UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007
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 1-1204

 

 

 

 

Hess Corporation

(Exact name of Registrant as specified in its charter)

 

 

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

 

 

 

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

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

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

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

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

 

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

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of voting stock held by non-affiliates of the Registrant amounted to $16,463,000,000 as of June 30, 2007.

 

At December 31, 2007, there were 320,599,585 shares of Common Stock outstanding.

 

Part III is incorporated by reference from the Proxy Statement for the annual meeting of stockholders to be held on May 7, 2008.

 

 

HESS CORPORATION

 

Form 10-K

 

TABLE OF CONTENTS

 

 

Hess Corporation (the Registrant) is a Delaware corporation, incorporated in 1920. The Registrant and its subsidiaries (collectively referred to as the “Corporation” or “Hess”) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place principally in Algeria, Australia, Azerbaijan, Brazil, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia, Norway, Russia, Thailand, the United Kingdom and the United States. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. The Corporation owns 50% of a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations, most of which include convenience stores, located on the East Coast of the United States.

 

Exploration and Production

 

The Corporation’s total proved reserves at December 31 were as follows:

 

 

 

 

On a barrel of oil equivalent (boe) basis, 44% of the Corporation’s worldwide proved reserves are undeveloped at December 31, 2007 (40% at December 31, 2006). Proved reserves held under production sharing contracts at December 31, 2007 totaled 25% of crude oil and natural gas liquids and 57% of natural gas reserves.

 

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

 

 

 

 

The Corporation presently estimates that its 2008 production will be approximately 380,000 to 390,000 barrels of oil equivalent per day (boepd). The Corporation is developing a number of oil and gas fields and has an inventory of domestic and foreign exploration prospects.

United States

 

At December 31, 2007, 19% of the Corporation’s total proved reserves were located in the United States. During 2007, 15% of the Corporation’s crude oil and natural gas liquids production and 14% of its natural gas production were from United States operations. The Corporation’s production in the United States was principally from properties offshore in the Gulf of Mexico, which include the Llano (Hess 50%), Conger (Hess 37.5%), Baldpate (Hess 50%), Hack Wilson (Hess 33.3%) and Penn State (Hess 50%) fields, onshore in North Dakota including interests in the Bakken Play and Williston Basin and the Seminole-San Andres Unit (Hess 34.3%) onshore Texas in the Permian Basin.

 

The Shenzi development (Hess 28%) in the Green Canyon area of the deepwater Gulf of Mexico was sanctioned by the operator in 2006 and progressed in 2007 with installation of the tension leg platform tendon piles and hull fabrication. First production from Shenzi is expected to commence in mid-2009. In February 2007, the Corporation completed the acquisition of a 28% interest in the Genghis Khan oil and gas development located in the deepwater Gulf of Mexico on Green Canyon Blocks 652 and 608. The Genghis Khan development is part of the same geological structure as the Shenzi development. These fields were unitized in 2007. Crude oil production from the Genghis Khan Field commenced in October 2007.

 

Development of a residual oil zone at the Seminole-San Andres Unit commenced in the fourth quarter of 2007 and it is anticipated that production from this development will begin in 2009. The Corporation intends to inject carbon dioxide gas supplied from its interests in the West Bravo Dome and Bravo Dome fields in New Mexico into the residual oil zone to enhance recovery of crude oil.

 

At the Corporation’s Tubular Bells prospect (Hess 20%) located in the Mississippi Canyon area of the deepwater Gulf of Mexico a successful sidetrack to the second Tubular Bells well was completed during the first quarter of 2007 and the drilling of a third well commenced in October 2007. On the Pony prospect on Green Canyon Block 468 (Hess 100%) in the deepwater Gulf of Mexico a sidetrack from the original discovery well was successfully completed in the first quarter of 2007 and a second appraisal well is being drilled about 1.5 miles northwest of the original discovery well.

 

At December 31, 2007, the Corporation has interests in more than 370 exploration blocks in the Gulf of Mexico, which include 1,372,529 net undeveloped acres.

 

Europe

 

At December 31, 2007, 33% of the Corporation’s total proved reserves were located in Europe (United Kingdom 11%, Norway 14%, Denmark 3% and Russia 5%). During 2007, 36% of the Corporation’s crude oil and natural gas liquids production and 42% of its natural gas production were from European operations.

 

United Kingdom:  Production of crude oil and natural gas liquids from the United Kingdom North Sea was principally from the Corporation’s non-operated interests in the Beryl (Hess 22.2%), Bittern (Hess 28.3%), Schiehallion (Hess 15.7%) and Clair (Hess 9.3%) fields. Natural gas production from the United Kingdom in 2007 was primarily from fields in the Easington Catchment Area (Hess 28.8%), as well as the Everest (Hess 18.7%), Lomond (Hess 16.7%), Beryl (Hess 22.2%), Atlantic (Hess 25%) and Cromarty (Hess 90%) fields.

 

In 2007, the Corporation completed the sale of its interests in the Scott and Telford fields located offshore United Kingdom.

 

Norway:  Substantially all of the 2007 and 2006 Norwegian production was from the Corporation’s interest in the Valhall Field (Hess 28.1%). A field redevelopment for Valhall was sanctioned during 2007. In September 2007, gas production commenced at the Snohvit Field (Hess 3.26%) located offshore Norway.

 

Denmark:  Crude oil and natural gas production comes from the Corporation’s interest in the South Arne Field (Hess 57.5%).

 

Russia:  The Corporation’s activities in Russia are conducted through its 80%-owned interest in a corporate joint venture operating in the Volga-Urals region of Russia.

Africa

 

At December 31, 2007, 22% of the Corporation’s total proved reserves were located in Africa (Equatorial Guinea 9%, Algeria 2%, Libya 10% and Gabon 1%). During 2007, 42% of the Corporation’s crude oil and natural gas liquids production was from African operations.

 

Equatorial Guinea:  The Corporation is the operator and owns an interest in Block G (Hess 85%) which contains the Ceiba Field and Okume Complex.

 

Algeria:  The Corporation has a 49% interest in a venture with the Algerian national oil company that is redeveloping three oil fields.

 

Libya:  The Corporation, in conjunction with its Oasis Group partners, has oil and gas production operations in the Waha concessions in Libya (Hess 8.16%). The Corporation also owns a 100% interest in offshore exploration Area 54, where drilling of an exploration well is planned for 2008.

 

Gabon:  The Corporation’s activities in Gabon are conducted through its 77.5% owned Gabonese subsidiary, where the Corporation has interests in the Rabi Kounga, Toucan and Atora fields.

 

Egypt:  The Corporation has a 25-year development lease for the West Med Block 1 concession (West Med Block) (Hess 55%), which contains four existing natural gas discoveries and additional exploration opportunities. During 2007, the Corporation commenced front-end engineering and seismic studies.

 

Ghana:  The Corporation holds an interest in the Cape Three Points South Block (Hess 100%) located offshore Ghana where drilling of an exploration well is planned during 2008.

 

Asia and Other

 

At December 31, 2007, 26% of the Corporation’s total proved reserves were located in the Asia and other region (JDA 14%, Indonesia 7%, Thailand 3% and Azerbaijan 2%). During 2007, 7% of the Corporation’s crude oil and natural gas liquids production and 44% of its natural gas production were from Asia and other operations.

 

Joint Development Area of Malaysia and Thailand:  The Corporation owns an interest in the JDA (Hess 50%) in the Gulf of Thailand. In the fourth quarter of 2007, the Corporation completed the expansion of offshore facilities and installation of wellhead platforms at the JDA. Full Phase 2 production is expected in the second half of 2008.

 

Indonesia:  The Corporation’s natural gas production in Indonesia primarily comes from its interests offshore in the Ujung Pangkah project (Hess 75%) and the Natuna A gas Field (Hess 23%). Natural gas production from the Ujung Pangkah project commenced in April 2007. In addition, during 2007 a crude oil development project commenced at Ujung Pangkah. Production from this Phase 2 oil project is expected to commence in 2009. The Corporation also owns an interest in the onshore Jambi Merang natural gas project (Hess 25%), which was sanctioned for development in 2007.

 

Thailand:  The Corporation has an interest in the Pailin gas Field (Hess 15%) offshore Thailand. The Corporation is the operator and owns an interest in the onshore natural gas project in the Sinphuhorm Block (formerly the Phu Horm Block) (Hess 35%) which commenced production in the fourth quarter of 2006.

 

Azerbaijan:  The Corporation has an interest in the Azeri-Chirag-Gunashli (ACG) fields (Hess 2.72%) in the Caspian Sea. The Corporation also holds an interest in the Baku-Tbilisi-Ceyhan (BTC) Pipeline (Hess 2.36%).

 

Australia:  In 2007, the Corporation acquired a 100% interest in an exploration license covering 780,000 acres in the Carnarvon basin offshore Western Australia (Block 390-P). During 2008, the Corporation plans to drill four wells of a 16 well commitment on the block. During 2007, the Corporation also acquired a 50% interest in Block 404-P located offshore Western Australia, which covers a total area of 680,000 acres.

 

Brazil:  The Corporation has interests in two blocks located offshore Brazil, the BMS-22 Block (Hess 40%) in the Santos Basin, where drilling of an exploration well is planned in 2008, and the BM-ES-30 Block (Hess 60%) in the Espirito Santo Basin.

Oil and Gas Reserves

 

The Corporation’s net proved oil and gas reserves at the end of 2007, 2006 and 2005 are presented under Supplementary Oil and Gas Data on pages 76 through 78 in the accompanying financial statements.

 

During 2007, the Corporation provided oil and gas reserve estimates for 2006 to the United States Department of Energy. Such estimates are compatible with the information furnished to the SEC on Form 10-K for the year ended December 31, 2006, although not necessarily directly comparable due to the requirements of the individual requests. There were no differences in excess of 5%.

 

Sales commitments:  The Corporation has no contracts or agreements to sell fixed quantities of its crude oil production. In the United States, natural gas is marketed on a spot basis and under contracts for varying periods to local distribution companies, and commercial, industrial and other purchasers. The Corporation’s United States natural gas production is expected to approximate 30% of its 2008 sales commitments under long-term contracts. The Corporation attempts to minimize price and supply risks associated with its United States natural gas supply commitments by entering into purchase contracts with third parties having reliable sources of supply, on terms substantially similar to those under its commitments and by leasing storage facilities.

 

In international markets, the Corporation generally sells its natural gas production under long-term sales contracts with prices that are periodically adjusted due to changes in the commodity prices or other indices. In the United Kingdom, the Corporation sells the majority of its natural gas production on a spot basis.

 

Average selling prices and average production costs

 

 

 

Note A:  Includes inter-company transfers valued at approximate market prices and the effect of the Corporation’s hedging activities.

 

Note B:  Production (lifting) costs consist of amounts incurred to operate and maintain the Corporation’s producing oil and gas wells, related equipment and facilities (including lease costs of floating production and storage facilities), transportation costs and production and severance taxes. Production costs in 2005 exclude Gulf of Mexico hurricane related expenses. The average production costs per barrel of oil equivalent reflect the crude oil equivalent of natural gas production converted on the basis of relative energy content (six mcf equals one barrel).

 

The table above does not include costs of finding and developing proved oil and gas reserves, or the costs of related general and administrative expenses, interest expense and income taxes.

Gross and net undeveloped acreage at December 31, 2007

 

 

 

Note A:  Includes acreage held under production sharing contracts.

 

Note B:  Licenses covering approximately 32% of the Corporation’s net undeveloped acreage held at December 31, 2007 are scheduled to expire during the next three years pending the results of exploration activities. These scheduled expirations are largely in Libya (offshore exploration Area 54), Algeria and Peru.

 

Gross and net developed acreage and productive wells at December 31, 2007

 

 

 

Note A:  Includes multiple completion wells (wells producing from different formations in the same bore hole) totaling 200 gross wells and 39 net wells.

 

Number of net exploratory and development wells drilled

 

Number of wells in process of drilling at December 31, 2007

 

 

 

Number of net waterfloods and pressure maintenance projects in process of installation at December 31, 2007 — 1

 

 

 

Marketing and Refining

 

Total M&R product sales were as follows:

 

 

 

 

Refining

 

The Corporation owns a 50% interest in HOVENSA L.L.C. (HOVENSA), a refining joint venture in the United States Virgin Islands with a subsidiary of Petroleos de Venezuela S.A. (PDVSA). In addition, it owns and operates a refining facility in Port Reading, New Jersey.

 

HOVENSA:  Refining operations at HOVENSA consist of crude units, a fluid catalytic cracking unit and a delayed coker unit.

 

The following table summarizes capacity and utilization rates for HOVENSA:

 

 

 

The delayed coker unit permits HOVENSA to run lower-cost heavy crude oil. HOVENSA has a long-term supply contract with PDVSA to purchase 115,000 barrels per day of Venezuelan Merey heavy crude oil. PDVSA also supplies 155,000 barrels per day of Venezuelan Mesa medium gravity crude oil to HOVENSA under a long-term crude oil supply contract. The remaining crude oil requirements are purchased mainly under contracts of one year or less from third parties and through spot purchases on the open market. After sales of refined products by HOVENSA to third parties, the Corporation purchases 50% of HOVENSA’s remaining production at market prices.

Gross crude runs at HOVENSA averaged 454,000 barrels per day in 2007 compared with 448,000 barrels per day in 2006 and 461,000 barrels per day in 2005. During the second quarter of 2007, the coker unit at HOVENSA was shut down for approximately 30 days for a scheduled turnaround. The fluid catalytic cracking unit at HOVENSA was shut down for approximately 22 days of unscheduled maintenance in 2006.

 

Port Reading Facility:  The Corporation owns and operates a fluid catalytic cracking facility in Port Reading, New Jersey, with a capacity of 65,000 barrels per day. This facility, which processes residual fuel oil and vacuum gas oil, operated at a rate of approximately 61,000 barrels per day in 2007 compared with 63,000 barrels per day in 2006 and 55,000 barrels per day in 2005. Substantially all of Port Reading’s production is gasoline and heating oil.

 

Marketing

 

The Corporation markets refined petroleum products on the East Coast of the United States to the motoring public, wholesale distributors, industrial and commercial users, other petroleum companies, governmental agencies and public utilities. It also markets natural gas and electricity to utilities and other industrial and commercial customers.

 

The Corporation has 1,371 HESS^® gasoline stations at December 31, 2007, including stations owned by the WilcoHess joint venture (Hess 44%). Approximately 90% of the gasoline stations are operated by the Company or WilcoHess. Of the operated stations, 93% have convenience stores on the sites. Most of the Corporation’s gasoline stations are in New York, New Jersey, Pennsylvania, Florida, Massachusetts, North Carolina and South Carolina.

 

Refined product sales averaged 451,000 barrels per day in 2007 compared with 459,000 barrels per day in 2006 and 456,000 barrels in 2005. Total energy marketing natural gas sales volumes, including utility and spot sales, were approximately 1.9 million mcf per day in 2007, 1.8 million mcf per day in 2006 and 1.7 million mcf per day in 2005. In addition, energy marketing sold electricity volumes at the rate of 2,800, 1,400 and 500 megawatts (round the clock) in 2007, 2006 and 2005, respectively.

 

The Corporation owns 22 terminals with an aggregate storage capacity of 22 million barrels in its East Coast marketing areas. The Corporation also owns a terminal in St. Lucia with a storage capacity of 10 million barrels, which is used for third party storage.

 

The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and derivatives. The Corporation also takes energy commodity and derivative trading positions for its own account.

 

The Corporation also has a 92.5% interest in Hess LNG, which is pursuing investments in liquefied natural gas (LNG) terminals and related supply, trading and marketing opportunities. The joint venture is pursuing the development of LNG terminal projects located in Fall River, Massachusetts and Shannon, Ireland. The Corporation also has invested in a venture to develop fuel cells for electricity generation.

 

Competition and Market Conditions

 

See Item 1A, Risk Factors Related to Our Business and Operations, for a discussion of competition and market conditions.

 

Other Items

 

Compliance with various existing environmental and pollution control regulations imposed by federal, state, local and foreign governments is not expected to have a material adverse effect on the Corporation’s earnings and competitive position within the industry. The Corporation spent $23 million in 2007 for environmental remediation.

 

The number of persons employed by the Corporation at year end was approximately 13,300 in 2007 and 13,700 in 2006.

 

The Corporation’s Internet address is www.hess.com. On its website, the Corporation makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Corporation electronically files with or furnishes such material to the Securities and Exchange Commission. Copies of the Corporation’s Code of Business Conduct and Ethics, its Corporate

Governance Guidelines and the charters of the Audit Committee, the Compensation and Management Development Committee and the Corporate Governance and Nominating Committee of the Board of Directors are available on the Corporation’s website and are also available free of charge upon request to the Secretary of the Corporation at its principal executive offices. The Corporation has also filed with the New York Stock Exchange (NYSE) its annual certification that the Corporation’s chief executive officer is unaware of any violation of the NYSE’s corporate governance standards.

 

 

Our business activities and the value of our securities are subject to significant risk factors, including those described below. The risk factors described below could negatively affect our operations, financial condition, liquidity and results of operations, and as a result, holders and purchasers of our securities could lose part or all of their investments. It is possible additional risks relating to our securities may be described in a prospectus supplement if we issue securities in the future.

 

Commodity Price Risk:  Our estimated proved reserves, revenue, operating cash flows, operating margins, future earnings and trading operations are highly dependent on the prices of crude oil, natural gas and refined petroleum products, which are influenced by numerous factors beyond our control. Historically these prices have been very volatile. The major foreign oil producing countries, including members of the Organization of Petroleum Exporting Countries (OPEC), exert considerable influence over the supply and price of crude oil and refined petroleum products. Their ability or inability to agree on a common policy on rates of production and other matters has a significant impact on the oil markets. The commodities trading markets may also influence the selling prices of crude oil, natural gas and refined petroleum products. A significant downward trend in commodity prices would have a material adverse effect on our revenues, profitability and cash flow and could result in a reduction in the carrying value of our oil and gas assets, goodwill and proved oil and gas reserves. To the extent that we engage in hedging activities to mitigate commodity price volatility, we will not realize the benefit of price increases above the hedged price.

 

Technical Risk:  We own or have access to a finite amount of oil and gas reserves which will be depleted over time. Replacement of oil and gas reserves is subject to successful exploration drilling, development activities, and enhanced recovery programs. Therefore, future oil and gas production is dependent on technical success in finding and developing additional hydrocarbon reserves. Exploration activity involves the interpretation of seismic and other geological and geophysical data, which does not always successfully predict the presence of commercial quantities of hydrocarbons. Drilling risks include adverse unexpected conditions, irregularities in pressure or formations, equipment failure, blowouts and weather interruptions. Future developments may be affected by unforeseen reservoir conditions which negatively affect recovery factors or flow rates. The costs of drilling and development activities have also been increasing, which could negatively affect expected economic returns. Although due diligence is used in evaluating acquired oil and gas properties, similar uncertainties may be encountered in the production of oil and gas on properties acquired from others.

 

Oil and Gas Reserves and Discounted Future Net Cash Flow Risks:  Numerous uncertainties exist in estimating quantities of proved reserves and future net revenues from those reserves. Actual future production, oil and gas prices, revenues, taxes, capital expenditures, operating expenses, geologic success and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates and could materially affect the estimated quantities and future net revenues of our proved reserves. In addition, reserve estimates may be subject to downward or upward revisions based on production performance, purchases or sales of properties, results of future development, prevailing oil and gas prices, production sharing contracts which may decrease reserves as crude oil and natural gas prices increase, and other factors.

 

Political Risk:  Federal, state, local, territorial and foreign laws and regulations relating to tax increases and retroactive tax claims, expropriation of property, mandatory government participation, cancellation or amendment of contract rights, and changes in import regulations, as well as other political developments may affect our operations. Some of the international areas in which we operate may be politically less stable than our domestic operations. In addition, the increasing threat of terrorism around the world poses additional risks to the operations of the oil and gas industry. In our M&R segment, we market motor fuels through lessee-dealers and wholesalers in

certain states where legislation prohibits producers or refiners of crude oil from directly engaging in retail marketing of motor fuels. Similar legislation has been periodically proposed in the U.S. Congress and in various other states.

 

Environmental Risk:  Our oil and gas operations, like those of the industry, are subject to environmental hazards such as oil spills, produced water spills, gas leaks and ruptures and discharges of substances or gases that could expose us to substantial liability for pollution or other environmental damage. Our operations are also subject to numerous United States federal, state, local and foreign environmental laws and regulations. Non-compliance with these laws and regulations may subject us to administrative, civil or criminal penalties, remedial clean-ups and natural resource damages or other liabilities. In addition, increasingly stringent environmental regulations, particularly relating to the production of motor and other fuels and the potential for controls on greenhouse gas emissions, have resulted, and will likely continue to result, in higher capital expenditures and operating expenses for us and the oil and gas industry in general.

 

Competitive Risk:  The petroleum industry is highly competitive and very capital intensive. We encounter competition from numerous companies in each of our activities, including acquiring rights to explore for crude oil and natural gas, and in purchasing and marketing of refined products and natural gas. Many competitors, including national oil companies, are larger and have substantially greater resources. We are also in competition with producers and marketers of other forms of energy. Increased competition for worldwide oil and gas assets has significantly increased the cost of acquisitions. In addition, competition for drilling services, technical expertise and equipment has affected the availability of technical personnel and drilling rigs and has increased capital and operating costs.

 

Catastrophic Risk:  Although we maintain a level of insurance coverage consistent with industry practices against property and casualty losses, our oil and gas operations are subject to unforeseen occurrences which may damage or destroy assets or interrupt operations. Examples of catastrophic risks include hurricanes, fires, explosions and blowouts. These occurrences have affected us from time to time. During 2005, our annual Gulf of Mexico production of crude oil and natural gas was reduced by 7,000 barrels of oil equivalent per day (boepd) due to the impact of Hurricanes Katrina and Rita.

 

 

The Registrant, along with many other companies engaged in refining and marketing of gasoline, has been a party to lawsuits and claims related to the use of methyl tertiary butyl ether (MTBE) in gasoline. A series of substantially identical lawsuits, many involving water utilities or governmental entities, were filed in jurisdictions across the United States against producers of MTBE and petroleum refiners who produce gasoline containing MTBE, including the Registrant. These cases have been consolidated in the Southern District of New York and, as of the end of 2007, the Registrant is named as a defendant in 51 of approximately 80 cases pending. The principal allegation in all cases is that gasoline containing MTBE is a defective product and that these parties are strictly liable in proportion to their share of the gasoline market for damage to groundwater resources and are required to take remedial action to ameliorate the alleged effects on the environment of releases of MTBE. The damages claimed in these actions are substantial and in some cases, punitive damages are also sought. In April 2005, the District Court denied the primary legal aspects of the defendants’ motion to dismiss these actions. As a result of Court-ordered mediation, the Registrant anticipates that settlement will be reached in a number of the pending cases, the number and terms of which are currently being negotiated and are subject to a confidentiality agreement. In the fourth quarter 2007, the Registrant recorded a pre-tax charge of $40 million related to MTBE litigation.

 

Over the last several years, many refiners have entered into consent agreements to resolve the United States Environmental Protection Agency’s (EPA) assertions that refining facilities were modified or expanded without complying with New Source Review regulations that require permits and new emission controls in certain circumstances and other regulations that impose emissions control requirements. These consent agreements, which arise out of an EPA enforcement initiative focusing on petroleum refiners and utilities, have typically imposed substantial civil fines and penalties and required (i) significant capital expenditures to install emissions control equipment over a three to eight year time period and (ii) changes to operations which resulted in increased operating costs. The capital expenditures, penalties and supplemental environmental projects for individual

refineries covered by the settlements can vary significantly, depending on the size and configuration of the refinery, the circumstances of the alleged modifications and whether the refinery has previously installed more advanced pollution controls. EPA initially contacted Registrant and HOVENSA L.L.C. (HOVENSA), its 50% owned joint venture with Petroleos de Venezuela, which owns and operates a refinery in the U.S. Virgin Islands, regarding the Petroleum Refinery Initiative in August 2003 and discussions resumed in August 2005. The Registrant and HOVENSA have had and expect to have further discussions with the EPA regarding the Petroleum Refining Initiative, although both the Registrant and HOVENSA have already installed many of the pollution controls required of other refiners under the consent agreements. While the effect on the Corporation of the Petroleum Refining Initiative cannot be estimated at this time, additional future capital expenditures and operating expenses may be incurred. The amount of penalties, if any, is not expected to be material to the Corporation. Negotiations with EPA are continuing and substantial progress has been made toward resolving this matter.

 

On September 13, 2007, HOVENSA received a Notice Of Violation (NOV) pursuant to section 113(a)(i) of the Clean Air Act (Act) from the United States Environmental Protection Agency (EPA) finding that HOVENSA failed to obtain proper permitting for the construction and operation of its delayed coking unit in accordance with applicable law and regulations. HOVENSA believes it properly obtained all necessary permits for this project. The NOV states that EPA has authority to issue an administrative order assessing penalties for violation of the Act. However, HOVENSA intends to enter into discussions with the EPA to reach resolution of this matter. Registrant does not believe that this matter will result in material liability to HOVENSA or Registrant.

 

In December 2006, HOVENSA received a NOV from the EPA alleging non-compliance with emissions limits in a permit issued by the Virgin Islands Department of Planning and Natural Resources (DPNR) for the two process heaters in the delayed coking unit. The NOV was issued in response to a voluntary investigation and submission by HOVENSA regarding potential non-compliance with the permit emissions limits for two pollutants. Any exceedances were minor from the perspective of the amount of pollutants emitted in excess of the limits. HOVENSA intends to work with the appropriate governmental agency to reach resolution of this matter and does not believe that it will result in material liability.

 

Registrant is one of over 60 companies that have received a directive from the New Jersey Department of Environmental Protection (NJDEP) to remediate contamination in the sediments of the lower Passaic River and NJDEP is also seeking natural resource damages. The directive, insofar as it affects Registrant, relates to alleged releases from a petroleum bulk storage terminal in Newark, New Jersey now owned by the Registrant. Registrant and over 40 companies entered into an Administrative Order on Consent with EPA to study the same contamination. In June 2007, EPA issued a draft study which evaluated six alternatives for early action, with costs ranging from $900 million to $2.3 billion. Based on adverse comments from Registrant and others, EPA is reevaluating its alternatives. In addition, the federal trustees for natural resources have begun a separate assessment of damages to natural resources in the Passaic River. Given the ongoing studies, remedial costs cannot be reliably estimated at this time. Based on currently known facts and circumstances, the Registrant does not believe that this matter will result in material liability because its terminal could not have contributed contamination along most of the river’s length and did not store or use contaminants which are of the greatest concern in the river sediments, and because there are numerous other parties who will likely share in the cost of remediation and damages.

 

In July 2004, Hess Oil Virgin Islands Corp. (HOVIC), a wholly owned subsidiary of the Registrant, and HOVENSA, each received a letter from the Commissioner of the Virgin Islands Department of Planning and Natural Resources and Natural Resources Trustees, advising of the Trustee’s intention to bring suit against HOVIC and HOVENSA under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The letter alleges that HOVIC and HOVENSA are potentially responsible for damages to natural resources arising from releases of hazardous substances from the “HOVENSA Oil Refinery.” HOVENSA currently owns and operates a petroleum refinery on the south shore of St. Croix, United States Virgin Islands, which had been operated by HOVIC until October 1998. An action was filed on May 5, 2005 in the District Court of the Virgin Islands against HOVENSA, HOVIC and other companies that operated industrial facilities on the south shore of St. Croix asserting that the defendants are liable under CERCLA and territorial statutory and common law for damages to natural resources. HOVIC and HOVENSA do not believe that this matter will result in a material liability as they believe that they have strong defenses to this complaint, and they intend to vigorously defend this matter.

Registrant has been served with a complaint from the New York State Department of Environmental Conservation (DEC) relating to alleged violations at its petroleum terminal in Brooklyn, New York. The complaint, which seeks an order to shut down the terminal and penalties in unspecified amounts, alleges violations involving the structural integrity of certain tanks, the erosion of shorelines and bulkheads, petroleum discharges and improper certification of tank repairs. DEC is also seeking relief relating to remediation of certain gasoline stations in the New York metropolitan area. Registrant and DEC have reached a settlement in principle, which is expected to be finalized in early 2008. Any settlement is not expected to be material to the Corporation.

 

The Registrant periodically receives notices from EPA that it is a “potential responsible party” under the Superfund legislation with respect to various waste disposal sites. Under this legislation, all potentially responsible parties are jointly and severally liable. For certain sites, EPA’s claims or assertions of liability against the Corporation relating to these sites have not been fully developed. With respect to the remaining sites, EPA’s claims have been settled, or a proposed settlement is under consideration, in all cases for amounts that are not material. The ultimate impact of these proceedings, and of any related proceedings by private parties, on the business or accounts of the Corporation cannot be predicted at this time due to the large number of other potentially responsible parties and the speculative nature of clean-up cost estimates, but is not expected to be material.

 

The Securities and Exchange Commission (SEC) has notified the Registrant that on July 21, 2005, it commenced a private investigation into payments made to the government of Equatorial Guinea or to officials and persons affiliated with officials of the government of Equatorial Guinea. The staff of the SEC has requested documents and information from the Registrant and other oil and gas companies that have operations or interests in Equatorial Guinea. The staff of the SEC had previously been conducting an informal inquiry into such matters. The Registrant has been cooperating and continues to cooperate with the SEC investigation.

 

The Corporation is from time to time involved in other judicial and administrative proceedings, including proceedings relating to other environmental matters. Although the ultimate outcome of these proceedings cannot be ascertained at this time and some of them may be resolved adversely to the Corporation, no such proceeding is required to be disclosed under applicable rules of the Securities and Exchange Commission. In management’s opinion, based upon currently known facts and circumstances, such proceedings in the aggregate will not have a material adverse effect on the financial condition of the Corporation.

 

During the fourth quarter of 2007, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

 

The following table presents information as of February 1, 2008 regarding executive officers of the Registrant:

 

 

 

 

Except for Messrs. Bohling, Drennen, Sandison, Scelfo and Shearer, each of the above officers has been employed by the Registrant or its subsidiaries in various managerial and executive capacities for more than five years. Mr. Bohling was employed in senior human resource positions with American Standard Corporation and CDI Corporation before joining the Registrant in 2004. Mr. Drennen served in senior executive positions in exploration and technology at ExxonMobil and its subsidiaries prior to joining the company in 2007. Mr. Scelfo was chief financial officer of Sirius Satellite Radio and a division of Dell Computer before his employment by the Registrant in 2003. Mr. Sandison served in senior executive positions in the area of global drilling with Texaco, Inc. before he was employed by the Registrant in 2003. Prior to joining Hess LNG, a joint venture subsidiary of the company, in 2004, Mr. Shearer was a consultant at Poten Partners, and held other senior positions in the liquefied natural gas industry.

 

 

Stock Market Information

 

The common stock of Hess Corporation is traded principally on the New York Stock Exchange (ticker symbol: HES). High and low sales prices were as follows:

 

 

Performance Graph

 

Set forth below is a line graph comparing the cumulative total shareholder return, assuming reinvestment of dividends, on the Corporation’s common stock with the cumulative total return, assuming reinvestment of dividends, of:

 

 

As of each December 31, over a five-year period commencing on December 31, 2002 and ending on December 31, 2007:

Comparison of Five-Year Shareholder Returns
Years Ended December 31,

 

 

Holders

 

At December 31, 2007, there were 5,673 stockholders (based on number of holders of record) who owned a total of 320,599,585 shares of common stock.

Dividends

 

Cash dividends on common stock totaled $.40 per share ($.10 per quarter) during 2007 and 2006 on a split adjusted basis.

 

Equity Compensation Plans

 

Following is information on the Registrant’s equity compensation plans at December 31, 2007:

 

 

 

 

See Note 8, “Share-Based Compensation,” in the notes to the financial statements for further discussion of the Corporation’s equity compensation plans.

 

A five-year summary of selected financial data follows*:

 

 

 

 

Overview

 

The Corporation is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity.

 

Net income in 2007 was $1,832 million compared with $1,920 million in 2006 and $1,226 million in 2005. Diluted earnings per share were $5.74 in 2007 compared with $6.08 in 2006 and $3.93 in 2005. A table of items affecting comparability between periods is shown on page 21.

 

Exploration and Production

 

The Corporation’s strategy for the E&P segment is to profitably grow reserves and production in a sustainable and financially disciplined manner. The Corporation’s total proved reserves were 1,330 million barrels of oil equivalent (boe) at December 31, 2007 compared with 1,243 million boe at December 31, 2006 and 1,093 million boe at December 31, 2005. Total proved reserves at year end 2007 increased 87 million boe or 7% from the end of 2006.

 

E&P net income was $1,842 million in 2007, $1,763 million in 2006 and $1,058 million in 2005. The improved results in 2007 as compared to 2006 were primarily driven by higher average crude oil selling prices and increased crude oil and natural gas production. See further discussion in Comparison of Results on page 21.

 

Production averaged 377,000 barrels of oil equivalent per day (boepd) in 2007 compared with 359,000 boepd in 2006 and 335,000 boepd in 2005. Production in 2007 increased 18,000 boepd or 5% from 2006 reflecting the following developments:

 

 

In 2008, the Corporation expects total worldwide production of approximately 380,000 boepd to 390,000 boepd.

 

During the year, the Corporation progressed development projects that will add to its production in future years:

 

 

 

During 2007, the Corporation’s exploration activities included:

 

 

During 2007, the Corporation completed the following acquisition and divestiture transactions:

 

 

Marketing and Refining

 

The Corporation’s strategy for the M&R segment is to deliver consistent operating performance and generate free cash flow. M&R net income was $300 million in 2007, $394 million in 2006 and $499 million in 2005. Profitability in 2007 and 2006 was adversely affected by lower average margins.

 

Refining operations contributed net income of $193 million in 2007, $240 million in 2006 and $330 million in 2005. The Corporation received cash distributions from HOVENSA, a 50% owned refining joint venture with a subsidiary of Petroleos de Venezuela S.A. (PDVSA), totaling $300 million in 2007, $400 million in 2006 and $275 million in 2005. Gross crude runs at HOVENSA averaged 454,000 barrels per day in 2007 compared with 448,000 barrels per day in 2006 and 461,000 barrels per day in 2005. In 2007, HOVENSA successfully completed the first turnaround of its delayed coking unit. The Port Reading refinery operated at an average of 61,000 barrels per day in 2007 versus 63,000 barrels per day in 2006 and 55,000 barrels per day in 2005. Marketing earnings were $83 million in 2007, $108 million in 2006 and $136 million in 2005. Total refined product sales volumes averaged 451,000 barrels per day in 2007 compared with 459,000 barrels per day in 2006 and 456,000 barrels per day in 2005.

 

Liquidity and Capital and Exploratory Expenditures

 

Net cash provided by operating activities was $3,507 million in 2007, $3,491 million in 2006 and $1,840 million in 2005, principally reflecting increasing earnings. At December 31, 2007, cash and cash equivalents totaled $607 million compared with $383 million at December 31, 2006. Total debt was

$3,980 million at December 31, 2007 compared with $3,772 million at December 31, 2006. The Corporation’s debt to capitalization ratio at December 31, 2007 was 28.9% compared with 31.6% at the end of 2006. The Corporation has debt maturities of $62 million in 2008 and $143 million in 2009.

 

Capital and exploratory expenditures were as follows for the years ended December 31:

 

 

The Corporation anticipates $4.4 billion in capital and exploratory expenditures in 2008, of which $4.3 billion relates to E&P operations.

 

Consolidated Results of Operations

 

The after-tax results by major operating activity are summarized below:

 

 

In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.

The following items of income (expense), on an after-tax basis, are included in net income:

 

 

 

The items in the table above are explained, and the pre-tax amounts are shown, on pages 24 through 27.

 

Comparison of Results

 

Exploration and Production

 

Following is a summarized income statement of the Corporation’s Exploration and Production operations:

 

 

 

 

 

After considering the Exploration and Production items in the table on page 21, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, production volumes, operating costs, exploration expenses and income taxes, as discussed below.

 

Selling prices:  Higher average selling prices, primarily crude oil, increased Exploration and Production revenues by approximately $740 million in 2007 compared with 2006. In 2006, the increase in average crude oil selling prices and reduced hedge positions increased revenues by approximately $1,900 million compared with 2005.

 

The Corporation’s average selling prices were as follows:

 

 

 

The after-tax impacts of hedging reduced earnings by $244 million ($399 million before income taxes) in 2007, $285 million ($449 million before income taxes) in 2006 and $989 million ($1,582 million before income taxes) in 2005.

 

Production and sales volumes:  The Corporation’s crude oil and natural gas production was 377,000 boepd in 2007 compared with 359,000 boepd in 2006 and 335,000 boepd in 2005. The Corporation anticipates that its 2008 production will average between 380,000 and 390,000 boepd.

The Corporation’s net daily worldwide production was as follows:

 

 

 

 

United States:  Crude oil and natural gas production was lower in 2007 compared with 2006 and 2005, principally due to natural decline and asset sales.

 

Europe:  Crude oil production in 2007 was lower than in 2006, reflecting natural decline, facilities work on three North Sea fields, and the sale of the Corporation’s interests in the Scott and Telford fields in the United Kingdom. These decreases were partially offset by increased production in Russia. Decreased natural gas production in 2007 compared with 2006 was principally due to lower nominations related to the shut-down of a non-operated pipeline in the North Sea and natural decline, partially offset by higher production from the Atlantic and Cromarty natural gas fields in the United Kingdom which commenced in June 2006. Production in Europe was comparable in 2006 and 2005, reflecting increased production from Russia and new production from the Atlantic and Cromarty fields, which offset lower production due to maintenance and natural decline.

 

Africa:  Crude oil production increased in 2007 compared with 2006 primarily due to the start-up of the Okume Complex in Equatorial Guinea in December 2006. Production in 2006 was higher than 2005 levels, principally due to production from Libya, which the Corporation re-entered in January 2006.

 

Asia and other:  Crude oil production increased in 2007 versus 2006, reflecting a combination of an increased entitlement and higher production in Azerbaijan. Higher natural gas production in 2007 compared with 2006 was principally due to new production from the Sinphuhorm onshore gas project in Thailand which commenced in November 2006 and new production from the Ujung Pangkah Field in Indonesia which commenced in April 2007. These increases were partially offset by the planned shut-down of the JDA to install facilities required for Phase 2 gas sales. Natural gas production was higher in 2006 compared with 2005 due to increased production from the JDA.

 

Sales volumes:  Higher sales volumes increased revenue by approximately $240 million in 2007 compared with 2006 and $400 million in 2006 compared with 2005.

 

Operating costs and depreciation, depletion and amortization:  Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $409 million in 2007 and $322 million in 2006 compared with the corresponding amounts in prior years (excluding the charges for

vacated leased office space and hurricane related costs in 2006). The increases in 2007 and 2006 were primarily due to higher production volumes, increased costs of services and materials, higher employee costs and increased production taxes. Cash operating costs per barrel of oil equivalent were $13.36 in 2007, $10.92 in 2006 and $9.07 in 2005. Cash operating costs in 2008 are estimated to be in the range of $14.00 to $15.00 per barrel of oil equivalent.

 

Excluding the pre-tax amount of the 2007 asset impairments, depreciation, depletion and amortization charges increased by $232 million and $194 million in 2007 and 2006, respectively. The increases were primarily due to higher production volumes and per barrel costs. Depreciation, depletion and amortization costs per barrel of oil equivalent were $10.11 in 2007, $8.85 in 2006 and $7.88 in 2005. Depreciation, depletion and amortization costs for 2008 are expected to be in the range of $12.50 to $13.50 per barrel.

 

Exploration expenses:  Exploration expenses were lower in 2007 compared with 2006, primarily reflecting lower dry hole costs, partially offset by increased costs related to seismic studies. Exploration expenses were higher in 2006 compared with 2005, principally reflecting higher dry hole costs.

 

Income taxes:  The effective income tax rate for Exploration and Production operations was 50% in 2007, 53% in 2006 and 41% in 2005. After considering the items in the table below, the effective income tax rates were 50% in 2007, 54% in 2006 and 42% in 2005. The effective income tax rate increased beginning in 2006 due to the Corporation’s re-entry into Libya and the increase in the supplementary tax on petroleum operations in the United Kingdom from 10% to 20%. The effective income tax rate for E&P operations in 2008 is expected to be in the range of 47% to 51%.

 

Other:  The after-tax foreign currency loss was $7 million in 2007, compared with a gain of $10 million in 2006 and $20 million in 2005.

 

Reported Exploration and Production earnings include the following items of income (expense) before and after income taxes: