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July 25, 2008
VIA EDGAR/VIA FEDERAL EXPRESS
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 7010
Washington, D.C. 20549
Attn: H. Roger Schwall, Assistant Director
Re: Hess Corporation
Form 10-K for Fiscal Year Ended December 31, 2007
Filed February 27, 2008
Definitive Proxy Statement on Schedule 14A
Filed on March 27, 2008
Response to Comment Letter Dated July 2, 2008
Commission File No. 1-01204
Dear Ladies and Gentlemen:
Enclosed are the responses of Hess Corporation (the "Company") to the
comments of the staff of the Securities and Exchange Commission (the
"Commission") as transmitted to me by letter dated July 2, 2008 in connection
with the Form 10-K for Fiscal Year Ended December 31, 2007 filed by the Company
with the Commission on February 27, 2008 (the "Annual Report") and the
Definitive Proxy Statement on Schedule 14A filed by the Company with the
Commission on March 27, 2008 (the "Proxy Statement", and together with the
Annual Report, the "Filings"). By letter dated July 15, 2008, the Company
confirmed that Mr. Sean Donahue of the staff had agreed to extend the time for
the Company to respond until July 25, 2008. For convenience, the staff's
comments are reprinted below in bold, with the corresponding response set
immediately below the applicable comment.
Enclosed herewith in CD-ROM format is a submission containing revised
schedules relating to the Standardized Measure of Discounted Future Net Cash
Flows relating to Proved Oil and Gas Reserves in the Annual Report. In response
to certain comments of the staff in its letter of July 2, 2008, we have included
in this submission certain clarifications and footnote revisions discussed in
greater detail herein to the schedules submitted by the Company with its letter
to the staff dated June 10, 2008. As previously noted, we do not
in the regular course of business prepare these schedules in the format
requested by the staff.
Request of Confidentiality
Pursuant to Rule 83 of the Commission's Freedom of Information Act
Rules, 17 C.F.R. Sec. 200.83, the Company hereby requests confidential treatment
for all of the information contained in the enclosed submission. Accordingly,
each page of this submission is stamped "Confidential Information Requested by
Hess Corporation".
This application for confidential treatment is based upon 5 U.S.C. ss.
552(b)(4) and (b)(9), which provides exemptions from the public availability
requirements of the Freedom of Information Act for trade secrets and commercial
or financial information which is privileged or confidential and geological and
geophysical information and data concerning wells.
This submission contains information relating to estimated oil and gas
production, revenues, costs and cash flows by year, which has not been publicly
disclosed by the Company. We respectfully submit that the information contained
in this submission falls within the exemptions noted above and believe that if
such information were publicly disclosed it could cause substantial economic
injury and competitive harm to the Company.
We respectively request confidential treatment of the enclosed submission for a
three-year period ending July 25, 2011.
Proxy Statement filed March 27, 2008
Compensation Discussion and Analysis, page 10
1. We note your response to prior comment 1. In future filings,
please disclose how difficult the undisclosed target is to
achieve. See Instruction 4 to Item 402(b)(1) of Regulation S-K.
We note the staff's comment. In future filings, we will disclose
how difficult it is to achieve the target corporate performance
goal for the annual cash bonus.
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2. We note your response to prior comment 2. While you indicate that
you do not believe the disclosure of the approximately 30 targets
for business metrics is material to an understanding of the
compensation awarded, you disclose that collectively, attainment
of these business metrics targets constitutes 1/3rd of the cash
bonus consideration. We refer you also to page 14 in which you
identify the relatively more material or "key" business metrics
considered for each officer. It would appear that disclosure of
the targets associated with such key metrics would be material to
a shareholder's understanding of compensation awarded.
Accordingly, please disclose the targets associated with the key
metrics referenced on page 14 and any other material metric that
may have been considered for a named executive officer. If you
disagree, please provide the supplemental analysis we requested
in prior comment 2. We may have further comment.
As explained on page 13 of the Proxy Statement and in our
response to the staff dated April 4, 2008, business unit metrics
vary not only between the exploration and production and
marketing and refining divisions but also among units within each
division. As noted on page 14 of the Proxy Statement, exploration
and production goals included approximately 10 operating and
financial metrics, and those for marketing and refining included
approximately 20 such metrics.
The payout of the business unit component for Mr. O'Connor was
determined as a weighted average of the performance of business
goals across operating groups within the exploration and
production division, and similarly Mr. Walker's payout was
determined as a weighted average of the business goals across
operating groups within the marketing and refining division. The
business unit component of the annual cash bonuses for Messrs.
Hess, Collins and Rielly was a composite of the performance of
business goals across both divisions.
We do not believe that any one of the business unit performance
metrics for 2007 was material to the determination of the cash
bonus of any of the named executive officers for 2007, much less
to their total direct compensation (of which the cash bonus
constituted from 14% to 25%). On page 14 of the proxy statement,
we listed certain metrics that positively or negatively affected
the business unit payout in an effort to give the reader an
understanding of some of the factors that caused the business
unit payout to be above or below target. However, no single
metric was material to the overall cash bonus of any of the named
executive officers. For example, while two of three operating
groups within exploration and production achieved maximum
performance of metrics relating to reserve additions, the
weighting of these metrics in
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total constituted only 4% of Mr. O'Connor's 2007 cash bonus.
Similarly, maximum performance of the metric relating to
portfolio additions was achieved, but its weighting constituted
only 2% of Mr. O'Connor's bonus. Performance of metrics relating
to workplace safety was 120% of target across operating groups
within exploration and production, but their weighting in total
constituted only 1.4% of Mr. O'Connor's 2007 cash bonus.
As for Mr. Walker, above-target performance of the metric
relating to energy marketing growth was achieved, but the
weighting of this metric constituted only 4.5% of Mr. Walker's
2007 cash bonus. Maximum performance of the energy marketing net
income metric was also achieved, but its weighting constituted
only 4.5% of Mr. Walker's 2007 cash bonus. On the other hand, as
explained in the Proxy Statement, performance of certain other
business unit net income metrics were significantly below target
due to lower margins prevailing in both the retail marketing and
refining industry environments. However, even the most
significant net income metric, retail marketing net income, had a
weighting of only 5.1% of Mr. Walker's 2007 cash bonus.
As for Messrs. Hess, Collins and Rielly, because the business
unit component of their 2007 cash bonuses is a composite of the
performance metrics from both divisions, the contribution of any
individual metric is by definition even less significant. For
these reasons and those stated in our letter of April 4, 2008, we
do not believe that disclosure of the quantitative target for any
individual business unit metric was material to an understanding
of the named executive officers' cash bonuses or total
compensation for 2007.
However, both the business unit metrics and the weighting of
those metrics may vary from year to year due to changes in
strategic priorities and other factors. We note the staff's
comment and agree that if any individual business unit metric is
material to an understanding of the annual cash bonus payout of a
named executive officer in the future, we will disclose the
quantitative target for that metric in future filings, unless
disclosure of the target would result in competitive harm to the
Company.
Form 10-K for the Fiscal Year Ended December 31, 2007
Engineering Comments
Reserve Report
3. According to the reserve report you have applied an end of
year 2007 oil price of approximately $92 per barrel to your
entire U.S. liquid reserves. However, in you 10-K report, you
indicate you produced 31,000 barrels of crude oil per day and
10,000 barrels of NGLs per day from the U.S. in 2008. Based on a
ratio of 75% crude oil and 25% NGL production, it would appear
that the average year end price in
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the reserve report for the U.S. may be too high. Please explain
the use of this oil price for all of your liquid U.S. reserves.
Please refer to the footnote at the bottom of the revised page
entitled "United States - Total Proved" in this submission for an
explanation of the United States natural gas liquids price used
in the Standardized Measure of Discounted Future Net Cash Flows.
4. You report that 25% of your U.S. liquid production is NGLs on
pages 2 and 3 of your 10-K. Therefore, it appears it is
appropriate to disclose the average price you receive for NGLs in
the table of Average Selling Prices and Average Production Costs
on page 6 of your 10-K. Please revise your document.
Prices for natural gas liquids are disclosed in Management's
Discussion and Analysis of Financial Condition and Results of
Operations on page 22 of the Annual Report. We will include
prices for natural gas liquids in the Business and Properties
section of Form 10-K in future filings.
5. Please explain to us why you ran the U.S. reserves case with a
natural gas price of only $1 per Mcf.
Please refer to the footnotes at the bottom of the pages entitled
"United States - Total Proved" in the June 10th submission and
this submission for an explanation of the United States natural
gas price used in the Standardized Measure of Discounted Future
Net Cash Flows.
6. We note that in all the foreign geographic regions there is a
material increase in the price of oil over time. Please provide a
reason for this, why you believe this is in agreement with the
SEC definition of proved reserves and how these future prices
were determined. In addition, please provide us with the
estimated increase in SMOG per geographic area and the increase
in proved reserves per geographic area as a result of using oil
prices above the current price of oil as of December 31, 2008.
The end of year (December 31, 2007) oil price was used in the
Company's disclosure of Standardized Measure of Discounted Future
Net Cash Flows. The year-end price was not increased or decreased
over time. The tables containing the Standardized Measure of
Discounted Future Net Cash Flows in the June 10th submission and
this submission are presented by geographic region. Consequently,
even though the end of year oil price was used throughout the
standardized measure calculations, the timing and mix of
production from the various assets within each region create
situations in which the average price realized for the overall
geographic
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region can increase or decrease during certain time periods. An
explanation of each affected geographic region is provided below.
The Europe region includes production from Russia, where the
majority of Russian crude is sold into the domestic market at a
significant discount to prices obtained in the global oil
markets. In addition, export duties are charged on exported sales
volumes which reduce the realized price of exported sales
volumes. In the earlier years of the standardized measure
calculation, the proportion of Russian production to total
European production is greater, and then declines in later years.
This decrease in the contribution of Russian production increases
the overall average realized price for the European region over
time.
In the Asia and Other region, a similar situation occurs. A
portion of oil produced in Indonesia must be sold into the
domestic market at a significant discount to global oil markets.
As the proportion of Indonesian oil produced decreases within the
Asia and Other region, the overall average price realized for the
region increases.
In the Africa region, the treatment of Libyan royalty volumes
creates a similar fluctuation in the overall average realized
price for the region over time. See the footnotes at the bottom
of the pages entitled "Africa - Total Proved" in the June 10th
submission and this submission for an explanation of the
treatment of Libyan royalty volumes in the Standardized Measure
of Discounted Future Net Cash Flows.
7. For large capital intensive undeveloped projects, such as in the
deepwater, which may contain both technically proved and unproved
reserves, but where the proved reserves are not economic on a
stand-alone basis to cover the entire capital investment needed
to develop them, tell us if you book those reserves as proved
undeveloped prior to the development of the reserves.
The Company does not record proved undeveloped reserves for any
project where the proved reserves are not economic on a
stand-alone basis to cover the entire capital investment needed
to develop them. In the evaluations performed by the Company's
independent petroleum engineer, DeGolyer and MacNaughton, all
proved undeveloped reserves must have a development scenario that
generates a positive cash flow using year-end prices, current
costs (including abandonment costs), and estimated operating
expenses.
8. You are forecasting that you will increase net gas production
from Africa in 2008 by almost five times over previous rates.
Please tell us the market that you will be providing this gas to
and explain to us
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why the net proved undeveloped gas reserves are almost three
times greater than the gross gas reserves. Please also tell us
how much net gas has been produced and sold to date in 2008. Also
please tell us why there are development costs that will not be
incurred until 2025.
The Company sells associated gas from the WAHA concession in
Libya to the government. Through June 30, 2008, the Company has
sold approximately 2,300 mcf per day. Natural gas production for
the Africa region in the June 10th submission and this submission
also includes fuel gas volumes primarily related to our offshore
operations in Equatorial Guinea. These fuel gas volumes are not
included in the natural gas production volumes disclosed in the
Business and Properties section of the Annual Report since these
volumes are not sold to third parties. However, fuel gas volumes
are included in proved reserves volumes and therefore included in
production in the submitted Standardized Measure of Discounted
Future Net Cash Flows schedules. These fuel gas volumes do not
impact revenue or operating expenses in the standardized measure
calculations. The disparity between gross and net proved
undeveloped gas volumes for Africa in the June 10th submission
was due to an incorrect presentation of the split between
developed and undeveloped gas reserves and omission of certain
gross fuel gas volumes. However, the net gas volumes for Africa
total proved reserves were correct. Please see the updated
schedules in this submission. Future development costs in the
years subsequent to 2020 include abandonment costs for oil fields
at the end of their productive lives.
9. Please tell us why you have significant development costs
beyond the year 2012 in the geographic regions of Asia, Europe
and Africa.
Future development costs beyond the year 2012 include costs to
abandon oil and gas fields at the end of their productive lives.
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The Company acknowledges that: (i) the Company is responsible for the
adequacy and accuracy of the disclosure in the Filings; (ii) staff comments or
changes to disclosure in response to staff comments do not foreclose the
Commission from taking any action with respect to the Filings; and (iii) the
Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
If you have any questions concerning the foregoing, please contact me at
(212) 536-8599.
Very truly yours,
/s/ George C. Barry
cc: Mr. James Murphy
Mr. Sean Donahue
Ms. Mellissa Campbell Duru
Division of Corporation Finance
Kevin Keogh, Esq. White & Case LLP
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