General

Apache Corporation, a Delaware corporation formed in 1954, is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids. Apache currently has exploration and production operations in four geographic areas: the United States (U.S.), Canada, Egypt, and offshore the United Kingdom (U.K.) in the North Sea. Apache also has exploration interests in Suriname that may, over time, result in a reportable discovery and development opportunity.

Our common stock, par value $0.625 per share, has been listed on the New York Stock Exchange (NYSE) since 1969, on the Chicago Stock Exchange (CHX) since 1960, and on the NASDAQ Global Select Market (NASDAQ) since 2004. On May 31, 2016, we filed certifications of our compliance with the listing standards of the NYSE and the NASDAQ, including our principal executive officer’s certification of compliance with the NYSE standards. Through our website, www.apachecorp.com , you can access, free of charge, electronic copies of the charters of the committees of our Board of Directors, other documents related to our corporate governance (including our Code of Business Conduct and Governance Principles), and documents we file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Included in our annual and quarterly reports are the certifications of our principal executive officer and our principal financial officer that are required by applicable laws and regulations. Access to these electronic filings is available as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. You may also request printed copies of our corporate charter, bylaws, committee charters, or other governance documents free of charge by writing to our corporate secretary at the address on the cover of this report. Our reports filed with the SEC are made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov . From time to time, we also post announcements, updates, and investor information on our website in addition to copies of all recent press releases. Information on our website or any other website is not incorporated by reference into, and does not constitute a part of, this Annual Report on Form 10-K.

Properties to which we refer in this document may be held by subsidiaries of Apache Corporation. References to “Apache” or the “Company” include Apache Corporation and its consolidated subsidiaries unless otherwise specifically stated.

During the second quarter of 2016, Apache changed its method of accounting for its oil and gas exploration and development activities from the full cost method to the successful efforts method of accounting. Financial information for all periods has been recast to reflect retrospective application of the successful efforts method of accounting. See Note 1—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements under Part IV, Item 15 of this Form 10-K.

During 2015, Apache sold its Australia LNG business and oil and gas assets. During 2014, Apache sold its operations in Argentina. Results of operations and cash flows from operations for Argentina and Australia are reflected as discontinued operations in the Company’s financial statements for all periods presented. Certain historical information has been recast to reflect the results of operations for Argentina and Australia as discontinued operations.

Business Strategy

Apache’s mission is to grow a profitable exploration and production company in a safe and environmentally responsible manner for the long-term benefit of our shareholders. Apache’s long-term perspective has many dimensions, which are centered on the following core strategic components:

Rigorous management of the Company’s asset portfolio plays a key role in optimizing shareholder value over the long-term. The Company has monetized certain capital intensive projects that were not accretive to earnings in the near-term and other non-strategic assets. These divestitures over the past few years included selling Apache’s interest in LNG projects in Australia and Canada, all of its exploration and production operations in Australia and Argentina, mature assets offshore in the Gulf of Mexico, and various leasehold areas in North America onshore plays where the Company made strategic decisions to allocate resources to other, more impactful development opportunities.

Preserving financial flexibility is also key to the Company’s business philosophy. In response to the significant decline in commodity prices that began in 2014, Apache immediately took proactive measures to reduce activity levels and bring costs in alignment with activity levels, while taking concrete steps to cut overhead, operating, and drilling costs. The Company allocated a portion of its reduced overall capital spend in North America for strategic testing and completion optimization, which resulted in significant expansion of our economic drilling inventory and improved well performance. In addition, the Company completed confirmation testing and initiated a delineation program that confirmed a significant exploration discovery in the Delaware Basin, “Alpine High.”

For a more in-depth discussion of the Company’s Alpine High discovery, please refer to the Permian region discussion. For a more in-depth discussion of the Company’s divestitures, strategy, 2016 results, and its capital resources and liquidity, please see Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

Geographic Area Overviews

Apache has exploration and production interests in four geographic areas: the United States (U.S.), Canada, Egypt, and the United Kingdom (U.K.) North Sea. Apache also has exploration interests in Suriname that may, over time, result in a reportable discovery and development opportunity.

The following table sets out a brief comparative summary of certain key 2016 data for each of Apache’s operating areas. Additional data and discussion is provided in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

 

 

North America

In 2016, Apache’s North American operations contributed approximately 54 percent of production and 69 percent of estimated year-end proved reserves. Apache has access to significant liquid hydrocarbons across its 11.3 million gross acres in North America, 59 percent of which is undeveloped.

In North America Apache has three onshore regions:

Apache also has one offshore region in North America, the Gulf of Mexico region, which consists of both shallow and deep water exploration and production activities.

Permian Region The Permian region is one of Apache’s core growth areas. Highlights of the Company’s operations in the region include:

In September 2016, after more than two years of extensive geological and geophysical work, methodical acreage accumulation, and strategic testing and delineation drilling, Apache announced the discovery of a significant new resource play, “Alpine High.” Apache’s Alpine High acreage lies in the southern portion of the Delaware Basin, primarily in Reeves County, Texas. The Company has established an acreage position of over 320,000 contiguous net acres, which it acquired at an attractive average cost of approximately $1,300 per acre. Since first announcing the Alpine High last September, the Company has made substantial progress further delineating the opportunity. The Company has confirmed an extensive play fairway which spans 55 miles and a 5,000-foot vertical column encompassing five geologic formations, with multiple target zones spanning the hydrocarbon phase window from dry gas to wet gas to oil. We have recently identified an additional landing zone in the Woodford formation, and confirmed production from the Pennsylvanian. Based on these results, Apache now believes the drilling locations at Alpine High will exceed the 2,000 to 3,000 previously announced. During 2017, we expect to average 4 to 6 drilling rigs at Alpine High. A second hydraulic fracturing crew was added at the start of the year to accelerate completions and data collection. Using data collected from strategic testing and delineation drilling, the Company is now beginning to optimize wells drilled in Alpine High using customized targeting, larger fracs, and longer laterals. Combined with multi-well pad drilling, the Company believes these measures contribute to the optimized development of the area to maximize economic value. The field is expected to have low levels of water production which will also have a positive impact on long-term economics. We are currently installing the infrastructure, which will allow gas sales from the field around mid-year 2017.

In addition to activity in Alpine High, the Permian region drilled or participated in over 110 wells in 2016, with a 100 percent success rate. In the Midland Basin, where Apache holds approximately 443,000 net acres, activity was focused on stratigraphic and development pad drilling of the Wolfcamp and Spraberry shale formations in the Wildfire, Powell, and Azalea areas. Activity in Midland Basin has been significantly increased in 2017: the region has increased the rig count to five, compared to an average of one in 2016. The additional rigs will be dedicated to long-term pad development drilling. The Company’s assets in the Central Basin Platform/Northwest Shelf span 739,000 net acres. The Yeso play was the primary focus of 2016 development activities in this area. In the Delaware Basin, Apache holds approximately 392,000 net acres. In addition to drilling and development activities at Alpine High, the Company targeted plays in the Bone Spring and Wolfcamp plays.

Apache plans to significantly increase activity in the Permian region during 2017, while continuing to balance capital investments between its larger development project at Alpine High and focused exploration and development programs on other core assets in its Permian region. During 2017, the Company expects to average 15 drilling rigs in the Permian Basin and drill approximately 250 wells, which includes a four to six rig delineation drilling program at Alpine High. The Company plans to allocate approximately two-thirds of its 2017 capital budget to the Permian region.

Midcontinent/Gulf Coast Region As part of Apache’s 2015 strategic efforts to reduce its operating cost structure, the Company combined the Midcontinent (formerly Central region) and Gulf Coast regions. Apache’s Midcontinent/Gulf Coast region includes 2.6 million gross acres and over 3,200 producing wells primarily in western Oklahoma, the Texas Panhandle and south Texas. In 2016, the region accounted for 11 percent of the Company’s production and approximately 9 percent of the Company’s year-end estimated proved reserves.

In 2016 , Apache drilled or participated in drilling 35 wells with a 94 percent success rate. Activity was focused primarily in the Woodford-SCOOP and Canyon Lime formations. In 2017, Apache plans to run a targeted program, drilling four wells in the Woodford-SCOOP play. In addition, the region will continue its focus on high grading acreage and building its inventory of future drilling locations.

Canada Region Apache holds 3.5 million gross acres across the provinces of British Columbia, Alberta, and Saskatchewan. The region’s large acreage position provides significant drilling opportunities and portfolio diversification with exposure to oil, gas, and liquids rich fairways. The Canadian region provided approximately 11 percent of Apache’s 2016 worldwide production and 175 MMboe of estimated proved reserves at year-end.

In 2016 , Apache drilled or participated in drilling 17 wells in the region with an 88 percent success rate. Drilling operations primarily focused on the Wapiti Montney, Ante Creek Montney, Duvernay, and Glauconite plays. In 2017, the Company expects to drill 10 wells: a six-well pad in the Duvernay play, three wells in the Wapiti Montney play, and one exploratory well in the East Shale Basin.

Gulf of Mexico Region The Gulf of Mexico region comprises assets in the offshore waters of the Gulf of Mexico and onshore Louisiana. In addition to its interest in several deepwater exploration and development offshore leases, when the Company sold substantially all of its offshore assets in water depths less than 1,000 feet, it retained a 50 percent ownership interest in all exploration blocks and in horizons below production in development blocks, and access to existing infrastructure. Apache’s offshore technical teams continue to focus on evaluating subsalt and other deeper exploration opportunities in water depths less than 1,000 feet, which have been relatively untested by the industry, where high-potential deep hydrocarbon plays may exist. During 2016, Apache’s Gulf of Mexico region contributed 7.7 Mboe/d to the Company’s total production. During 2017, the Company expects to participate in one non-operated exploration well.

North America Marketing In general, most of the Company’s North American gas is sold at either monthly or daily market prices. The Company also occasionally enters into fixed physical sales contracts for durations of up to one year. These physical sales volumes are typically sold at fixed prices over the term of the contract. Natural gas is sold primarily to local distribution companies (LDCs), utilities, end-users, marketers, and integrated major oil companies. Apache strives to maintain a diverse client portfolio, which is intended to reduce the concentration of credit risk.

Apache primarily markets its North American crude oil to integrated major oil companies, marketing and transportation companies, and refiners based on a West Texas Intermediate (WTI) price, adjusted for quality, transportation, and a market-reflective differential.

In the U.S., Apache’s objective is to maximize the value of crude oil sold by identifying the best markets and most economical transportation routes available to move the product. Sales contracts are generally 30-day evergreen contracts that renew automatically until canceled by either party. These contracts provide for sales that are priced daily at prevailing market prices. Also, from time to time, the Company will enter into physical term sales contracts for durations up to five years. These term contracts typically have a firm transport commitment and often provide for the higher of prevailing market prices from multiple market hubs.

In Canada, crude is transported by pipeline or truck within Western Canada to market hubs in Alberta and Manitoba where it is sold, allowing for a more diversified group of purchasers and a higher netback price. The Company evaluates its transport options monthly to maximize its netback prices.

Apache’s NGL production is sold under contracts with prices based on local supply and demand conditions, less the costs for transportation and fractionation, or on a weighted-average sales price received by the purchaser.

International

In 2016 , international assets contributed 46 percent of Apache’s production and 56 percent of oil and gas revenues. Approximately 31 percent of estimated proved reserves at year-end were located outside North America.

Apache has two international regions:

The Company also has an offshore exploration program in Suriname.

Egypt Apache’s Egypt operations are conducted pursuant to production sharing contracts (PSCs). Under the terms of the Company’s PSCs, the contractor partners (Contractor) bears the risk and cost of exploration, development, and production activities. In return, if exploration is successful, the Contractor receives entitlement to variable physical volumes of hydrocarbons, representing recovery of the costs incurred and a stipulated share of production after cost recovery. Additionally, the Contractor’s income taxes, which remain the liability of the Contractor under domestic law, are paid by Egyptian General Petroleum Corporation (EGPC) on behalf of the Contractor out of EGPC’s production entitlement. Income taxes paid to the Arab Republic of Egypt on behalf of the Contractor are recognized as oil and gas sales revenue and income tax expense and reflected as production and estimated reserves. Because Contractor cost recovery entitlement and income taxes paid on its behalf are determined as a monetary amount, the quantities of production entitlement and estimated reserves attributable to these monetary amounts will fluctuate with commodity prices. In addition, because the Contractor income taxes are paid by EGPC, the amount of the income tax has no economic impact on Apache’s Egypt operations despite impacting Apache’s production and reserves. Sinopec International Petroleum Exploration and Production Corporation (Sinopec) holds a one-third minority participation interest in Apache’s oil and gas operations in Egypt.

Apache has 21 years of exploration, development and operations experience in Egypt and is one of the largest acreage holders in Egypt’s Western Desert. At year-end 2016, the Company held 4.8 million gross acres in 23 separate concessions. Development leases within concessions currently have expiration dates ranging from 4 to 20 years, with extensions possible for additional commercial discoveries or on a negotiated basis. Approximately 63 percent of the Company’s acreage in Egypt is undeveloped, providing us with considerable exploration and development opportunities for the future. In December 2016, the Company was notified by the Egyptian Ministry that it was the successful bidder in two new concessions, which will add an additional 1.6 million gross undeveloped acres to its portfolio. Apache anticipates these concessions will be signed into law mid-2017.

The Company’s estimated proved reserves in Egypt are reported under the economic interest method and exclude the host country’s share of reserves. The Egypt region, including the one-third noncontrolling interest, contributed 33 percent of 2016 production, 21 percent of year-end estimated proved reserves, and 37 percent of estimated discounted future net cash flows. Excluding the noncontrolling interest, Egypt contributed 24 percent of 2016 production, 15 percent of year-end estimated proved reserves, and 28 percent of estimated discounted future net cash flows.

While Apache has historically been one of the most active drillers in the Western Desert, activity has been curtailed for the past several years in response to weak oil prices. In 2016, the region drilled 47 development and 14 exploration wells. Approximately 57 percent of the exploration wells were successful, further expanding Apache’s presence in the westernmost concessions and unlocking additional opportunities in existing plays. A key component of the region’s success has been the ability to acquire and evaluate 3-D seismic surveys that enable Apache’s technical teams to consistently high-grade existing prospects and identify new targets across multiple pay horizons in the Cretaceous, Jurassic, and deeper Paleozoic formations.

In 2017, Apache plans to operate 8 to 10 drilling rigs and drill approximately 90 to 100 wells. In addition, Apache will initiate a large, continuous 3-D seismic survey program to support development on its existing acreage and exploration on its new concessions. The program will provide newer vintage, higher resolution imaging of the substrata across Apache’s Western Desert position, allowing Apache to build and high-grade its drilling inventory.

Egypt Marketing   Apache’s gas production in Egypt is sold to EGPC primarily under an industry-pricing formula, a sliding scale based on Dated Brent crude oil with a minimum of $1.50 per MMBtu and a maximum of $2.65 per MMBtu, plus an upward adjustment for liquids content. The region averaged $2.71 per Mcf in 2016 .

Oil production is sold to third parties in the export market or to EGPC when called upon to supply domestic demand. Oil production sold to third parties is exported from or sold at one of two terminals on the northern coast of Egypt. Oil production sold to EGPC is sold at prices equivalent to the export market .

North Sea Apache has interests in approximately 380,000 gross acres in the U.K. North Sea. The region contributed 13 percent of Apache’s 2016 production and approximately 10 percent of year-end estimated proved reserves.

Apache entered the North Sea in 2003 after acquiring an approximate 97 percent working interest in the Forties field (Forties). Since acquiring Forties, Apache has actively invested in the region and has established a large inventory of drilling prospects through successful exploration programs and the interpretation of acquired 3-D and 4-D seismic data. Building upon its success in Forties, in 2011 Apache acquired Mobil North Sea Limited, providing the region with additional exploration and development opportunities across numerous fields, including operated interests in the Beryl, Nevis, Nevis South, Skene, and Buckland fields and non-operated interests in the Maclure and Nelson field. The Beryl field, which is a geologically complex area with multiple fields and stacked pay potential, provides for significant exploration opportunity. The North Sea region plays a strategic role in Apache’s portfolio by providing competitive investment opportunities and potential reserve upside with high-impact exploration potential.

During the year, the region drilled 12 development wells with an 83 percent success rate: six at Forties, five at Beryl, and one at Aviat. In addition, it drilled or participated in three exploration wells with a 33 percent success rate. The Storr discovery, an exploration prospect targeting the Beryl and Nansen sands, encountered hydrocarbons in two separate fault blocks. The region is evaluating a development plan for the Storr discovery. Apache holds a 55 percent working interest in the prospect.

Apache progressed the development of the 2015 Callater (formerly K) exploration discovery in the Beryl area, with first production projected in the second half of 2017. Initial production is expected at 20,000 boe/d on a gross basis. Apache plans to drill two additional wells in the second half of the year. Apache holds a 55 percent working interest in Callater, and operates the field. The region also continued to assess development plans for two earlier exploration discoveries, Seagull and Corona, in which Apache holds 35 and 100 percent interests, respectively.

Also during the year, Apache completed the Aviat gas-for-power project at Forties. This project enables a switch from diesel to natural gas to power the Forties field. The use of natural gas to power the field will extend the economic life, lower operating costs, and reduce certain reliability and safety risks associated with bunkering diesel. Annual fuel and other savings are projected at $15 million.

In 2017, Apache currently plans to operate an average of three rigs in the North Sea region, two platform rigs (one at Forties and one at Beryl) and two semi-submersible rigs on rig-sharing agreements, and drill 15 to 16 wells.

North Sea Marketing   Apache has traditionally sold its North Sea crude oil under term contracts, with a market-based index price plus a premium, which reflects the higher market value for term arrangements.

Natural gas from the Beryl field is processed through the SAGE gas plant operated by Apache. The gas is sold to a third party at the St. Fergus entry point of the national grid on a National Balancing Point index price basis. The condensate mix from the SAGE plant is processed further downstream. The split streams of propane and butane are sold on a monthly entitlement basis, and condensate is sold on a spot basis at the Braefoot Bay terminal using index pricing less transportation.

Australia/Argentina During the second quarter of 2015, Apache completed the sale of its Australian LNG business and oil and gas assets. In March 2014, Apache completed the sale of all of its operations in Argentina. Results of operations and consolidated cash flows for the divested Australia assets and Argentina operations are reflected as discontinued operations in the Company’s financial statements for all periods presented in this Annual Report on Form 10-K.

Other Exploration

New Ventures Apache’s global New Ventures team provides exposure to new growth opportunities by looking outside of the Company’s traditional core areas and targeting higher-risk, higher-reward exploration opportunities located in frontier basins as well as new plays in more mature basins. Plans for 2017 include continued analysis and review of the Company’s deepwater prospects in offshore Suriname, including fully processing the data set from its 3-D seismic shoot completed in the third quarter of 2016. Apache will begin drilling an exploration well in the first quarter of 2017.

Major Customers

In 2016 and 2015, purchases by China Petroleum & Chemical Corporation and its subsidiaries accounted for 21 percent and 12 percent , respectively, of the Company’s worldwide oil and gas production revenues. In 2016 and 2015, purchases by Egyptian General Petroleum Company and its subsidiaries accounted for 12 percent and 11 percent , respectively, of the Company’s worldwide oil and gas production revenues. In 2015 and 2014 , purchases by Royal Dutch Shell plc and its subsidiaries accounted for 11 percent and 19 percent , respectively, of the Company’s worldwide oil and gas production revenues.

Drilling Statistics

Worldwide in 2016 , Apache participated in drilling 260 gross wells, with 240 (92 percent) completed as producers. Historically, Apache’s drilling activities in the U.S. have generally concentrated on exploitation and extension of existing producing fields rather than exploration. As a general matter, Apache’s operations outside of North America focus on a mix of exploration and development wells. In addition to Apache’s completed wells, at year-end a number of wells had not yet reached completion: 70 gross (33.7 net) in the U.S., 14 gross (14 net) in Egypt, and 5 gross (3.1 net) in the North Sea.

The following table shows the results of the oil and gas wells drilled and completed for each of the last three fiscal years:

 

Gross natural gas and crude oil wells include 640 wells with multiple completions.

Production, Pricing, and Lease Operating Cost Data

The following table describes, for each of the last three fiscal years, oil, NGL, and gas production volumes, average lease operating costs per boe (including transportation costs but excluding severance and other taxes), and average sales prices for each of the countries where the Company has operations:

 

 

Gross and Net Undeveloped and Developed Acreage

The following table sets out Apache’s gross and net acreage position as of December 31, 2016 , in each country where the Company has operations:

As of December 31, 2016 , Apache had 1.2 million net undeveloped acres scheduled to expire by year-end 2017 if production is not established or Apache takes no other action to extend the terms. Additionally, Apache has 668,000 and 854,000 net undeveloped acres set to expire in 2018 and 2019, respectively. The Company strives to extend the terms of many of these licenses and concession areas through operational or administrative actions, but cannot assure that such extensions can be achieved on an economic basis or otherwise on terms agreeable to both the Company and third parties, including governments.

Exploration concessions in Apache’s Egypt region comprise a significant portion of Apache’s net undeveloped acreage expiring over the next three years. Apache has 0.7 million, 0.4 million, and 0.6 million net undeveloped acres set to expire in 2017, 2018, and 2019, respectively. Apache will continue to pursue acreage extensions in areas in which it believes exploration opportunities exist. There were no reserves recorded on this undeveloped acreage. Separately, Apache was awarded the NW Razzak and South Alam El Shawish concession blocks in December 2016. The agreements are currently progressing and formal approval and signing of the agreements by Apache, EGPC, and the Ministry of Petroleum is expected to occur by the summer of 2017. Combined, the two concessions are expected to add approximately 1.6 million of undeveloped gross acres in Egypt in 2017.

As of December 31, 2016 , 34 percent of U.S. net undeveloped acreage and 44 percent of Canadian net undeveloped acreage was held by production.

In addition, Apache has exploration interests in Suriname consisting of 1.8 million net undeveloped acreage in two blocks set to expire in 2017 and 2018. Apache will commence drilling operations on a commitment well in 2017, and will determine a course of action based on the results of drilling tests. No reserves have been booked on this undeveloped acreage.

Estimated Proved Reserves and Future Net Cash Flows

Proved oil and gas reserves are those quantities of natural gas, crude oil, condensate, and NGLs, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method, which excludes the host country’s share of reserves.

Estimated reserves that can be produced economically through application of improved recovery techniques are included in the “proved” classification when successful testing by a pilot project or the operation of an active, improved recovery program using reliable technology establishes the reasonable certainty for the engineering analysis on which the project or program is based. Economically producible means a resource that generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. Reasonable certainty means a high degree of confidence that the quantities will be recovered. Reliable technology is a grouping of one or more technologies (including computational methods) that has been field-tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation. In estimating its proved reserves, Apache uses several different traditional methods that can be classified in three general categories: (1) performance-based methods; (2) volumetric-based methods; and (3) analogy with similar properties. Apache will, at times, utilize additional technical analysis, such as computer reservoir models, petrophysical techniques, and proprietary 3-D seismic interpretation methods, to provide additional support for more complex reservoirs. Information from this additional analysis is combined with traditional methods outlined above to enhance the certainty of our reserve estimates.

Proved undeveloped reserves include those reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Undeveloped reserves may be classified as proved reserves on undrilled acreage directly offsetting development areas that are reasonably certain of production when drilled, or where reliable technology provides reasonable certainty of economic producibility. Undrilled locations may be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless specific circumstances justify a longer time period.

The following table shows proved oil, NGL, and gas reserves as of December 31, 2016 , based on average commodity prices in effect on the first day of each month in 2016 , held flat for the life of the production, except where future oil and gas sales are covered by physical contract terms. This table shows reserves on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of 6 Mcf to 1 bbl. This ratio is not reflective of the current price ratio between the two products.

 

 

As of December 31, 2016 , Apache had total estimated proved reserves of 642 MMbbls of crude oil, 192 MMbbls of NGLs, and 2.9 Tcf of natural gas. Combined, these total estimated proved reserves are the volume equivalent of 1.3 billion barrels of oil or 7.9 Tcf of natural gas, of which oil represents 49 percent. As of December 31, 2016 , the Company’s proved developed reserves totaled 1,174 MMboe and estimated PUD reserves totaled 137 MMboe, or approximately 10.5 percent of worldwide total proved reserves. Apache has elected not to disclose probable or possible reserves in this filing.

During 2016 , Apache added 103 MMboe of proved reserves through exploration and development activity and 2 MMboe through purchases of minerals in-place. Apache sold a combined 7 MMboe through several divestiture transactions. During 2016 , Apache also had combined downward revisions of previously estimated reserves of 159 MMboe. Changes in product prices accounted for 172 MMboe, lease ownership changes accounted for 6 MMboe, offset by engineering and performance upward revisions totaling 19 MMboe.

The Company’s estimates of proved reserves, proved developed reserves, and PUD reserves as of December 31, 2016 , 2015 , and 2014 , changes in estimated proved reserves during the last three years, and estimates of future net cash flows from proved reserves are contained in Note 16—Supplemental Oil and Gas Disclosures in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Form 10-K. Estimated future net cash flows were calculated using a discount rate of 10 percent per annum, end of period costs, and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of the production, except where prices are defined by contractual arrangements.

Proved Undeveloped Reserves

The Company’s total estimated PUD reserves of 137 MMboe as of December 31, 2016 , decreased by 95 MMboe from 232 MMboe of PUD reserves reported at the end of 2015 . During the year, Apache converted 22 MMboe of PUD reserves to proved developed reserves through development drilling activity. In North America, Apache converted 15 MMboe, with the remaining 7 MMboe in Apache’s international areas. Apache sold 3 MMboe and acquired no PUD reserves during the year. Apache added 48 MMboe of new PUD reserves through extensions and discoveries. Apache recognized a 118 MMboe downward revision in proved undeveloped reserves during the year, of which 99 MMboe was associated with lower product prices, 5 MMboe was associated with interest revisions, and 14 MMboe was a result of changes in development plans.

During the year, a total of approximately $357 million was spent on projects associated with reserves that were carried as PUD reserves at the end of 2015. A portion of Apache’s costs incurred each year relate to development projects that will be converted to proved developed reserves in future years. Apache spent approximately $289 million on PUD reserve development activity in North America and $68 million in the international areas. As of December 31, 2016 , Apache had no material amounts of proved undeveloped reserves scheduled to be developed beyond five years from initial disclosure.

Preparation of Oil and Gas Reserve Information

Apache’s reported reserves are reasonably certain estimates which, by their very nature, are subject to revision. These estimates are reviewed throughout the year and revised either upward or downward, as warranted.

Apache’s proved reserves are estimated at the property level and compiled for reporting purposes by a centralized group of experienced reservoir engineers that is independent of the operating groups. These engineers interact with engineering and geoscience personnel in each of Apache’s operating areas and with accounting and marketing employees to obtain the necessary data for projecting future production, costs, net revenues, and ultimate recoverable reserves. All relevant data is compiled in a computer database application, to which only authorized personnel are given security access rights consistent with their assigned job function. Reserves are reviewed internally with senior management and presented to Apache’s Board of Directors in summary form on a quarterly basis. Annually, each property is reviewed in detail by our corporate and operating region engineers to ensure forecasts of operating expenses, netback prices, production trends, and development timing are reasonable.

Apache’s Executive Vice President of Corporate Reservoir Engineering is the person primarily responsible for overseeing the preparation of our internal reserve estimates and for coordinating any reserves audits conducted by a third-party engineering firm. He has a Bachelor of Science degree in Petroleum Engineering and over 36 years of industry experience with positions of increasing responsibility within Apache’s corporate reservoir engineering department. The Executive Vice President of Corporate Reservoir Engineering reports directly to our Chief Executive Officer.

The estimate of reserves disclosed in this Annual Report on Form 10-K is prepared by the Company’s internal staff, and the Company is responsible for the adequacy and accuracy of those estimates. However, the Company engages Ryder Scott Company, L.P. Petroleum Consultants (Ryder Scott) to review our processes and the reasonableness of our estimates of proved hydrocarbon liquid and gas reserves. The Company selects the properties for review by Ryder Scott based primarily on relative reserve value. The Company also considers other factors such as geographic location, new wells drilled during the year and reserves volume. During 2016 , the properties selected for each country ranged from 87 to 100 percent of the total future net cash flows discounted at 10 percent. These properties also accounted for over 88 percent of the reserves value of our international proved reserves and 93 percent of the new wells drilled in each country. In addition, all fields containing five percent or more of the Company’s total proved reserves volume were included in Ryder Scott’s review. The review covered 83 percent of total proved reserves by volume.

During 2016 , 2015 , and 2014 , Ryder Scott’s review covered 92, 90, and 91 percent, respectively, of the Company’s worldwide estimated proved reserves value and 83, 83, and 85 percent, respectively, of the Company’s total proved reserves volume. Ryder Scott’s review of 2016 covered 81 percent of U.S., 81 percent of Canada, 85 percent of Egypt, and 92 percent of the U.K.’s total proved reserves.

Ryder Scott’s review of 2015 covered 81 percent of U.S., 81 percent of Canada, 86 percent of Egypt, and 88 percent of the U.K.’s total proved reserves.

Ryder Scott’s review of 2014 covered 83 percent of U.S., 75 percent of Canada, 99.5 percent of Australia, 86 percent of Egypt, and 94 percent of the U.K.’s total proved reserves.

The Company has filed Ryder Scott’s independent report as an exhibit to this Form 10-K.

According to Ryder Scott’s opinion, based on their review, including the data, technical processes, and interpretations presented by Apache, the overall procedures and methodologies utilized by Apache in determining the proved reserves comply with the current SEC regulations, and the overall proved reserves for the reviewed properties as estimated by Apache are, in aggregate, reasonable within the established audit tolerance guidelines as set forth in the Society of Petroleum Engineers auditing standards.

Employees

On December 31, 2016 , the Company had 3,727 employees.

Offices

Our principal executive offices are located at One Post Oak Central, 2000 Post Oak Boulevard, Suite 100, Houston, Texas 77056-4400. At year-end 2016, the Company maintained regional exploration and/or production offices in Midland, Texas; San Antonio, Texas; Houston, Texas; Calgary, Alberta; Cairo, Egypt; and Aberdeen, Scotland. Apache leases all of its primary office space. The current lease on our principal executive offices runs through December 31, 2019. The Company has two, five-year options to extend the lease through 2024 and 2029, which may be exercised in five or ten-year increments. For information regarding the Company’s obligations under its office leases, please see Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Contractual Obligations and Note 10—Commitments and Contingencies in the Notes to Consolidated Financial Statements set forth in Part IV, Item 15 of this Form 10-K.

Title to Interests

As is customary in our industry, a preliminary review of title records, which may include opinions or reports of appropriate professionals or counsel, is made at the time we acquire properties. We believe that our title to all of the various interests set forth above is satisfactory and consistent with the standards generally accepted in the oil and gas industry, subject only to immaterial exceptions that do not detract substantially from the value of the interests or materially interfere with their use in our operations. The interests owned by us may be subject to one or more royalty, overriding royalty, or other outstanding interests (including disputes related to such interests) customary in the industry. The interests may additionally be subject to obligations or duties under applicable laws, ordinances, rules, regulations, and orders of arbitral or governmental authorities. In addition, the interests may be subject to burdens such as production payments, net profits interests, liens incident to operating agreements and current taxes, development obligations under oil and gas leases, and other encumbrances, easements, and restrictions, none of which detract substantially from the value of the interests or materially interfere with their use in our operations.

Additional Information about Apache

In this section, references to “we,” “us,” “our,” and “Apache” include Apache Corporation and its consolidated subsidiaries, unless otherwise specifically stated.

Response Plans and Available Resources

Apache and its wholly owned subsidiary, Apache Deepwater LLC (ADW), developed Oil Spill Response Plans (the Plans) for their respective Gulf of Mexico operations and offshore operations in the North Sea and Suriname. These plans ensure rapid and effective responses to spill events that may occur on such entities’ operated properties. Annually, drills are conducted to measure and maintain the effectiveness of the Plans.

Apache is a member of Oil Spill Response Limited (OSRL), a large international oil spill response cooperative, which entitles any Apache entity worldwide to access OSRL’s services. Apache also has a contract in place for response resources and services with Polyeco Group, a large, privately owned, tier three Oil Spill Response Organization (OSRO), which has resources strategically staged at six bases worldwide.

In the event of a spill in the Gulf of Mexico, Clean Gulf Associates (CGA) is the primary oil spill response association available to Apache and ADW. Both Apache and ADW are members of CGA, a not-for-profit association of producing and pipeline companies operating in the Gulf of Mexico. CGA was created to provide a means of effectively staging response equipment and providing immediate spill response for its member companies’ operations in the Gulf of Mexico. In the event of a spill, CGA’s equipment, which is positioned at various staging points around the Gulf, is ready to be mobilized. In addition, ADW is a member of Marine Spill Response Corporation (MSRC), and their equipment and resources are also available to ADW for its deepwater Gulf of Mexico and new venture operations.

An Apache subsidiary is also a member of the Marine Well Containment Company (MWCC) to help the Company fulfill the government’s permit requirements for containment and oil spill response plans in deepwater Gulf of Mexico operations. MWCC is a not-for-profit, stand-alone organization whose goal is to improve capabilities for containing an underwater well control incident in the U.S. Gulf of Mexico. Members and their affiliates have access to MWCC’s extensive containment network and systems. As of December 31, 2016 , Apache’s investment in MWCC totals $163 million and is reflected in “Deferred charges and other” in the Company’s consolidated balance sheet.

Competitive Conditions

The oil and gas business is highly competitive in the exploration for and acquisitions of reserves, the acquisition of oil and gas leases, equipment and personnel required to find and produce reserves, and the gathering and marketing of oil, gas, and natural gas liquids. Our competitors include national oil companies, major integrated oil and gas companies, other independent oil and gas companies, and participants in other industries supplying energy and fuel to industrial, commercial, and individual consumers.

Certain of our competitors may possess financial or other resources substantially larger than we possess or have established strategic long-term positions and maintain strong governmental relationships in countries in which we may seek new entry. As a consequence, we may be at a competitive disadvantage in bidding for leases or drilling rights.

However, we believe our diversified portfolio of core assets, which comprises large acreage positions and well-established production bases across four geographic areas, our balanced production mix between oil and gas, our management and incentive systems, and our experienced personnel give us a strong competitive position relative to many of our competitors who do not possess similar geographic and production diversity. Our global position provides a large inventory of geologic and geographic opportunities in the four geographic areas in which we have producing operations to which we can reallocate capital investments in response to changes in commodity prices, local business environments, and markets. It also reduces the risk that we will be materially impacted by an event in a specific area or country.

Environmental Compliance

As an owner or lessee and operator of oil and gas properties and facilities, we are subject to numerous federal, provincial, state, local, and foreign country laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations, subject the lessee to liability for pollution damages and require suspension or cessation of operations in affected areas. Although environmental requirements have a substantial impact upon the energy industry as a whole, we do not believe that these requirements affect us differently, to any material degree, than other companies in our industry.

We have made and will continue to make expenditures in our efforts to comply with these requirements, which we believe are necessary business costs in the oil and gas industry. We have established policies for continuing compliance with environmental laws and regulations, including regulations applicable to our operations in all countries in which we do business. We have established operating procedures and training programs designed to limit the environmental impact of our field facilities and identify and comply with changes in existing laws and regulations. The costs incurred under these policies and procedures are inextricably connected to normal operating expenses such that we are unable to separate expenses related to environmental matters; however, we do not believe expenses related to training and compliance with regulations and laws that have been adopted or enacted to regulate the discharge of materials into the environment will have a material impact on our capital expenditures, earnings, or competitive position.