As previously disclosed, the company has been conducting additional drilling and field performance analysis of the Leadon field. The field has been producing lower volumes than initially anticipated because of early water breakthrough and reservoir compartmentalization. To maximize cash flow from the Leadon field, the company is considering various alternatives, including continued production using existing infrastructure, a subsea tieback to another host structure, such as the Kerr-McGee-operated Gryphon facility, or sale of the asset. The subsea tieback option would allow for redeployment or sale of the Kerr-McGee Global Producer III, a floating production, storage and offloading vessel launched at Leadon in 2001. The after-tax noncash impairment for Leadon will be approximately $335 million. Leadon has produced approximately 8 million barrels of oil equivalent (BOE) through 2002, and remaining reserves are estimated at about 30 million BOE.
In addition, the company will take an after-tax noncash charge of approximately $50 million for impairments of several older Gulf of Mexico shelf properties and two other U.K. North Sea fields, Buckland and South Gryphon, based on analysis in the fourth quarter of recent production performance, resulting in a decrease in ultimate reserve recovery estimates.
Kerr-McGee estimates that it will close the year with proved reserves of about 1 billion BOE. The company has produced about 115 million BOE in 2002. Divestiture of noncore properties has reduced reserves by approximately 315 million BOE. Negative revisions during the year were approximately 120 million BOE, primarily related to Leadon and other U.K. North Sea and Gulf of Mexico shelf properties. The reductions are expected to be offset partially by reserve additions of about 70 million BOE. Kerr-McGee has a very active fourth-quarter exploration program, and any future discoveries from drilling are expected to be included in the 2003 reserve additions.
"Our strategy remains to grow through an active exploration program, primarily in selected deepwater basins worldwide," said Luke R. Corbett, Kerr-McGee chairman and chief executive officer. "Positive results of this strategy can be seen through the developments at Nansen, Boomvang, Gunnison and Red Hawk in the deepwater gulf. While Leadon clearly has been a disappointment, our goal is to maximize cash flow from this asset. We are supporting our exploration program with strong cash flows from our current production base, and we believe our strategic plan will deliver value for shareholders.
"We also have taken advantage of strong 2002 commodity prices to sell properties that are no longer core to the company due to their high cost and limited growth potential," Corbett continued. "Divestitures now total more than $750 million, and we have used approximately $650 million toward debt reduction. We expect to have reduced debt from $4.6 billion at year-end 2001 to approximately $3.9 billion at year-end 2002."
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