b'ASC 740 provides a more-likely-than-not standard in evaluating whether a valuation allowance isnecessary after weighing all of the available evidence. When evaluating the need for a valuationallowance, we consider all available positive and negative evidence, including the following:\x7f the status of our operations in the particular taxing jurisdiction, including whether we havecommenced production from a commercial discovery;\x7f whether a commercial discovery has resulted in significant proved reserves that have beenindependently verified;\x7f the amounts and history of taxable income or losses in a particular jurisdiction;\x7f projections of future income, including the sensitivity of such projections to changes inproduction volumes and prices;\x7f the existence, or lack thereof, of statutory limitations on the period that net operating losses maybe carried forward in a jurisdiction; and\x7f the creation and timing of future income associated with the reversal of deferred tax liabilities inexcess of deferred tax assets.Derivative Instruments and Hedging Activities. We utilize oil derivative contracts to mitigate ourexposure to commodity price risk associated with our anticipated future oil production. These derivativecontracts consist of collars, put options, call options and swaps. We also use interest rate derivativecontracts to mitigate our exposure to interest rate fluctuations related to our long-term debt. Ourderivative financial instruments are recorded on the balance sheet as either assets or a liabilitiesmeasured at fair value. We do not apply hedge accounting to our oil derivative contracts.Estimates of Proved Oil and Natural Gas Reserves. Reserve quantities and the related estimates offuture net cash flows affect our periodic calculations of depletion and assessment of impairment of ouroil and natural gas properties. Proved oil and natural gas reserves are the estimated quantities of crudeoil, natural gas and natural gas liquids which geological and engineering data demonstrate withreasonable certainty to be recoverable in future periods from known reservoirs under existing economicand operating conditions. As additional proved reserves are discovered, reserve quantities and futurecash flows will be estimated by independent petroleum consultants and prepared in accordance withguidelines established by the SEC and the FASB. The accuracy of these reserve estimates is a functionof:\x7f the engineering and geological interpretation of available data;\x7f estimates of the amount and timing of future operating cost, production taxes, development costand workover cost;\x7f the accuracy of various mandated economic assumptions; and\x7f the judgments of the persons preparing the estimates.Asset Retirement Obligations. We account for asset retirement obligations as required by theASC 410Asset Retirement and Environmental Obligations. Under these standards, the fair value of aliability for an asset retirement obligation is recognized in the period in which it is incurred if areasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made inthe period the asset retirement obligation is incurred, the liability is recognized when a reasonableestimate of fair value can be made. If a tangible long-lived asset with an existing asset retirementobligation is acquired, a liability for that obligation shall be recognized at the assets acquisition date asif that obligation were incurred on that date. In addition, a liability for the fair value of a conditionalasset retirement obligation is recorded if the fair value of the liability can be reasonably estimated. Wecapitalize the asset retirement costs by increasing the carrying amount of the related long-lived asset by98'