The Gulf of Mexico is an integral part of our growth strategy. Large discoveries, relatively high success rates, expanding production infrastructure and attractive fiscal terms make the deep-water Gulf of Mexico one of the world’s most prospective sources for oil and gas. While costs of deep-water exploration are high relative to other basins, deep-water prospects generally have multiple sands and high production rates—factors which improve economics. Technology to find, drill, and develop deep-water discoveries is rapidly progressing and becoming more cost effective. The deep-water Gulf is near infrastructure and continental US markets, so discoveries can be brought on stream in reasonable time.

Strategy
Our strategy in the Gulf is to explore for new reserves, exploit our existing asset base and acquire assets with upside potential. We focus our exploration program on three strategic play types:

• deep-water prospects near existing infrastructure;
• deep-water, Miocene and Lower Tertiary sub-salt plays with the potential to become new core areas; and
• deep-water, Norphlet targets in the eastern Gulf of Mexico.

These plays are relatively under-explored, hold potential for large discoveries and have attractive fiscal terms. The shorter cycle-times for deep-water prospects near infrastructure complement the longer cycle-times for deep-water sub-salt and Norphlet plays. Although competition in the Gulf is strong, we have built a large inventory of deep-water acreage and are now a significant leaseholder in the deep-water.

Fiscal Terms
In 2008, royalty rates on our US production averaged 16.5% for shelf volumes and 12.2% for deep-water volumes. The US government increased royalty rates from 12.5% to 16.7% for new deep-water leases awarded after July 2007. We qualify for royalty relief at our deep-water Aspen and Gunnison fields on the first 87.5 mmboe of production. The US Department of the Interior’s minerals management Service (MMS) suspended royalty relief on our Gunnison lease and assessed royalties on our production from the field. The oil and gas industry litigated the enforceability of these actions and won a judgement in a US District court. The MMS subsequently lost their appeal of that judgement in January 2009. Our Aspen field is not subject to a minimum price threshold. US taxable income is subject to federal income tax of 35% and state taxes ranging from 0% to 12%.