance date.







98
 Table of Contents





Proved
Oil Reserves (Unaudited)




The
following reserve schedule was developed by our reserve engineers and sets forth
the changes in estimated quantities of proved crude oil reserves:




Crude
      Oil, Condensate and NGLs (MMBbls)United
                                                                                                
                                                                                                
                                                                                                West
                                                                                                
                                                                                                
                                                                                                North
                                                                                                
                                                                                                
                                                                                                OtherStates
                                                                                                
                                                                                                
                                                                                                Africa
                                                                                                
                                                                                                
                                                                                                Sea
                                                                                                
                                                                                                
                                                                                                Int'l(1)
                                                                                                
                                                                                                
                                                                                                TotalProved
      reserves as of:December
      31, 2005
                                                                                                
                                                                                                
                                                                                                152
                                                                                                
                                                                                                
                                                                                                
                                                                                                101
                                                                                                
                                                                                                
                                                                                                
                                                                                                20
                                                                                                
                                                                                                
                                                                                                
                                                                                                18
                                                                                                
                                                                                                
                                                                                                
                                                                                                291Revisions
      of previous estimates
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                (2
                                                                                                )
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                (2
                                                                                                )Extensions,
      discoveries and other additions (2)
                                                                                                
                                                                                                
                                                                                                23
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                2
                                                                                                
                                                                                                
                                                                                                
                                                                                                25Purchase
      of minerals in place (3)
                                                                                                
                                                                                                
                                                                                                19
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                19Sale
      of minerals in place(4)
                                                                                                
                                                                                                
                                                                                                (7
                                                                                                )
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                (7
                                                                                                )Production
      (5)
                                                                                                
                                                                                                
                                                                                                (17
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (9
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (1
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (3
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (30
                                                                                                )December
      31, 2006
                                                                                                
                                                                                                
                                                                                                170
                                                                                                
                                                                                                
                                                                                                
                                                                                                90
                                                                                                
                                                                                                
                                                                                                
                                                                                                19
                                                                                                
                                                                                                
                                                                                                
                                                                                                17
                                                                                                
                                                                                                
                                                                                                
                                                                                                296Revisions
      of previous estimates (6)
                                                                                                
                                                                                                
                                                                                                28
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                1
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                29Extensions,
      discoveries and other additions (7)
                                                                                                
                                                                                                
                                                                                                27
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                10
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                37Purchase
      of minerals in place
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Sale
      of minerals in place
                                                                                                
                                                                                                
                                                                                                (2
                                                                                                )
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                (2
                                                                                                )Production
      (5)
                                                                                                
                                                                                                
                                                                                                (16
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (8
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (5
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (2
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (31
                                                                                                )December
      31, 2007
                                                                                                
                                                                                                
                                                                                                207
                                                                                                
                                                                                                
                                                                                                
                                                                                                82
                                                                                                
                                                                                                
                                                                                                
                                                                                                25
                                                                                                
                                                                                                
                                                                                                
                                                                                                15
                                                                                                
                                                                                                
                                                                                                
                                                                                                329Revisions
      of previous estimates (8)
                                                                                                
                                                                                                
                                                                                                (10
                                                                                                )
                                                                                                
                                                                                                
                                                                                                1
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                (9
                                                                                                )Extensions,
      discoveries and other additions (9)
                                                                                                
                                                                                                
                                                                                                16
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                2
                                                                                                
                                                                                                
                                                                                                
                                                                                                9
                                                                                                
                                                                                                
                                                                                                
                                                                                                27Purchase
      of minerals in place
                                                                                                
                                                                                                
                                                                                                3
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                3Sale
      of minerals in place(10)
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                -
                                                                                                
                                                                                                
                                                                                                
                                                                                                (7
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (7
                                                                                                )Production
      (5)
                                                                                                
                                                                                                
                                                                                                (18
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (8
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (4
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (2
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (32
                                                                                                )December
      31, 2008
                                                                                                
                                                                                                
                                                                                                198
                                                                                                
                                                                                                
                                                                                                
                                                                                                75
                                                                                                
                                                                                                
                                                                                                
                                                                                                23
                                                                                                
                                                                                                
                                                                                                
                                                                                                15
                                                                                                
                                                                                                
                                                                                                
                                                                                                311Proved
      developed reserves as of:December
      31, 2005
                                                                                                
                                                                                                
                                                                                                114
                                                                                                
                                                                                                
                                                                                                
                                                                                                101
                                                                                                
                                                                                                
                                                                                                
                                                                                                8
                                                                                                
                                                                                                
                                                                                                
                                                                                                16
                                                                                                
                                                                                                
                                                                                                
                                                                                                239December
      31, 2006
                                                                                                
                                                                                                
                                                                                                115
                                                                                                
                                                                                                
                                                                                                
                                                                                                90
                                                                                                
                                                                                                
                                                                                                
                                                                                                19
                                                                                                
                                                                                                
                                                                                                
                                                                                                16
                                                                                                
                                                                                                
                                                                                                
                                                                                                240December
      31, 2007
                                                                                                
                                                                                                
                                                                                                129
                                                                                                
                                                                                                
                                                                                                
                                                                                                71
                                                                                                
                                                                                                
                                                                                                
                                                                                                15
                                                                                                
                                                                                                
                                                                                                
                                                                                                14
                                                                                                
                                                                                                
                                                                                                
                                                                                                229December
      31, 2008
                                                                                                
                                                                                                
                                                                                                121
                                                                                                
                                                                                                
                                                                                                
                                                                                                57
                                                                                                
                                                                                                
                                                                                                
                                                                                                15
                                                                                                
                                                                                                
                                                                                                
                                                                                                6
                                                                                                
                                                                                                
                                                                                                
                                                                                                199




(1)
            Other
      International includes China and Argentina. We sold our assets in
      Argentina in 2008.


(2)
            The
      increase in US proved reserves includes 14 MMBbl in the US Wattenberg
      field, primarily due to infill drilling
  activities.


(3)
            Purchase
      of minerals in place includes 18 MMBbl acquired in the purchase of U.S.
      Exploration. See Note 4—Acquisitions and
      Divestitures.


(4)
            Sale
      of minerals in place is primarily due to the sale of Gulf of Mexico shelf
      properties. See Note 4—Acquisitions and
      Divestitures.


(5)
            West
      Africa production includes sales from the Alba field to the Alba LPG plant
      of 3 MMBbl in 2008, 3 MMBbl in 2007, and 3 MMBbl in
  2006.


(6)
            The
      positive revisions within the US are primarily due to 29 MMBbl of NGLs,
      previously recorded in proved natural gas reserves, being reflected in
      proved oil reserves, partially offset by negative revisions within the US
      Southern region related to less than expected well
      performance.


(7)
            The
      increase in proved reserves includes 17 MMBbl in the US Wattenberg field,
      primarily due to infill drilling activities, 8 MMBbl in the deepwater Gulf
      of Mexico and 10 MMBbl in the North Sea Dumbarton field
    area.


(8)
            The
      negative revisions within the US are primarily due to lower year-end
      prices (28 MMBbl), partially offset by the recording of NGLs which had
      previously been recorded in proved natural gas
  reserves.


(9)
            The
      increase in proved reserves includes 13 MMBbl in the US Wattenberg field,
      primarily due to infill drilling activities, and 9 MMBbl in
      China.


(10)
            Decrease
      due to sale of our assets in Argentina. See Note 4–
      Acquisitions and Divestitures.







99
 Table of Contents





Proved Gas
      Reserves (Unaudited)




The
following reserve schedule was developed by our reserve engineers and sets forth
the changes in estimated quantities of proved natural gas reserves:




Natural
      Gas and Casinghead Gas (Bcf)United
                                                                                                                    
                                                                                                                    
                                                                                                                    West
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    OtherStates
                                                                                                                    
                                                                                                                    
                                                                                                                    Africa
                                                                                                                    
                                                                                                                    
                                                                                                                    Israel
                                                                                                                    
                                                                                                                    
                                                                                                                    Ecuador
                                                                                                                    
                                                                                                                    
                                                                                                                    Int'l(1)
                                                                                                                    
                                                                                                                    
                                                                                                                    TotalProved
      reserves as of:December
      31, 2005
                                                                                                                    
                                                                                                                    
                                                                                                                    1,641
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    901
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    394
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    144
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    11
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3,091Revisions
      of previous estimates (2)
                                                                                                                    
                                                                                                                    
                                                                                                                    (83
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    58
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    33
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    11
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    19Extensions,
      discoveries and other additions (3)
                                                                                                                    
                                                                                                                    
                                                                                                                    314
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    314Purchase
      of minerals in place (4)
                                                                                                                    
                                                                                                                    
                                                                                                                    141
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    144Sale
      of minerals in place (5)
                                                                                                                    
                                                                                                                    
                                                                                                                    (110
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (110
                                                                                                                    )Production
                                                                                                                    
                                                                                                                    
                                                                                                                    (164
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (17
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (34
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (9
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (3
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (227
                                                                                                                    )December
      31, 2006
                                                                                                                    
                                                                                                                    
                                                                                                                    1,739
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    945
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    360
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    168
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    19
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3,231Revisions
      of previous estimates (6)
                                                                                                                    
                                                                                                                    
                                                                                                                    (67
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    44
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    29
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (1
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    5Extensions,
      discoveries and other additions (7)
                                                                                                                    
                                                                                                                    
                                                                                                                    316
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    319Purchase
      of minerals in place
                                                                                                                    
                                                                                                                    
                                                                                                                    3
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3Sale
      of minerals in place
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -Production
                                                                                                                    
                                                                                                                    
                                                                                                                    (151
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (48
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (41
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (9
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (2
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (251
                                                                                                                    )December
      31, 2007
                                                                                                                    
                                                                                                                    
                                                                                                                    1,840
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    941
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    319
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    188
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    19
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3,307Revisions
      of previous estimates (8)
                                                                                                                    
                                                                                                                    
                                                                                                                    (253
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    34
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    8
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (210
                                                                                                                    )Extensions,
      discoveries and other additions (9)
                                                                                                                    
                                                                                                                    
                                                                                                                    345
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    78
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    427Purchase
      of minerals in place (10)
                                                                                                                    
                                                                                                                    
                                                                                                                    72
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    72Sale
      of minerals in place
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -Production
                                                                                                                    
                                                                                                                    
                                                                                                                    (145
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (75
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (51
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (8
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (2
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (281
                                                                                                                    )December
      31, 2008
                                                                                                                    
                                                                                                                    
                                                                                                                    1,859
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    978
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    273
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    180
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    25
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3,315Proved
      developed reserves as of:December
      31, 2005
                                                                                                                    
                                                                                                                    
                                                                                                                    1,279
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    431
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    337
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    144
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    11
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,202December
      31, 2006
                                                                                                                    
                                                                                                                    
                                                                                                                    1,255
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    360
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    303
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    168
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    19
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,105December
      31, 2007
                                                                                                                    
                                                                                                                    
                                                                                                                    1,259
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    830
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    263
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    188
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    16
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,556December
      31, 2008
                                                                                                                    
                                                                                                                    
                                                                                                                    1,268
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    700
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    216
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    180
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    21
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,385





(1)
            Other
      International includes the North Sea, China and Argentina. We sold our
      assets in Argentina in 2008.


(2)
            West
      Africa’s positive revisions are primarily due to additional production
      allowances related to LNG sales.


Positive
      revisions in Ecuador are related to better than expected well
      performance.


(3)
            The
      increase in US proved reserves includes 140 Bcf in the Wattenberg field,
      77 Bcf in the Piceance basin and 55 Bcf in the Mid-continent area,
      primarily due to infill drilling
activities.


(4)
            Purchase
      of minerals in place includes 128 Bcf acquired in the purchase of U.S.
      Exploration. See Note 4—Acquisitions and
      Divestitures.


(5)
            Sale
      of minerals in place is primarily due to sale of Gulf of Mexico shelf
      properties. See Note 4—Acquisitions and
      Divestitures.


(6)
            The
      negative revisions within the US are primarily due to 103 Bcf of natural
      gas being reflected in the proved oil reserves
      table as NGLs, partially offset by positive revisions resulting
      from an increase in commodity price.  West Africa’s positive
      revisions are primarily due to additional production allowances related to
      LNG sales.  Positive revisions in Ecuador are related to better
      than expected well performance.


(7)
            The
      increase in US proved reserves includes 142 Bcf in the Wattenberg field,
      83 Bcf in the Piceance basin and 19 Bcf in the Niobrara trend, primarily
      due to infill drilling activities.


(8)
            Negative
      revisions in the US are primarily due to lower year-end
      prices (109 Bcf), as well as additional natural gas volumes being
      reflected in the oil reserves table as NGLs. West Africa’s positive
      revisions are primarily due to additional production allowances related to
      LNG sales.


(9)
            The
      increase in US proved reserves includes 106 Bcf in the Wattenberg field
      and 173 Bcf in the Rockies, primarily from the Piceance basin and Niobrara
      trend primarily due to infill drilling activities. The remaining increase
      is due to other development programs in the US Northern and Southern
      regions.


(10)
            Purchase
      of minerals in place is primarily due to theMid-continent
      acquisition. See Note 4—Acquisitions and
      Divestitures.





100
 Table of Contents





Results
      of Operations for Oil and Gas Producing Activities
    (Unaudited)




Aggregate
      results of operations in connection with crude oil and natural gas
      producing activities are as
follows:




United
                      
                      
                      West
                      
                      
                      
                      
                      
                      
                      
                      
                      North
                      
                      
                      OtherStates
                      
                      
                      Africa
                      
                      
                      Israel
                      
                      
                      Ecuador
                      
                      
                      Sea
                      
                      
                      Int'l
      (1)
                      
                      
                      Total(in
      millions)Year
      Ended December 31, 2008RevenuesSales
      (2)
                      
                      $
                      2,459
                      
                      
                      $
                      500
                      
                      
                      $
                      157
                      
                      
                      $
                      -
                      
                      
                      $
                      410
                      
                      
                      $
                      125
                      
                      
                      $
                      3,651Sales
      to affiliated power plant
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      30
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      30Total
      Revenues
                      
                      
                      2,459
                      
                      
                      
                      500
                      
                      
                      
                      157
                      
                      
                      
                      30
                      
                      
                      
                      410
                      
                      
                      
                      125
                      
                      
                      
                      3,681Production
      costs (3)
                      
                      
                      470
                      
                      
                      
                      42
                      
                      
                      
                      12
                      
                      
                      
                      12
                      
                      
                      
                      66
                      
                      
                      
                      45
                      
                      
                      
                      647Exploration
      expense
                      
                      
                      111
                      
                      
                      
                      9
                      
                      
                      
                      4
                      
                      
                      
                      1
                      
                      
                      
                      18
                      
                      
                      
                      39
                      
                      
                      
                      182DD&A
                      
                      
                      653
                      
                      
                      
                      34
                      
                      
                      
                      23
                      
                      
                      
                      9
                      
                      
                      
                      55
                      
                      
                      
                      11
                      
                      
                      
                      785Impairment
      of assets
                      
                      
                      224
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      224Income
      before income taxes
                      
                      
                      1,001
                      
                      
                      
                      415
                      
                      
                      
                      118
                      
                      
                      
                      8
                      
                      
                      
                      271
                      
                      
                      
                      30
                      
                      
                      
                      1,843Income
      tax expense
                      
                      
                      339
                      
                      
                      
                      99
                      
                      
                      
                      22
                      
                      
                      
                      2
                      
                      
                      
                      132
                      
                      
                      
                      17
                      
                      
                      
                      611Results
      of operations (4)
                      
                      $
                      662
                      
                      
                      $
                      316
                      
                      
                      $
                      96
                      
                      
                      $
                      6
                      
                      
                      $
                      139
                      
                      
                      $
                      13
                      
                      
                      $
                      1,232Equity
      investee results of operations (5)
                      
                      $
                      -
                      
                      
                      $
                      118
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      118Year
      Ended December 31, 2007RevenuesSales
      (2)
                      
                      $
                      1,952
                      
                      
                      $
                      406
                      
                      
                      $
                      113
                      
                      
                      $
                      -
                      
                      
                      $
                      364
                      
                      
                      $
                      131
                      
                      
                      $
                      2,966Sales
      to affiliated power plant
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      35
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      35Total
      Revenues
                      
                      
                      1,952
                      
                      
                      
                      406
                      
                      
                      
                      113
                      
                      
                      
                      35
                      
                      
                      
                      364
                      
                      
                      
                      131
                      
                      
                      
                      3,001Production
      costs (3)
                      
                      
                      390
                      
                      
                      
                      42
                      
                      
                      
                      10
                      
                      
                      
                      6
                      
                      
                      
                      52
                      
                      
                      
                      49
                      
                      
                      
                      549Exploration
      expense
                      
                      
                      122
                      
                      
                      
                      44
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      17
                      
                      
                      
                      3
                      
                      
                      
                      187DD&A
                      
                      
                      595
                      
                      
                      
                      25
                      
                      
                      
                      18
                      
                      
                      
                      11
                      
                      
                      
                      81
                      
                      
                      
                      20
                      
                      
                      
                      750Impairment
      of assets
                      
                      
                      4
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4Income
      before income taxes
                      
                      
                      841
                      
                      
                      
                      295
                      
                      
                      
                      84
                      
                      
                      
                      18
                      
                      
                      
                      214
                      
                      
                      
                      59
                      
                      
                      
                      1,511Income
      tax expense
                      
                      
                      191
                      
                      
                      
                      84
                      
                      
                      
                      14
                      
                      
                      
                      4
                      
                      
                      
                      114
                      
                      
                      
                      10
                      
                      
                      
                      417Results
      of operations (4)
                      
                      $
                      650
                      
                      
                      $
                      211
                      
                      
                      $
                      70
                      
                      
                      $
                      14
                      
                      
                      $
                      100
                      
                      
                      $
                      49
                      
                      
                      
                      1,094Equity
      investee results of operations (5)
                      
                      $
                      -
                      
                      
                      $
                      128
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      128Year
      Ended December 31, 2006RevenuesSales
      (2)
                      
                      $
                      1,937
                      
                      
                      $
                      414
                      
                      
                      $
                      92
                      
                      
                      $
                      -
                      
                      
                      $
                      115
                      
                      
                      $
                      143
                      
                      
                      $
                      2,701Sales
      to affiliated power plant
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      34
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      34Total
      Revenues
                      
                      
                      1,937
                      
                      
                      
                      414
                      
                      
                      
                      92
                      
                      
                      
                      34
                      
                      
                      
                      115
                      
                      
                      
                      143
                      
                      
                      
                      2,735Production
      costs (3)
                      
                      
                      420
                      
                      
                      
                      32
                      
                      
                      
                      9
                      
                      
                      
                      6
                      
                      
                      
                      22
                      
                      
                      
                      42
                      
                      
                      
                      531Exploration
      expense
                      
                      
                      113
                      
                      
                      
                      7
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      11
                      
                      
                      
                      12
                      
                      
                      
                      143DD&A
                      
                      
                      571
                      
                      
                      
                      23
                      
                      
                      
                      14
                      
                      
                      
                      12
                      
                      
                      
                      9
                      
                      
                      
                      26
                      
                      
                      
                      655Impairment
      of assets
                      
                      
                      9
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9Income
      before income taxes
                      
                      
                      824
                      
                      
                      
                      352
                      
                      
                      
                      69
                      
                      
                      
                      16
                      
                      
                      
                      73
                      
                      
                      
                      63
                      
                      
                      
                      1,397Income
      tax expense
                      
                      
                      313
                      
                      
                      
                      125
                      
                      
                      
                      20
                      
                      
                      
                      4
                      
                      
                      
                      42
                      
                      
                      
                      23
                      
                      
                      
                      527Results
      of operations (4)
                      
                      $
                      511
                      
                      
                      $
                      227
                      
                      
                      $
                      49
                      
                      
                      $
                      12
                      
                      
                      $
                      31
                      
                      
                      $
                      40
                      
                      
                      $
                      870Equity
      investee results of operations (5)
                      
                      $
                      -
                      
                      
                      $
                      101
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      101







(1)
            Other
      International includes China, Argentina (through February 2008) and
      Suriname.


(2)
            Includes
      impact resulting from applying cash flow hedge accounting for related
      commodity derivative instruments. See Note 6 -
      Derivative Instruments and Hedging
Activities.


(3)
            Production
      costs from oil and gas producing activities consist of oil and gas
      operations expense, production and ad valorem taxes, transportation costs,
      and general and administrative expense supporting oil and gas
      operations.


(4)
            Results
      of operations from oil and gas producing activities exclude the
      mark-to-market gain or loss on commodity derivative instruments, corporate
      overhead and interest costs. See Note 6 - Derivative
      Instruments and Hedging Activities.


(5)
            Equity
      investee results of operations represents our share of the Alba Plant
      equity investee results of operations from oil and gas producing
      activities.





101
 Table of Contents





Costs
      Incurred in Oil and Gas Property Acquisition, Exploration and Development
      Activities (Unaudited) (1)




Costs
      incurred in connection with crude oil and natural gas acquisition,
      exploration and development are as
follows:




United
                        
                        
                        West
                        
                        
                        
                        
                        
                        
                        
                        
                        North
                        
                        
                        OtherStates
                        
                        
                        Africa
                        
                        
                        Israel
                        
                        
                        Ecuador
                        
                        
                        Sea
                        
                        
                        Int'l(2)
                        
                        
                        Total(in
      millions)Year
      Ended December 31, 2008Property
      acquisition costsProved
      (3)
                        
                        $
                        256
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        256Unproved
      (4)
                        
                        
                        296
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        5
                        
                        
                        
                        302Total
      acquisition costs
                        
                        
                        552
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        5
                        
                        
                        
                        558Exploration
      costs
                        
                        
                        322
                        
                        
                        
                        110
                        
                        
                        
                        28
                        
                        
                        
                        1
                        
                        
                        
                        17
                        
                        
                        
                        39
                        
                        
                        
                        517Development costs(5) (6)
      (7)
                        
                        
                        1,106
                        
                        
                        
                        41
                        
                        
                        
                        13
                        
                        
                        
                        1
                        
                        
                        
                        94
                        
                        
                        
                        10
                        
                        
                        
                        1,265Total
      consolidated operations
                        
                        $
                        1,980
                        
                        
                        $
                        151
                        
                        
                        $
                        41
                        
                        
                        $
                        2
                        
                        
                        $
                        112
                        
                        
                        $
                        54
                        
                        
                        $
                        2,340Our
      share of Alba Plant development costs
                        
                        $
                        -
                        
                        
                        $
                        2
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2Year
      Ended December 31, 2007Property
      acquisition costsProved
                        
                        $
                        11
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        11Unproved
                        
                        
                        145
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        146Total
      acquisition costs
                        
                        
                        156
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        157Exploration
      costs
                        
                        
                        184
                        
                        
                        
                        179
                        
                        
                        
                        2
                        
                        
                        
                        -
                        
                        
                        
                        52
                        
                        
                        
                        3
                        
                        
                        
                        420Development costs(5) (6)
      (7)
                        
                        
                        1,081
                        
                        
                        
                        15
                        
                        
                        
                        25
                        
                        
                        
                        -
                        
                        
                        
                        47
                        
                        
                        
                        23
                        
                        
                        
                        1,191Total
      consolidated operations
                        
                        $
                        1,421
                        
                        
                        $
                        194
                        
                        
                        $
                        27
                        
                        
                        $
                        -
                        
                        
                        $
                        99
                        
                        
                        $
                        27
                        
                        
                        $
                        1,768Our
      share of Alba Plant development costs
                        
                        $
                        -
                        
                        
                        $
                        1
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1Year
      Ended December 31, 2006Property
      acquisition costsProved(8)
                        
                        $
                        514
                        
                        
                        $
                        8
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        522Unproved(8)
                        
                        
                        157
                        
                        
                        
                        26
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        185Total
      acquisition costs
                        
                        
                        671
                        
                        
                        
                        34
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        707Exploration
      costs
                        
                        
                        205
                        
                        
                        
                        13
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        18
                        
                        
                        
                        11
                        
                        
                        
                        247Development costs(5) (6)
      (7)
                        
                        
                        785
                        
                        
                        
                        7
                        
                        
                        
                        14
                        
                        
                        
                        -
                        
                        
                        
                        231
                        
                        
                        
                        22
                        
                        
                        
                        1,059Total
      consolidated operations
                        
                        $
                        1,661
                        
                        
                        $
                        54
                        
                        
                        $
                        15
                        
                        
                        $
                        -
                        
                        
                        $
                        250
                        
                        
                        $
                        33
                        
                        
                        $
                        2,013Our
      share of Alba Plant development costs
                        
                        $
                        -
                        
                        
                        $
                        1
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1







(1)
            Costs
      incurred include capitalized and expensed
items.


(2)
            Other
      International includes China, Argentina (through February 2008), Suriname
      and other new ventures.


(3)
            Includes
      $254 million related to the Mid-continent
  acquisition.


(4)
            Includes
      $179 million for deepwater Gulf of Mexico lease blocks, $38 million
      related to the Mid-continent acquisition, $39 million related to lease
      acquisitions in East Texas and the remainder primarily for other onshore
      US lease acquisitions.


(5)
            US
      development costs include increases in asset retirement obligations of $34
      million in 2008, $24 million in 2007, and $4 million in 2006. US
      asset retirement costs of $33 million in 2006 were incurred as a
      result of hurricane damage and are excluded from the costs incurred
      schedule above as we recovered the costs from insurance
      proceeds.


(6)
            Worldwide
      development costs include amounts spent to develop proved undeveloped
      reserves of $1.0 billion in both 2008 and 2007, and $768 million in
      2006. Worldwide development costs also include $191 million spent on
      an FSPO in the North Sea Dumbarton field in
  2006.


(7)
            North
      Sea development costs include increases in asset retirement obligations of
      $18 million in 2008 and $4 million in
2007.


(8)
            Includes
      amounts allocated from the U.S. Exploration acquisition (2006) See Note 4—Acquisitions and
  Divestitures.





102
 Table of Contents





Capitalized
Costs Relating to Oil and Gas Producing Activities (Unaudited)




Aggregate
capitalized costs relating to crude oil and natural gas producing activities,
including asset retirement costs and related accumulated DD&A, are as
follows:




December
      31,2008
                            
                            
                            2007(in
      millions)Unproved
      oil and gas properties (1)
                            
                            $
                            961
                            
                            
                            $
                            1,165Proved
      oil and gas properties(2)
                            
                            
                            10,905
                            
                            
                            
                            8,903Total
      oil and gas properties
                            
                            
                            11,866
                            
                            
                            
                            10,068Accumulated
      DD&A
                            
                            
                            (3,022
                            )
                            
                            
                            (2,281
                            )Net
      capitalized costs
                            
                            $
                            8,844
                            
                            
                            $
                            7,787Our
      share of Alba Plant net capitalized costs
                            
                            $
                            113
                            
                            
                            $
                            117




(1)
            Unproved
      oil and gas properties includes $465 million and $628 million at December
      31, 2008 and 2007, respectively, remaining from the allocation of costs to
      unproved properties acquired in the Patina Merger and the acquisition of
      U.S. Exploration.


(2)
            Proved
      oil and gas properties include asset retirement costs of $180 million and
      $91 million at December 31, 2008 and 2007,
      respectively.







103
 Table of Contents





Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves (Unaudited)




The
following information is based on our best estimate of the required data for the
Standardized Measure of Discounted Future Net Cash Flows as of December 31,
2008, 2007 and 2006 in accordance with SFAS 69. The standard requires the
use of a 10% discount rate. This information is not the fair market value nor
does it represent the expected present value of future cash flows of our proved
oil and gas reserves.




United
                                                
                                                
                                                West
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                North
                                                
                                                
                                                OtherStates
                                                
                                                
                                                Africa
                                                
                                                
                                                Israel
                                                
                                                
                                                Ecuador
                                                
                                                
                                                Sea
                                                
                                                
                                                Int'l(1)
                                                
                                                
                                                Total(in
      millions)December
      31, 2008Future
      cash inflows (2)
                                                
                                                $
                                                16,551
                                                
                                                
                                                $
                                                3,277
                                                
                                                
                                                $
                                                938
                                                
                                                
                                                $
                                                674
                                                
                                                
                                                $
                                                1,170
                                                
                                                
                                                $
                                                455
                                                
                                                
                                                $
                                                23,065Future
      production costs (3)
                                                
                                                
                                                4,646
                                                
                                                
                                                
                                                784
                                                
                                                
                                                
                                                120
                                                
                                                
                                                
                                                249
                                                
                                                
                                                
                                                442
                                                
                                                
                                                
                                                185
                                                
                                                
                                                
                                                6,426Future
      development costs
                                                
                                                
                                                3,082
                                                
                                                
                                                
                                                62
                                                
                                                
                                                
                                                160
                                                
                                                
                                                
                                                17
                                                
                                                
                                                
                                                184
                                                
                                                
                                                
                                                148
                                                
                                                
                                                
                                                3,653Future
      income tax expense
                                                
                                                
                                                2,594
                                                
                                                
                                                
                                                774
                                                
                                                
                                                
                                                173
                                                
                                                
                                                
                                                119
                                                
                                                
                                                
                                                305
                                                
                                                
                                                
                                                49
                                                
                                                
                                                
                                                4,014Future
      net cash flows
                                                
                                                
                                                6,229
                                                
                                                
                                                
                                                1,657
                                                
                                                
                                                
                                                485
                                                
                                                
                                                
                                                289
                                                
                                                
                                                
                                                239
                                                
                                                
                                                
                                                73
                                                
                                                
                                                
                                                8,97210%
      annual discount for estimated timing of cash flows
                                                
                                                
                                                3,180
                                                
                                                
                                                
                                                608
                                                
                                                
                                                
                                                106
                                                
                                                
                                                
                                                157
                                                
                                                
                                                
                                                14
                                                
                                                
                                                
                                                43
                                                
                                                
                                                
                                                4,108Standardized
      measure of discounted future net cash flows
                                                
                                                $
                                                3,049
                                                
                                                
                                                $
                                                1,049
                                                
                                                
                                                $
                                                379
                                                
                                                
                                                $
                                                132
                                                
                                                
                                                $
                                                225
                                                
                                                
                                                $
                                                30
                                                
                                                
                                                $
                                                4,864December
      31, 2007Future
      cash inflows (2)
                                                
                                                $
                                                30,733
                                                
                                                
                                                $
                                                6,935
                                                
                                                
                                                $
                                                858
                                                
                                                
                                                $
                                                704
                                                
                                                
                                                $
                                                2,492
                                                
                                                
                                                $
                                                879
                                                
                                                
                                                $
                                                42,601Future
      production costs (3)
                                                
                                                
                                                5,936
                                                
                                                
                                                
                                                1,112
                                                
                                                
                                                
                                                180
                                                
                                                
                                                
                                                174
                                                
                                                
                                                
                                                516
                                                
                                                
                                                
                                                335
                                                
                                                
                                                
                                                8,253Future
      development costs
                                                
                                                
                                                3,136
                                                
                                                
                                                
                                                202
                                                
                                                
                                                
                                                88
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                200
                                                
                                                
                                                
                                                15
                                                
                                                
                                                
                                                3,653Future
      income tax expense
                                                
                                                
                                                6,622
                                                
                                                
                                                
                                                1,348
                                                
                                                
                                                
                                                146
                                                
                                                
                                                
                                                115
                                                
                                                
                                                
                                                881
                                                
                                                
                                                
                                                125
                                                
                                                
                                                
                                                9,237Future
      net cash flows
                                                
                                                
                                                15,039
                                                
                                                
                                                
                                                4,273
                                                
                                                
                                                
                                                444
                                                
                                                
                                                
                                                403
                                                
                                                
                                                
                                                895
                                                
                                                
                                                
                                                404
                                                
                                                
                                                
                                                21,45810%
      annual discount for estimated timing of cash flows
                                                
                                                
                                                7,398
                                                
                                                
                                                
                                                1,705
                                                
                                                
                                                
                                                163
                                                
                                                
                                                
                                                227
                                                
                                                
                                                
                                                221
                                                
                                                
                                                
                                                93
                                                
                                                
                                                
                                                9,807Standardized
      measure of discounted future net cash flows
                                                
                                                $
                                                7,641
                                                
                                                
                                                $
                                                2,568
                                                
                                                
                                                $
                                                281
                                                
                                                
                                                $
                                                176
                                                
                                                
                                                $
                                                674
                                                
                                                
                                                $
                                                311
                                                
                                                
                                                $
                                                11,651December
      31, 2006Future
      cash inflows (2)
                                                
                                                $
                                                18,948
                                                
                                                
                                                $
                                                4,904
                                                
                                                
                                                $
                                                972
                                                
                                                
                                                $
                                                629
                                                
                                                
                                                $
                                                1,225
                                                
                                                
                                                $
                                                808
                                                
                                                
                                                $
                                                27,486Future
      production costs (3)
                                                
                                                
                                                4,551
                                                
                                                
                                                
                                                738
                                                
                                                
                                                
                                                146
                                                
                                                
                                                
                                                162
                                                
                                                
                                                
                                                327
                                                
                                                
                                                
                                                187
                                                
                                                
                                                
                                                6,111Future
      development costs
                                                
                                                
                                                2,846
                                                
                                                
                                                
                                                80
                                                
                                                
                                                
                                                90
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                35
                                                
                                                
                                                
                                                28
                                                
                                                
                                                
                                                3,091Future
      income tax expense
                                                
                                                
                                                3,422
                                                
                                                
                                                
                                                1,348
                                                
                                                
                                                
                                                187
                                                
                                                
                                                
                                                130
                                                
                                                
                                                
                                                435
                                                
                                                
                                                
                                                177
                                                
                                                
                                                
                                                5,699Future
      net cash flows
                                                
                                                
                                                8,129
                                                
                                                
                                                
                                                2,738
                                                
                                                
                                                
                                                549
                                                
                                                
                                                
                                                325
                                                
                                                
                                                
                                                428
                                                
                                                
                                                
                                                416
                                                
                                                
                                                
                                                12,58510%
      annual discount for estimated timing of cash flows
                                                
                                                
                                                3,966
                                                
                                                
                                                
                                                1,132
                                                
                                                
                                                
                                                215
                                                
                                                
                                                
                                                170
                                                
                                                
                                                
                                                95
                                                
                                                
                                                
                                                120
                                                
                                                
                                                
                                                5,698Standardized
      measure of discounted future net cash flows
                                                
                                                $
                                                4,163
                                                
                                                
                                                $
                                                1,606
                                                
                                                
                                                $
                                                334
                                                
                                                
                                                $
                                                155
                                                
                                                
                                                $
                                                333
                                                
                                                
                                                $
                                                296
                                                
                                                
                                                $
                                                6,887




(1)
            Other
      International includes China and Argentina. We sold our assets in
      Argentina in 2008.


(2)
            The
      standardized measure of discounted future net cash flows for 2008, 2007
      and 2006 does not include cash flows relating to anticipated future
      methanol or electricity sales.


(3)
            Production
      costs include oil and gas operations expense, production and ad valorem
      taxes, transportation costs and general and administrative expense
      supporting oil and gas operations.







104
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Prices
      and Other Assumptions in Discounted Future Net Cash Flows
      (Unaudited)




Future
cash inflows are computed by applying year-end prices, adjusted for location and
quality differentials on a field-by-field basis, to year-end quantities of
proved reserves, except in those instances where fixed and determinable price
changes are provided by contractual arrangements at year-end. The discounted
future cash flow estimates do not include the effects of derivative instruments.
Average prices per region are as follows:




United
                      
                      
                      West
                      
                      
                      
                      
                      
                      
                      
                      
                      North
                      
                      
                      OtherStates
                      
                      
                      Africa
                      
                      
                      Israel
                      
                      
                      Ecuador
                      
                      
                      Sea
                      
                      
                      Int'l(1)
                      
                      
                      TotalDecember
      31, 2008Average
      crude oil price per Bbl
                      
                      $
                      36.62
                      
                      
                      $
                      40.51
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      45.17
                      
                      
                      $
                      31.69
                      
                      
                      $
                      37.97Average
      natural gas price per Mcf
                      
                      
                      4.99
                      
                      
                      
                      0.25
                      
                      
                      
                      3.43
                      
                      
                      
                      3.74
                      
                      
                      
                      5.72
                      
                      
                      
                      -
                      
                      
                      
                      3.39December
      31, 2007Average
      crude oil price per Bbl
                      
                      $
                      88.00
                      
                      
                      $
                      81.26
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      93.79
                      
                      
                      $
                      61.72
                      
                      
                      $
                      85.62Average
      natural gas price per Mcf
                      
                      
                      6.78
                      
                      
                      
                      0.27
                      
                      
                      
                      2.69
                      
                      
                      
                      3.74
                      
                      
                      
                      7.07
                      
                      
                      
                      -
                      
                      
                      
                      4.36December
      31, 2006Average
      crude oil price per Bbl
                      
                      $
                      57.02
                      
                      
                      $
                      51.49
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      57.81
                      
                      
                      $
                      48.04
                      
                      
                      $
                      54.87Average
      natural gas price per Mcf
                      
                      
                      5.32
                      
                      
                      
                      0.27
                      
                      
                      
                      2.70
                      
                      
                      
                      3.75
                      
                      
                      
                      7.11
                      
                      
                      
                      0.85
                      
                      
                      
                      3.48




(1)
            Other
      International includes China at December 31, 2008, 2007 and 2006 and
      Argentina at December 31, 2007 and
2006.





We
estimate that a $1.00 per Bbl change in the average price of crude oil or a $.10
per Mcf change in the average price of natural gas from the year-end prices at
December 31, 2008 would change the discounted future net cash flows before
income taxes by approximately $187 million or $168 million,
respectively.




Future
production and development costs, which include dismantlement and restoration
expense, are computed by estimating the expenditures to be incurred in
developing and producing the proved crude oil and natural gas reserves at the
end of the year, based on year-end costs, and assuming continuation of existing
economic conditions.




Future
development costs include amounts that we expect to spend to develop proved
undeveloped reserves of $745 million in 2009, $795 million in 2010 and
$541 million in 2011.




Future
income tax expense is computed by applying the appropriate year-end statutory
tax rates to the estimated future pretax net cash flows relating to proved crude
oil and natural gas reserves, less the tax bases of the properties involved.
Future income tax expense gives effect to tax credits and allowances, but does
not reflect the impact of general and administrative costs and exploration
expenses of ongoing operations.




Imbalance
receivables and liabilities are as follows:




Year
      Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006(in
      millions)Imbalance
      receivables
                              
                              $
                              7
                              
                              
                              $
                              13
                              
                              
                              $
                              18Imbalance
      liabilities
                              
                              
                              8
                              
                              
                              
                              10
                              
                              
                              
                              17




Imbalance
receivables and imbalance liabilities have been excluded from the standardized
measure of discounted future net cash flows.







105
 Table of Contents





Sources
      of Changes in Discounted Future Net Cash Flows
  (Unaudited)




Principal
changes in the aggregate standardized measure of discounted future net cash
flows attributable to proved crude oil and natural gas reserves are as
follows:




Year
      Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006(in
      millions)Standardized
      measure of discounted future net cash flows, beginning of
    year
                          
                          $
                          11,651
                          
                          
                          $
                          6,887
                          
                          
                          $
                          8,771Changes
      in standardized measure of dicounted future net cash
flows:Sales
      of oil and gas produced, net of production costs
                          
                          
                          (3,030
                          )
                          
                          
                          (2,427
                          )
                          
                          
                          (2,177
                          )Net
      changes in prices and production costs
                          
                          
                          (8,017
                          )
                          
                          
                          5,266
                          
                          
                          
                          (2,788
                          )Extensions,
      discoveries and improved recovery, less related costs
                          
                          
                          400
                          
                          
                          
                          1,635
                          
                          
                          
                          769Changes
      in estimated future development costs
                          
                          
                          (883
                          )
                          
                          
                          (775
                          )
                          
                          
                          (558
                          )Development
      costs incurred during the period
                          
                          
                          1,291
                          
                          
                          
                          1,189
                          
                          
                          
                          1,076Revisions
      of previous quantity estimates
                          
                          
                          (617
                          )
                          
                          
                          1,276
                          
                          
                          
                          (92
                          )Purchases
      of minerals in place
                          
                          
                          182
                          
                          
                          
                          6
                          
                          
                          
                          573Sales
      of minerals in place
                          
                          
                          (66
                          )
                          
                          
                          (95
                          )
                          
                          
                          (579
                          )Accretion
      of discount
                          
                          
                          1,663
                          
                          
                          
                          1,006
                          
                          
                          
                          1,274Net
      change in income taxes
                          
                          
                          2,853
                          
                          
                          
                          (1,900
                          )
                          
                          
                          777Change
      in timing of estimated future production and other
                          
                          
                          (563
                          )
                          
                          
                          (417
                          )
                          
                          
                          (159
                          )Aggregate
      change in standardized measure of discounted future net cash
      flows
                          
                          
                          (6,787
                          )
                          
                          
                          4,764
                          
                          
                          
                          (1,884
                          )Standardized
      measure of discounted future net cash flows, end of year
                          
                          $
                          4,864
                          
                          
                          $
                          11,651
                          
                          
                          $
                          6,887







106
 Table of Contents





Supplemental Quarterly
Financial Information (Unaudited)




Supplemental
quarterly financial information is as follows:




Quarter
      EndedMarch
      31,
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              June
      30,
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              September
      30,
                                                                                                              
                                                                                                              
                                                                                                              December
      31,
                                                                                                              
                                                                                                              Total(in
      millions except per share amounts)2008
      (1)Revenues
                                                                                                              
                                                                                                              $
                                                                                                              1,025
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1,205
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1,098
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              573
                                                                                                              
                                                                                                              $
                                                                                                              3,901Income
      (loss) before income taxes
                                                                                                              
                                                                                                              
                                                                                                              315
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (198)
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1,454
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              490
                                                                                                              
                                                                                                              
                                                                                                              2,061Net
      income (loss)
                                                                                                              
                                                                                                              
                                                                                                              215
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (144)
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              974
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              305
                                                                                                              
                                                                                                              
                                                                                                              1,350Earnings
      (loss) per share:Basic
      (4)
                                                                                                              
                                                                                                              $
                                                                                                              1.25
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              (0.84)
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              5.64
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.77
                                                                                                              
                                                                                                              $
                                                                                                              7.83Diluted
      (2)
      (4)
                                                                                                              
                                                                                                              
                                                                                                              1.20
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              (0.84)
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              5.37
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1.72
                                                                                                              
                                                                                                              
                                                                                                              7.582007
      (3)Revenues
                                                                                                              
                                                                                                              $
                                                                                                              743
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              794
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              814
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              921
                                                                                                              
                                                                                                              $
                                                                                                              3,272Income
      before income taxes
                                                                                                              
                                                                                                              
                                                                                                              304
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              293
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              344
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              427
                                                                                                              
                                                                                                              
                                                                                                              1,368Net
      income
                                                                                                              
                                                                                                              
                                                                                                              212
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              209
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              223
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              300
                                                                                                              
                                                                                                              
                                                                                                              944Earnings
      per share:Basic
      (4)
                                                                                                              
                                                                                                              $
                                                                                                              1.24
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.22
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.30
                                                                                                              
                                                                                                              
                                                                                                              $
                                                                                                              1.75
                                                                                                              
                                                                                                              $
                                                                                                              5.52Diluted
      (4)
                                                                                                              
                                                                                                              
                                                                                                              1.22
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1.21
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1.28
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              1.73
                                                                                                              
                                                                                                              
                                                                                                              5.45




(1)
            First
      quarter 2008 includes the
following:


·
            $237
      million loss on commodity derivative instruments. (See
      Note 6–Derivative Instruments and Hedging
  Activities).




Second
      quarter 2008 includes the
following:


·
            $828
      million loss on commodity derivative instruments. (See
      Note 6–Derivative Instruments and Hedging
  Activities).




Third
      quarter 2008 includes the
following:


·
            $875
      million gain on commodity derivative instruments (See
      Note 6–Derivative Instruments and Hedging
  Activities);


·
            $38
      million write-down of SemCrude, L.P. receivable (See
      Note 17–Commitments and
Contingencies);


·
            $38
      million impairment of assets (See Note 4–Acquisitions
      and Divestitures); and


·
            $9
      million loss on involuntary conversion (See Note
      4–Acquisitions and
Divestitures).




Fourth
      quarter 2008 includes the
following:


·
            $630
      million gain on commodity derivative instruments (See
      Note 6–Derivative Instruments and Hedging Activities);and


·
            $256
      million impairment of assets (See Note 3–Asset
      Impairments).




(2)
            The
      diluted earnings per share calculations for the quarters ended September
      30, 2008 and December 31, 2008 include decreases to net income of $29
      million, net of tax, and $4 million, net of tax, respectively, related to
      deferred compensation gains related to shares of our common stock held in
      a rabbi trust.




(3)
              First
      quarter 2007 includes the
following:


·
            $13
      million loss on involuntary conversion (See Note
      4—Acquisitions and
Divestitures).




Second
      quarter 2007 includes the
following:


·
            $38
      million loss on involuntary conversion (See Note
      4—Acquisitions and
Divestitures).




(4)
            The
      sum of the individual quarterly earnings (loss) per share amounts may not
      agree with year-to-date earnings per share as each quarterly computation
      is based on the income or loss for that quarter and the weighted average
      number of shares outstanding during that
  quarter.












107
 Table of Contents





Item
9.                 
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure




None.




Item
9A.              
Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports we file or furnish to
the SEC under the Securities Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the SEC’s
rules and forms, and that information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.




Our
principal executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures,” as such term is
defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
Annual Report on Form 10-K. Based upon their evaluation, they have
concluded that our disclosure controls and procedures are
effective.




In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the control system will be met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of
future events and the application of judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Because of these and other
inherent limitations of control systems, there is only reasonable assurance that
our controls will succeed in achieving their goals under all potential future
conditions.




Management’s
Annual Report on Internal Control over Financial Reporting




The
management report called for by Item 308(a) of Regulation S-K is
incorporated herein by reference to Management’s Report on Internal Control over
Financial Reporting, included in Item
8. Financial Statements and Supplementary Data.




The
independent auditor’s attestation report called for by Item 308(b) of
Regulation S-K is incorporated herein by reference to Report of Independent
Registered Public Accounting Firm (Internal Control Over Financial Reporting),
included in Item 8.Financial Statements
and Supplementary Data.




Changes
in Internal Control over Financial Reporting




We have
been in the process of implementing a new Enterprise Resource Planning (ERP)
software system to replace our various legacy systems.  During 2008,
we implemented additional phases of the system. As appropriate, we modified the
design and documentation of internal control processes and procedures relating
to the implementation of the newest phases.  We believe that the new
ERP system has strengthened and will continue to enhance our internal controls
over financial reporting as additional phases are implemented; however, there
are inherent risks in implementing any new system that could impact our
financial reporting. See Item 1A. Risk Factors—Information technology systems
implementation issues could disrupt our internal operations, increase our costs
and adversely affect our financial results or our ability to report our
financial results.




In the
event that issues arise, we have manual procedures in place which would
facilitate our continued recording and reporting of results from the new ERP
system. However, because of its inherent limitations, internal control over
financial reporting may not detect or prevent misstatements. Projections of any
evaluation of the effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.




We will
continue to monitor, test, and appraise the impact and effect of the new ERP
system on our internal controls and procedures as additional phases and features
of the system are implemented. There were no changes in internal controls over
financial reporting that occurred during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except as described
above.




Item
9B.              
Other Information




None.







108
 Table of Contents





PART III




Item
10.               
Directors, Executive Officers and Corporate Governance




The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement, which will be filed with the SEC not later than 120 days
subsequent to December 31, 2008.




Item
11.            
   Executive Compensation




The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement, which will be filed with the SEC not later than 120 days
subsequent to December 31, 2008.




Item
      12.               
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder  Matters




The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement, which will be filed with the SEC not later than 120 days
subsequent to December 31, 2008.




Item
13.               
Certain Relationships and Related Transactions, and Director
Independence




The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement, which will be filed with the SEC not later than 120 days
subsequent to December 31, 2008.




Item
14.               
Principal Accounting Fees and Services




The
information required by this item is incorporated herein by reference to the
2009 Proxy Statement, which will be filed with the SEC not later than 120 days
subsequent to December 31, 2008.




PART IV




Item
15.              
 Exhibits, Financial Statements Schedules




a)       The
following documents are filed as a part of this report:




(3)
            Exhibits:
      The exhibits required to be filed by this Item 15 are set forth in
      the Index to Exhibits accompanying this
report.







109
 Table of Contents





SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.




NOBLE
      ENERGY, INC.(Registrant)Date:
      February 19, 2009
            By:
      /s/ Charles D. DavidsonCharles
      D. Davidson,Chairman
      of the Board, President,Chief
      Executive Officer and DirectorDate:
      February 19, 2009
            By:
      /s/ Chris TongChris
      Tong,Senior
      Vice President, Chief Financial OfficerDate:
      February 19, 2009
            By:
      /s/ Frederick B. BruningFrederick
      B. Bruning,Vice
      President, Chief Accounting Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




Signature
                
                
                
                Capacity
      in which signed
                
                
                
                Date/s/
      Charles D. Davidson
                
                Chairman
      of the Board, President,
                
                February 19,
      2009Charles
      D. Davidson
                
                Chief
      Executive Officer and Director(Principal
      Executive Officer)/s/
      Chris Tong
                
                Senior
      Vice President,
                
                February 19,
      2009Chris
      Tong
                
                Chief
      Financial Officer(Principal
      Financial Officer)/s/
      Frederick B. Bruning
                
                Vice
      President, Chief Accounting Officer
                
                February 19,
      2009Frederick
      B. Bruning
                
                (Principal
      Accounting Officer)/s/
      Jeffrey L. Berenson
                
                Director
                
                February 19,
      2009Jeffrey
      L. Berenson/s/
      Michael A. Cawley
                
                Director
                
                February 19,
      2009Michael
      A. Cawley/s/
      Edward F. Cox
                
                Director
                
                February 19,
      2009Edward
      F. Cox/s/
      Thomas J. Edelman
                
                Director
                
                February 19,
      2009Thomas
      J. Edelman/s/
      Eric P. Grubman
                
                Director
                
                February 19,
      2009Eric
      P. Grubmans/
      Kirby L. Hedrick
                
                Director
                
                February 19,
      2009Kirby
      L. Hedrick/s/
      Scott D. Urban
                
                Director
                
                February 19,
      2009Scott
      D. Urban/s/
      William T. Van Kleef
                
                Director
                
                February 19,
      2009William
      T. Van Kleef
















110
 Table of Contents


INDEX TO
EXHIBITS


Exhibit
                                                                                                                  Number
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                Exhibit**3.1
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Certificate
      of Incorporation, as amended through May 16, 2005, of the Registrant,
      filed herewith.3.2
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                By-Laws of Noble
      Energy, Inc. as amended through December 9, 2008 (filed as
      Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (Date
      of Event: December 9, 2008) filed December 15, 2008 and incorporated
      herein by reference).4.1
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Certificate
      of Designations of Series A Junior Participating Preferred Stock of
      the Registrant dated August 27, 1997 (filed as Exhibit A of
      Exhibit 4.1 to the Registrant’s Registration Statement on
      Form 8-A filed on August 28, 1997 and incorporated herein
      by reference).4.2
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Certificate
      of Designations of Series B Mandatorily Convertible Preferred Stock
      of the Registrant dated November 9, 1999 (filed as
      Exhibit 3.4 to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 1999 and incorporated herein by
      reference).4.3
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Indenture
      dated as of October 14, 1993 between the Registrant and U.S.
      Trust Company of Texas, N.A., as Trustee, relating to the Registrant’s 7
      1/4% Notes Due 2023, including form of the Registrant’s 7 1/4% Notes Due
      2023 (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on
      Form 10-Q for the quarter ended September 30, 1993 and
      incorporated herein by reference).4.4
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Indenture
      relating to Senior Debt Securities dated as of April 1, 1997
      between the Registrant and U.S. Trust Company of Texas, N.A., as Trustee
      (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on
      Form 10-Q for the quarter ended March 31, 1997 and
      incorporated herein by reference).4.5
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                First
      Indenture Supplement relating to $250 million of the Registrant’s 8%
      Senior Notes Due 2027 dated as of April 1, 1997 between the
      Registrant and U.S. Trust Company of Texas, N.A., as Trustee (filed as
      Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q
      for the quarter ended March 31, 1997 and incorporated herein by
      reference).4.6
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Second
      Indenture Supplement, between the Company and U.S. Trust Company of Texas,
      N.A. as trustee, relating to $100 million of the Registrant’s 7 1/4%
      Senior Debentures Due 2097 dated as of August 1, 1997 (filed as
      Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q
      for the quarter ended June 30, 1997 and incorporated herein by
      reference).4.7
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Third
      Indenture Supplement relating to $200 million of the Registrant’s
      5.25% Notes due 2014 dated April 19, 2004 between the Company
      and the Bank of New York Trust Company, N.A., as successor trustee to U.S.
      Trust Company of Texas, N.A. (filed as Exhibit 4.1 to the Company’s
      Registration Statement on Form S-4 (Registration No. 333-116092)
      and incorporated herein by reference).10.1*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Noble
      Energy, Inc. Retirement Restoration Plan dated effective as of January 1,
      2009, filed herewith.10.2*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Noble
      Energy, Inc. Restoration Trust effective August 1, 2002
      (filed as Exhibit 10.3 to the Registrant’s Annual Report on
      Form 10-K for the year ended December 31, 2002 and
      incorporated herein by reference).10.3*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Nonqualified Stock Option Agreement under the Noble Energy, Inc. 1992
      Stock Option and Restricted Stock Plan (filed as Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (Date of Event:
      February 1, 2005) filed February 7, 2005 and
      incorporated herein by reference).10.4*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Restricted Stock Agreement under the Noble Energy, Inc. 1992 Stock
      Option and Restricted Stock Plan, filed herewith.10.5*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                1988
      Nonqualified Stock Option Plan for Non-Employee Directors of the
      Registrant, as amended and restated, effective as of
      April 27, 2004 (filed as Exhibit 10.2 to the Registrant’s
      Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2004 and incorporated herein by
reference).10.6*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Indemnity Agreement entered into between the Registrant and each of the
      Registrant’s directors and bylaw officers (filed as Exhibit 10.18 to
      the Registrant’s Annual Report of Form 10-K for the year ended
      December 31, 1995 and incorporated herein by
      reference).10.7
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Guaranty
      of the Registrant dated October 28, 1982, guaranteeing certain
      obligations of Samedan (filed as Exhibit 10.12 to the Registrant’s
      Annual Report on Form 10-K for the year ended
      December 31, 1993 and incorporated herein by
      reference).10.8*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Letter
      agreement dated February 1, 2002 between the Registrant and
      Charles D. Davidson, terminating Mr. Davidson’s employment agreement
      and entering into the attached Change of Control Agreement (filed as
      Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2001 and incorporated herein by
      reference).10.9
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                364-day
      Credit Agreement dated as of November 27, 2002 among the
      Registrant, as borrower, JPMorgan Chase Bank, as the administrative agent
      for the lenders, Wachovia Bank, National Association, as the syndication
      agent for the lenders, Societe Generale, Citibank, N.A., Deutsche Bank Ag
      New York Branch, and The Royal Bank of Scotland PLC, as co-documentation
      agents, and certain commercial lending institutions, as lenders, (filed as
      Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2002 and incorporated herein by
      reference).


111
 Table of Contents




INDEX TO
EXHIBITS


Exhibit
                                                                                                                  Number
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                Exhibit**10.10
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                364-day
      Credit Agreement dated as of October 30, 2003 among the
      Registrant, as borrower, JPMorgan Chase Bank, as the administrative agent
      for the lenders, Wachovia Bank, National Association, as the syndication
      agent for the lenders, Societe Generale, Deutsche Bank Ag New York Branch,
      and The Royal Bank of Scotland PLC, as co-documentation agents, and
      certain commercial lending institutions, as lenders (filed as
      Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for
      the year ended December 31, 2003 and incorporated herein by
      reference).10.11
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Term
      Loan Agreement dated as of January 30, 2004 among Noble Energy
      Mediterranean Ltd., as borrower, Sumitomo Mitsui Banking Corporation, as
      initial lender and agent for the lenders, and certain commercial lending
      institutions, as lenders (filed as Exhibit 99.1 to the Registrant’s
      Current Report on Form 8-K (Date of Event:
      January 30, 2004) filed May 10, 2004 and incorporated
      herein by reference).10.12
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Guaranty
      of the Company dated January 30, 2004 guaranteeing obligations
      of Noble Energy Mediterranean, Ltd. under the Term Loan Agreement dated
      January 30, 2004 (filed as Exhibit 99.2 to the Registrant’s
      Current Report on Form 8-K (Date of Event:
      January 30, 2004) filed May 10, 2004 and incorporated
      herein by reference).10.13
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Term
      Loan Agreement dated as of February 2, 2004 among Noble Energy
      Mediterranean Ltd., as borrower, Bank One, NA, as agent for the lenders,
      and certain commercial lending institutions, as lenders (filed as
      Exhibit 99.3 to the Registrant’s Current Report on Form 8-K
      (Date of Event: January 30, 2004) filed May 10, 2004
      and incorporated herein by reference).10.14
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Guaranty
      of the Company dated February 2, 2004 guaranteeing obligations
      of Noble Energy Mediterranean, Ltd. under the Term Loan Agreement dated
      February 2, 2004 (filed as Exhibit 99.4 to the Registrant’s
      Current Report on Form 8-K (Date of Event:
      January 30, 2004) filed May 10, 2004 and incorporated
      herein by reference).10.15
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Term
      Loan Agreement dated as of February 4, 2004 among Noble Energy
      Mediterranean Ltd., as borrower, The Royal Bank of Scotland Finance
      (Ireland), as agent for the lenders and as the initial lender (filed as
      Exhibit 99.5 to the Registrant’s Current Report on Form 8-K
      (Date of Event: January 30, 2004) filed May 10, 2004
      and incorporated herein by reference).10.16
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Guaranty
      of the Company dated February 4, 2004 guaranteeing obligations
      of Noble Energy Mediterranean, Ltd. under the Term Loan Agreement dated
      February 4, 2004 (filed as Exhibit 99.6 to the Registrant’s
      Current Report on Form 8-K (Date of Event:
      January 30, 2004) filed May 10, 2004 and incorporated
      herein by reference).10.17*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Performance Units Agreement under the Noble Energy, Inc. 2004
      Long-Term Incentive Plan (filed as Exhibit 10.3 to the Registrant’s
      Current Report on Form 8-K (Date of Event:
      February 1, 2005) filed February 7, 2005 and
      incorporated herein by reference).10.18
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                $2.1 billion
      Five-Year Credit Agreement, dated December 9, 2005, among Noble
      Energy, Inc., JPMorgan Chase Bank, N.A., as administrative agent,
      Wachovia Bank, National Association and The Royal Bank of Scotland PLC, as
      co-syndication agents, Deutsche Bank Securities Inc. and Citibank, N.A.,
      as co-documentation agents, and certain other commercial lending
      institutions named therein (filed as Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K (Date of Event: December 9, 2005),
      filed December 14, 2005 and incorporated herein by
      reference).10.19
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                $2.1 billion
      Five-Year Credit Agreement, dated November 30, 2006, among Noble
      Energy, Inc., JPMorgan Chase Bank, N.A., as administrative agent,
      Wachovia Bank, National Association and The Royal Bank of Scotland PLC, as
      co-syndication agents, Deutsche Bank Securities Inc., Citibank, N.A. and
      The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, and
      certain other commercial lending institutions named therein (filed as
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      (Date of Event: November 30, 2006), filed December 6, 2006 and
      incorporated herein by reference).10.20*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Noble
      Energy, Inc. 2005 Non-Employee Director Fee Deferral Plan, dated
      December 11, 2008, and effective as of January 1, 2009, filed
      herewith.10.21*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Consulting
      Agreement, dated May 9, 2005 but commencing May 16, 2005, by and
      between Noble Energy, Inc. and Thomas J. Edelman (filed as
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      (Date of Event: May 16, 2005), filed May 20, 2005 and
      incorporated herein by reference).10.22*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                2005
      Stock Plan for Non-Employee Directors of Noble Energy, Inc. (filed as
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      (Date of Event: April 26, 2005) filed April 29, 2005 and
      incorporated herein by reference).10.23*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Stock Option Agreement under the Noble Energy, Inc. 2005 Non-Employee
      Director Stock Plan (filed as Exhibit 10.1 to the Registrant’s
      Quarterly Report on Form 10-Q for the quarter ended June 30,
      2005 and incorporated herein by reference).10.24*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Restricted Stock Agreement under the Noble Energy, Inc. 2005
      Non-Employee Director Stock Plan (filed as Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (Date of Event: January 27,
      2009) filed on February 2, 2009 and incorporated herein by
      reference).10.25*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Form of
      Restricted Stock Agreement under the Noble Energy, Inc. 1992 Stock
      Option and Restricted Stock Plan entered into by certain executive
      officers and key employees of the Company on May 16, 2005 and
      August 1, 2005, respectively (filed as Exhibit 10.4 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2005 and incorporated herein by reference).10.26*
                                                                                                                
                                                                                                                —
                                                                                                                
                                                                                                                Noble
      Energy, Inc.  1992 Stock Option and Restricted Stock Plan (as
      amended through April 24, 2007), (filed as exhibit 10.1 to Registrant’s
      Current Report on Form 8-K (Date of Event: April 24, 2007) filed April 30,
      2007 and incorporated herein by reference).




112
 Table of Contents





INDEX TO
EXHIBITS
 Exhibit
                                                                                                            Number
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          Exhibit**10.27*
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Noble
      Energy, Inc. Change of Control Severance Plan for Executives (as
      amended effective January 1, 2008), (filed as Exhibit 10.40 to the
      Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2007 and incorporated herein by
      reference).10.28*
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Noble
      Energy, Inc. Change of Control Agreement (as amended effective
      January 1, 2008), (filed as Exhibit 10.41 to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2007
      and incorporated herein by reference).10.29*
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Noble
      Energy, Inc. 2004 Long-Term Incentive Plan (as amended effective
      January 1, 2008), (filed as Exhibit 10.42 to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2007
      and incorporated herein by reference).10.30*
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Amendment
      to the 2006 Performance Units Agreement (as amended effective January 1,
      2008), (filed as Exhibit 10.43 to the Registrant’s Annual Report on
      Form 10-K for the year ended December 31, 2007 and
      incorporated herein by reference).10.31*
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Noble
      Energy, Inc. 2005 Deferred Compensation Plan (as amended effective
      January 1, 2009), filed herewith.10.32*
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Amendment
      to the 2005 Stock Plan for Non-Employee Directors of Noble Energy, Inc.
      (effective September 1, 2008) (filed as Exhibit to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended September 30, 2008 and
      incorporated herein by reference).12.1
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Calculation
      of ratio of earnings to fixed charges, filed herewith.21
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Subsidiaries,
      filed herewith.23.1
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Consent
      of Independent Registered Public Accounting Firm—KPMG LLP, filed
      herewith.23.2
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Consent
      of Independent Registered Public Accounting Firm—PricewaterhouseCoopers
      LLP, filed herewith.23.3
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Consent
      of Independent Petroleum Engineers and Geologists—Netherland,
      Sewell & Associates, Inc., filed herewith.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).99.1
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Report
      of Independent Public Accounting Firm—PricewaterhouseCoopers LLP, filed
      herewith.99.2
                                                                                                          
                                                                                                          —
                                                                                                          
                                                                                                          Report
      of Netherland, Sewell & Associates, Inc., filed
      herewith.*
                                                                                                          Management
      contract or compensatory plan or arrangement required to be filed as an
      exhibit hereto.**
                                                                                                          Copies
      of exhibits will be furnished upon prepayment of 25 cents per page.
      Requests should be addressed to the Senior Vice President and Chief
      Financial Officer, Noble Energy, Inc., 100 Glenborough Drive,
      Suite 100, Houston, Texas
77067.





113
 Table of Contents





GLOSSARY




In this
report, the following abbreviations are used:




Bbl(s)
            Barrel(s)MBbls
            Thousand
      barrelsMMBbls
            Million
      barrelsBpd
            Barrels
      per dayBopd
            Barrels
      oil per dayBoe
            Barrels
      oil equivalent; gas is converted on the basis of six Mcf of gas per one
      barrel of oil, condensate or natural gas liquidsMBoe
            Thousand
      barrels oil equivalentMMBoe
            Million
      barrels oil equivalentBoepd
            Barrels
      oil equivalent per dayMMgal
            Million
      gallonsKW
            KilowattKWh
            Kilowatt
      hoursMW
            MegawattGW
              Mcf
            Gigawatt
              Thousand
      cubic feetMMcf
            Million
      cubic feetBcf
            Billion
      cubic feetTcf
            Trillion
      cubic feetMcfpd
            Thousand
      cubic feet per dayMMcfpd
            Million
      cubic feet per dayMcfe
            Thousand
      cubic feet equivalentMMcfe
            Million
      cubic feet equivalentBcfe
            Billion
      cubic feet equivalentBTU
            British
      thermal unitMMBtu
            Million
      British thermal unitsMMBtupd
            Million
      British thermal units per dayBtupcf
            British
      thermal unit per cubic footMT
            Metric
      tonsMTpd
            Metric
      tons per dayLNG
            Liquefied
      natural gasLPG
            Liquefied
      petroleum gasNGL
            Natural
      gas liquid





114