NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amerada Hess Corporation and Consolidated Subsidiaries 1. SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES 40 The costs of exploratory wells that find oil and gas reserves are capitalized pending determination of whether proved reserves have been found. In an area requiring a major capital expenditure before production can begin, an exploration well is carried as an asset if sufficient reserves are discovered to justify its completion as a production well, and additional Costs of drilling and equipping productive wells, including development dry holes, and related production facilities are capitalized. Investments in affiliated companies, 20% to 50% owned, including HOVENSA but excluding a trading partnership, are stated at cost of acquisition plus the Corporation’s equity in undistributed net income since acquisition. The change in the equity in net income of these companies is included in non-operating income in the income statement. The Corporation consolidates the trading partnership in which it owns a 50% voting interest and over which it exer- cises control. Principles of Consolidation: The consolidated financial statements include the accounts of Amerada Hess Corpora- tion and entities in which the Corporation owns more than a 50% voting interest or entities that the Corporation controls. The Corporation’s undivided interests in unincorporated oil and gas exploration and production ventures are propor- tionately consolidated. Annual lease rentals and exploration expenses, including geological and geophysical expenses and exploratory dry hole costs, are expensed as incurred. Exploration and Development Costs: Oil and gas explo- ration and production activities are accounted for using the successful efforts method. Costs of acquiring unproved and proved oil and gas leasehold acreage, including lease bonuses, brokers’ fees and other related costs, are capitalized. Certain information in the financial statements and notes has been reclassified to conform with current period presentation. Inventories of materials and supplies are valued at the lower of average cost or market. Inventories: Crude oil and refined product inventories are valued at the lower of average cost or market. For invento- ries valued at cost, the Corporation uses principally the last- in, first-out (LIFO) inventory method. In preparing financial statements, management makes esti- mates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenues and expenses in the income statement. Actual results could dif- fer from those estimates. Among the estimates made by management are: oil and gas reserves, asset valuations, depreciable lives, pension liabilities, environmental obligations, dismantlement costs and income taxes. Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments, which are readily convertible into cash and have maturities of three months or less when acquired. Nature of Business: Amerada Hess Corporation and sub- sidiaries (the “Corporation”) engage in the exploration for and the production, purchase, transportation and sale of crude oil and natural gas. These activities are conducted primarily in the United States, United Kingdom, Norway, Denmark, Equatorial Guinea and Algeria. The Corporation also has oil and gas activities in Azerbaijan, Gabon, Indone- sia, Malaysia, Thailand and other countries. In addition, the Corporation manufactures, purchases, transports, trades and markets refined petroleum and other energy products. The Corporation owns 50% of HOVENSA L.L.C., a refinery joint venture in the United States Virgin Islands. An addi- tional refining facility, terminals and retail gasoline stations are located on the East Coast of the United States. The Corporation recognizes revenues from the production of natural gas properties in which it has an interest based on sales to customers. Differences between natural gas vol- umes sold and the Corporation’s share of natural gas pro- duction are not material. Revenue Recognition: The Corporation recognizes rev- enues from the sale of crude oil, natural gas, petroleum products and other merchandise when title passes to the customer. Intercompany transactions and accounts are eliminated in consolidation.