Hess - 10-K annual report

Hess Corporation (the Registrant) is a Delaware corporation, incorporated in 1920. The Registrant and its subsidiaries (collectively referred to as the Corporation or Hess) is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place principally in Algeria, Australia, Azerbaijan, Brazil, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia, Norway, Peru, Russia, Thailand, the United Kingdom and the United States. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. The Corporation owns 50% of a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations, most of which include convenience stores, located on the East Coast of the United States.

The Corporation’s total proved reserves at December 31 were as follows:

On a barrel of oil equivalent (boe) basis, 43% of the Corporation’s worldwide proved reserves are undeveloped at December 31, 2008 (44% at December 31, 2007). Proved reserves held under production sharing contracts at December 31, 2008 totaled 28% of crude oil and natural gas liquids and 58% of natural gas reserves (25% and 57% respectively, at December 31, 2007).

Worldwide crude oil, natural gas liquids and natural gas production was as follows:

The Corporation presently estimates that its 2009 production will be approximately 380,000 to 390,000 barrels of oil equivalent per day (boepd).

A description of our significant E&P operations follows:

At December 31, 2008, 19% of the Corporation’s total proved reserves were located in the United States. During 2008, 16% of the Corporation’s crude oil and natural gas liquids production and 11% of its natural gas production were from United States operations. The Corporation’s production in the United States was principally from properties offshore in the Gulf of Mexico, which include the Llano (Hess 50%), Conger (Hess 38%), Baldpate (Hess 50%), Hack Wilson (Hess 25%) and Penn State (Hess 50%) fields, as well as onshore properties in North Dakota and in the Permian Basin of Texas.

In the deepwater Gulf of Mexico, development of the Shenzi Field (Hess 28%) progressed in 2008. Tension leg platform tendons, hull and topsides were installed and flowlines were laid and tested. First production is expected in the second quarter of 2009.

In the Williston Basin of North Dakota, the Corporation holds a net acreage position in the Bakken Play of approximately 570,000 acres. In 2009, the Corporation plans to drill additional production wells and expand production facilities.

The Corporation is developing a residual oil zone at the Seminole-San Andres Unit (Hess 34%) in Texas where carbon dioxide gas supplied from its interests in the West Bravo Dome and Bravo Dome fields in New Mexico will be injected to enhance recovery of crude oil.

In the Pony prospect on Green Canyon Block 468 (Hess 100%) in the deepwater Gulf of Mexico, the Corporation successfully completed drilling an appraisal well in June 2008. The Corporation is evaluating development options for Pony.

At the Corporation’s Tubular Bells prospect (Hess 20%) located in the Mississippi Canyon area of the deepwater Gulf of Mexico, a third well was successfully drilled during 2008. The operator is evaluating development options for Tubular Bells.

At December 31, 2008, the Corporation had interests in more than 400 exploration blocks in the Gulf of Mexico, which included 1,442,020 net undeveloped acres.

At December 31, 2008, 31% of the Corporation’s total proved reserves were located in Europe (United Kingdom 9%, Norway 13%, Denmark 3% and Russia 6%). During 2008, 33% of the Corporation’s crude oil and natural gas liquids production and 37% of its natural gas production were from European operations.

United Kingdom:  Production of crude oil and natural gas liquids from the United Kingdom North Sea was principally from the Corporation’s non-operated interests in Nevis (Hess 39%), Schiehallion (Hess 16%), Clair (Hess 9%), Bittern (Hess 28%) and Beryl (Hess 22%) fields. Natural gas production from the United Kingdom was primarily from the Atlantic (Hess 25%) and Cromarty (Hess 90%), Easington Catchment Area (Hess 32%), Bacton area (Hess 23%), Beryl (Hess 22%), Everest (Hess 19%), Lomond (Hess 17%) and Nevis (Hess 39%) fields.

Norway:  Substantially all of the 2008 and 2007 Norwegian production was from the Corporation’s interest in the Valhall Field (Hess 28%). A field redevelopment for Valhall commenced in 2008 and is expected to be completed in 2010. The Corporation also holds an interest in the Snohvit Field (Hess 3%) located offshore Norway.

Denmark:  Crude oil and natural gas production comes from the Corporation’s interest in the South Arne Field (Hess 58%).

Russia:  The Corporation’s activities in Russia are conducted through its 80%-owned interest in a corporate joint venture operating in the Volga-Urals region of Russia.

At December 31, 2008, 23% of the Corporation’s total proved reserves were located in Africa (Equatorial Guinea 8%, Algeria 4%, Libya 10% and Gabon 1%). During 2008, 46% of the Corporation’s crude oil and natural gas liquids production was from African operations.

Equatorial Guinea:  The Corporation is the operator and owns an interest in Block G (Hess 85%) which contains the Ceiba Field and Okume Complex.

Algeria:  The Corporation has a 49% interest in a venture with the Algerian national oil company that is redeveloping three oil fields.

Libya:  The Corporation, in conjunction with its Oasis Group partners, has oil and gas production operations in the Waha concessions in Libya (Hess 8%). The Corporation also owns a 100% interest in offshore exploration Area 54, where a successful exploration well was drilled in 2008. The Corporation intends to obtain 3D seismic in Area 54 and further drilling is planned.

Gabon:  The Corporation’s activities in Gabon are conducted through its Gabonese subsidiary, where the Corporation has interests in the Rabi Kounga, Toucan and Atora fields. In the third quarter of 2008, the Corporation acquired the remaining 22.5% interest in the Gabonese subsidiary.

Egypt:  The Corporation has a25-yeardevelopment lease for the West Mediterranean Block 1 concession (West Med Block) (Hess 55%), which contains four existing natural gas discoveries and additional exploration opportunities. During 2008, the Corporation drilled a successful exploration well on the block, which encountered natural gas and crude oil. The Corporation is currently conducting engineering studies and further exploratory drilling is planned.

Ghana:  The Corporation holds a 100% interest in the Cape Three Points South Block located offshore Ghana. The Corporation is currently acquiring new 3D seismic in the unexplored western half of the license area.

At December 31, 2008, 27% of the Corporation’s total proved reserves were located in the Asia and other region (JDA 13%, Indonesia 9%, Thailand 3% and Azerbaijan 2%). During 2008, 5% of the Corporation’s crude oil and natural gas liquids production and 52% of its natural gas production were from Asia and other operations.

Joint Development Area of Malaysia and Thailand:  The Corporation owns an interest in Block A-18of the JDA (Hess 50%) in the Gulf of Thailand. Phase 2 gas sales commenced in November of 2008 upon commissioning of a third-party gas export pipeline to Thailand.

Indonesia:  The Corporation’s natural gas production in Indonesia primarily comes from its interests offshore in the Ujung Pangkah project (Hess 75%), which commenced in 2007, and the Natuna A Field (Hess 23%). Additional production from a Phase 2 oil project at Ujung Pangkah is expected in mid 2009. The Corporation also owns an interest in the onshore Jambi Merang natural gas project (Hess 25%), which was sanctioned for development in 2007. In the fourth quarter of 2008, the Corporation acquired a 100% working interest in the offshore Semai V exploration block.

Thailand:  The Corporation’s natural gas production in Thailand primarily comes from the offshore Pailin Field (Hess 15%) and the onshore Sinphuhorm Block (Hess 35%).

Azerbaijan:  The Corporation has an interest in the Azeri-Chirag-Gunashli (ACG) fields (Hess 3%) in the Caspian Sea. The Corporation also holds an interest in the Baku-Tbilisi-Ceyhan (BTC) Pipeline (Hess 2%).

Australia:  The Corporation holds a 100% interest in an exploration license covering 780,000 acres in the Carnarvon basin offshore Western Australia (WA-Block 390-P). During 2008, the Corporation completed drilling its initial four exploration wells of a 16 well commitment on the block. Three of the four wells discovered natural gas and the Corporation plans to drill five additional exploration wells in 2009. The Corporation also holds a 50% interest inWA-Block 404-Plocated offshore Western Australia, which covers a total area of 680,000 acres. The operator plans to drill three wells on this block in 2009.

Brazil:  The Corporation has interests in two blocks located offshore Brazil, theBM-S-22Block (Hess 40%) in the Santos Basin and theBM-ES-30Block (Hess 60%) in the Espirito Santo Basin. The operator commenced drilling of the Azulao exploration well onBM-S-22 in 2008 and filed a Notice of Discovery with the regulators on January 16, 2009. The operator plans to drill another well on BM-S-22in 2009.

The Corporation’s net proved oil and gas reserves at the end of 2008, 2007 and 2006 are presented under Supplementary Oil and Gas Data on pages 75 through 81 in the accompanying financial statements.

During 2008, the Corporation provided oil and gas reserve estimates for 2007 to the United States Department of Energy. Such estimates are consistent with the information furnished to the SEC onForm 10-Kfor the year ended December 31, 2007, although not necessarily directly comparable due to the requirements of the individual requests. There were no differences in excess of 5%.

Sales commitments:  The Corporation has no contracts or agreements to sell fixed quantities of its crude oil production. In the United States, natural gas is marketed by the M&R segment on a spot basis and under contracts for varying periods to local distribution companies, and commercial, industrial and other purchasers. The Corporation’s United States natural gas production is expected to approximate 20% of its 2009 sales commitments under long-term contracts. The Corporation attempts to minimize supply risks associated with its United States natural gas supply commitments by entering into purchase contracts with third parties having reliable sources of supply, on terms substantially similar to those under its commitments and by leasing storage facilities.

Outside of the United States, the Corporation generally sells its natural gas production under long-term sales contracts at prices that are periodically adjusted due to changes in commodity prices or other indices. In the United Kingdom, the Corporation sells the majority of its natural gas production on a spot basis.

The table above does not include costs of finding and developing proved oil and gas reserves, or the costs of related general and administrative expenses, interest expense and income taxes.

Number of net waterfloods and pressure maintenance projects in process of installation at December 31, 2008 — 1

Total refined product sales were as follows:

The Corporation owns a 50% interest in HOVENSA L.L.C. (HOVENSA), a refining joint venture in the United States Virgin Islands with a subsidiary of Petroleos de Venezuela S.A. (PDVSA). In addition, it owns and operates a refining facility in Port Reading, New Jersey.

HOVENSA:  Refining operations at HOVENSA consist of crude units, a fluid catalytic cracking unit and a delayed coker unit.

The following table summarizes capacity and utilization rates for HOVENSA:

The delayed coker unit permits HOVENSA to run lower-cost heavy crude oil. HOVENSA has a long-term supply contract with PDVSA to purchase 115,000 barrels per day of Venezuelan Merey heavy crude oil. PDVSA also supplies 155,000 barrels per day of Venezuelan Mesa medium gravity crude oil to HOVENSA under a long-term crude oil supply contract. The remaining crude oil requirements are purchased mainly under contracts of one year or less from third parties and through spot purchases on the open market. After sales of refined products by HOVENSA to third parties, the Corporation purchases 50% of HOVENSA’s remaining production at market prices.

Gross crude runs at HOVENSA averaged 441,000 barrels per day in 2008 compared with 454,000 barrels per day in 2007 and 448,000 barrels per day in 2006. The 2008 utilization rate for the fluid catalytic cracking unit at HOVENSA reflects lower utilization due to weak refining margins, planned and unplanned maintenance of certain units, and a refinery wide shut down for Hurricane Omar. During the second quarter of 2007, the coker unit at HOVENSA was shut down for approximately 30 days for a scheduled turnaround. The fluid catalytic cracking unit at HOVENSA was shut down for approximately 22 days of unplanned maintenance in 2006.

Port Reading Facility:  The Corporation owns and operates a fluid catalytic cracking facility in Port Reading, New Jersey, with a capacity of 70,000 barrels per day. This facility, which processes residual fuel oil and vacuum gas oil, operated at a rate of approximately 64,000 barrels per day in 2008 compared with 61,000 barrels per day in 2007 and 63,000 barrels per day in 2006. Substantially all of Port Reading’s production is gasoline and heating oil.

The Corporation markets refined petroleum products, natural gas and electricity on the East Coast of the United States to the motoring public, wholesale distributors, industrial and commercial users, other petroleum companies, governmental agencies and public utilities.

The Corporation had 1,366 HESS^®gasoline stations at December 31, 2008, including stations owned by its WilcoHess joint venture (Hess 44%). Approximately 90% of the gasoline stations are operated by the Corporation or WilcoHess. Of the operated stations, 93% have convenience stores on the sites. Most of the Corporation’s gasoline stations are in New York, New Jersey, Pennsylvania, Florida, Massachusetts, North Carolina and South Carolina.

Refined product sales averaged 472,000 barrels per day in 2008 compared with 451,000 barrels per day in 2007 and 459,000 barrels in 2006. Total energy marketing natural gas sales volumes, including utility and spot sales, were approximately 2.0 million mcf per day in 2008, 1.9 million mcf per day in 2007 and 1.8 million mcf per day in 2006. In addition, energy marketing sold electricity volumes at the rate of 3,200, 2,800 and 1,400 megawatts (round the clock) in 2008, 2007 and 2006, respectively. The increases reflect the impact of acquisitions and organic growth.

The Corporation owns 21 terminals with an aggregate storage capacity of 22 million barrels in its East Coast marketing areas. The Corporation also owns a terminal in St. Lucia with a storage capacity of 10 million barrels, which is operated for third party storage.

The Corporation has a 50% voting interest in a consolidated partnership that trades energy commodities and derivatives. The Corporation also takes energy commodity and derivative trading positions for its own account.

The Corporation also has a 92.5% interest in Hess LNG, which is pursuing investments in liquefied natural gas (LNG) terminals and related supply, trading and marketing opportunities. The joint venture is pursuing the development of LNG terminal projects located in Fall River, Massachusetts and Shannon, Ireland. In addition, a wholly-owned subsidiary of the Corporation is exploring the development of fuel cell technology.

See Item 1A, Risk Factors Related to Our Business and Operations, for a discussion of competition and market conditions.

Compliance with various existing environmental and pollution control regulations imposed by federal, state, local and foreign governments is not expected to have a material adverse effect on the Corporation’s financial condition or results of operations. The Corporation spent $23 million in 2008 for environmental remediation.

The number of persons employed by the Corporation at year end was approximately 13,500 in 2008 and 13,300 in 2007.

The Corporation’s Internet address is www.hess.com. On its website, the Corporation makes available free of charge its annual report onForm 10-K,quarterly reports onForm 10-Q,current reports onForm 8-Kand amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Corporation electronically files with or furnishes such material to the Securities and Exchange Commission. Copies of the Corporation’s Code of Business Conduct and Ethics, its Corporate Governance Guidelines and the charters of the Audit Committee, the Compensation and Management Development Committee and the Corporate Governance and Nominating Committee of the Board of Directors are available on the Corporation’s website and are also available free of charge upon request to the Secretary of the Corporation at its principal executive offices. The Corporation has also filed with the New York Stock Exchange (NYSE) its annual certification that the Corporation’s chief executive officer is unaware of any violation of the NYSE’s corporate governance standards.

Our business activities and the value of our securities are subject to significant risk factors, including those described below. The risk factors described below could negatively affect our operations, financial condition, liquidity and results of operations, and as a result, holders and purchasers of our securities could lose part or all of their investments. It is possible additional risks relating to our securities may be described in a prospectus supplement if we issue securities in the future.

Commodity Price Risk:  Our estimated proved reserves, revenue, operating cash flows, operating margins, future earnings and trading operations are highly dependent on the prices of crude oil, natural gas and refined petroleum products, which are influenced by numerous factors beyond our control. Historically these prices have been very volatile and most recently have been adversely affected by falling demand caused by the global economic downturn. The major foreign oil producing countries, including members of the Organization of Petroleum Exporting Countries (OPEC), exert considerable influence over the supply and price of crude oil and refined petroleum products. Their ability or inability to agree on a common policy on rates of production and other matters has a significant impact on the oil markets. The commodities trading markets may also influence the selling prices of crude oil, natural gas and refined petroleum products. If crude oil and natural gas prices remain at year-end 2008 levels, our revenues, profitability and cash flow will be lower in 2009 compared with 2008. In addition, if crude oil and natural gas prices decline further from year-end 2008 levels, it could result in a reduction in the carrying value of our oil and gas assets, proved oil and gas reserves, deferred tax assets and goodwill. To the extent that we engage in hedging activities to mitigate commodity price volatility, we may not realize the benefit of price increases above the hedged price. Changes in commodity prices can also have a material impact on margin requirements under our derivative contracts.

Technical Risk:  We own or have access to a finite amount of oil and gas reserves which will be depleted over time. Replacement of oil and gas reserves is subject to successful exploration drilling, development activities, and enhanced recovery programs. Reserve replacement can also be achieved through acquisition. Therefore, future oil and gas production is dependent on technical success in finding and developing additional hydrocarbon reserves. Exploration activity involves the interpretation of seismic and other geological and geophysical data, which does not always successfully predict the presence of commercial quantities of hydrocarbons. Drilling risks include unexpected adverse conditions, irregularities in pressure or formations, equipment failure, blowouts and weather interruptions. Future developments may be affected by unforeseen reservoir conditions which negatively affect recovery factors or flow rates. The costs of drilling and development activities have increased in recent years which could negatively affect expected economic returns. Although due diligence is used in evaluating acquired oil and gas properties, similar uncertainties may be encountered in the production of oil and gas on properties acquired from others.

Oil and Gas Reserves and Discounted Future Net Cash Flow Risks: Numerous uncertainties exist in estimating quantities of proved reserves and future net revenues from those reserves. Actual future production, oil and gas prices, revenues, taxes, capital expenditures, operating expenses, geologic success and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates and could materially affect the estimated quantities and future net revenues of our proved reserves. In addition, reserve estimates may be subject to downward or upward revisions based on production performance, purchases or sales of properties, results of future development, prevailing oil and gas prices, production sharing contracts which may decrease reserves as crude oil and natural gas prices increase, and other factors.

Political Risk:  Federal, state, local, territorial and foreign laws and regulations relating to tax increases and retroactive tax claims, expropriation or nationalization of property, mandatory government participation, cancellation or amendment of contract rights, and changes in import regulations, limitations on access to exploration and development opportunities, as well as other political developments may affect our operations. Some of the international areas in which we operate are politically less stable than our domestic operations. In addition, the threat of terrorism around the world poses additional risks to the operations of the oil and gas industry. In our M&R segment, we market motor fuels through lessee-dealers and wholesalers in certain states where legislation prohibits producers or refiners of crude oil from directly engaging in retail marketing of motor fuels. Similar legislation has been periodically proposed in the U.S. Congress and in various other states.

Environmental Risk:  Our oil and gas operations, like those of the industry, are subject to environmental risk such as oil spills, produced water spills, gas leaks and ruptures and discharges of substances or gases that could expose us to substantial liability for pollution or other environmental damage. Our operations are also subject to numerous United States federal, state, local and foreign environmental laws and regulations. Non-compliance with these laws and regulations may subject us to administrative, civil or criminal penalties, remedialclean-upsand natural resource damages or other liabilities. In addition, increasingly stringent environmental regulations, particularly relating to the production of motor and other fuels and the potential for controls on greenhouse gas emissions, have resulted, and will likely continue to result, in higher capital expenditures and operating expenses for us and the oil and gas industry in general.

Competitive Risk:  The petroleum industry is highly competitive and very capital intensive. We encounter competition from numerous companies in each of our activities, including acquiring rights to explore for crude oil and natural gas, and in purchasing and marketing of refined products and natural gas. Many competitors, including national oil companies, are larger and have substantially greater resources. We are also in competition with producers and marketers of other forms of energy. Increased competition for worldwide oil and gas assets has significantly increased the cost of acquisitions. In addition, competition for drilling services, technical expertise and equipment has affected the availability of technical personnel and drilling rigs and has increased capital and operating costs.

Catastrophic Risk:  Although we maintain a level of insurance coverage consistent with industry practices against property and casualty losses, our oil and gas operations are subject to unforeseen occurrences which may damage or destroy assets or interrupt operations. Examples of catastrophic risks include hurricanes, fires, explosions and blowouts. These occurrences have affected us from time to time. During 2008, our annual Gulf of Mexico production of crude oil and natural gas was reduced by an estimated 7,000 boepd due to the impact of Hurricanes Ike and Gustav.

The Registrant, along with many other companies engaged in refining and marketing of gasoline, has been a party to lawsuits and claims related to the use of methyl tertiary butyl ether (MTBE) in gasoline. A series of similar lawsuits, many involving water utilities or governmental entities, were filed in jurisdictions across the United States against producers of MTBE and petroleum refiners who produced gasoline containing MTBE, including the Registrant. While the majority of the cases were settled in 2008, the Registrant remains a defendant in approximately 20 cases. These cases have been consolidated for pre-trial purposes in the Southern District of New York as part of a multi-district litigation proceeding, with the exception of an action brought in state court by the State of New Hampshire. The principal allegation in all cases is that gasoline containing MTBE is a defective product and that these parties are strictly liable in proportion to their share of the gasoline market for damage to groundwater resources and are required to take remedial action to ameliorate the alleged effects on the environment of releases of MTBE. The damages claimed in these actions are substantial and in almost all cases, punitive damages are also sought. In the fourth quarter 2007, the Corporation recorded a pre-tax charge of $40 million related to MTBE litigation, including amounts for the cases settled in 2008.

Over the last several years, many refiners have entered into consent agreements to resolve the United States Environmental Protection Agency’s (EPA) assertions that refining facilities were modified or expanded without complying with New Source Review regulations that require permits and new emission controls in certain circumstances and other regulations that impose emissions control requirements. These consent agreements, which arise out of an EPA enforcement initiative focusing on petroleum refiners and utilities, have typically imposed substantial civil fines and penalties and required (i) significant capital expenditures to install emissions control equipment over a three to eight year time period and (ii) changes to operations which resulted in increased operating costs. The capital expenditures, penalties and supplemental environmental projects for individual refineries covered by the settlements can vary significantly, depending on the size and configuration of the refinery, the circumstances of the alleged modifications and whether the refinery has previously installed more advanced pollution controls. EPA initially contacted Registrant and HOVENSA regarding the Petroleum Refinery Initiative in August 2003. Negotiations with EPA and the relevant states and the Virgin Islands are continuing and substantial progress has been made toward resolving this matter for both the Corporation and HOVENSA. While

On September 13, 2007, HOVENSA received a Notice Of Violation (NOV) pursuant to section 113(a)(i) of the Clean Air Act (Act) from the EPA finding that HOVENSA failed to obtain proper permitting for the construction and operation of its delayed coking unit in accordance with applicable law and regulations. HOVENSA believes it properly obtained all necessary permits for this project. The NOV states that EPA has authority to issue an administrative order assessing penalties for violation of the Act. HOVENSA has entered into discussions with the EPA to reach resolution of this matter. Registrant does not believe that this matter will result in material liability to HOVENSA or Registrant.

In December 2006, HOVENSA received a NOV from the EPA alleging non-compliance with emissions limits in a permit issued by the Virgin Islands Department of Planning and Natural Resources (DPNR) for the two process heaters in the delayed coking unit. The NOV was issued in response to a voluntary investigation and submission by HOVENSA regarding potential non-compliance with the permit emissions limits for two pollutants. Any exceedances were minor from the perspective of the amount of pollutants emitted in excess of the limits. HOVENSA has entered into discussions with the appropriate governmental agencies to reach resolution of this matter and does not believe that it will result in material liability to HOVENSA or the Corporation.

Registrant received a directive from the New Jersey Department of Environmental Protection (NJDEP) to remediate contamination in the sediments of the lower Passaic River and NJDEP is also seeking natural resource damages. The directive, insofar as it affects Registrant, relates to alleged releases from a petroleum bulk storage terminal in Newark, New Jersey now owned by the Registrant. Registrant and over 70 companies entered into an Administrative Order on Consent with EPA to study the same contamination. NJDEP has also sued several other companies linked to a facility considered by the State to be the largest contributor to river contamination. In January 2009, these companies added third party defendants, including the Registrant, to that case. In June 2007, EPA issued a draft study which evaluated six alternatives for early action, with costs ranging from $900 million to $2.3 billion. Based on adverse comments from Registrant and others, EPA is reevaluating its alternatives. In addition, the federal trustees for natural resources have begun a separate assessment of damages to natural resources in the Passaic River. Given the ongoing studies, remedial costs cannot be reliably estimated at this time. Based on currently known facts and circumstances, the Registrant does not believe that this matter will result in material liability because its terminal could not have contributed contamination along most of the river’s length and did not store or use contaminants which are of the greatest concern in the river sediments, and because there are numerous other parties who will likely share in the cost of remediation and damages.

In July 2004, Hess Oil Virgin Islands Corp. (HOVIC), a wholly owned subsidiary of the Registrant, and HOVENSA, each received a letter from the Commissioner of the Virgin Islands Department of Planning and Natural Resources and Natural Resources Trustees, advising of the Trustee’s intention to bring suit against HOVIC and HOVENSA under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The letter alleges that HOVIC and HOVENSA are potentially responsible for damages to natural resources arising from releases of hazardous substances from the “HOVENSA Oil Refinery.” HOVENSA currently owns and operates a petroleum refinery on the south shore of St. Croix, United States Virgin Islands, which had been operated by HOVIC until October 1998. An action was filed on May 5, 2005 in the District Court of the Virgin Islands against HOVENSA, HOVIC and other companies that operated industrial facilities on the south shore of St. Croix asserting that the defendants are liable under CERCLA and territorial statutory and common law for damages to natural resources. HOVIC and HOVENSA do not believe that this matter will result in a material liability as they believe that they have strong defenses to this complaint, and they intend to vigorously defend this matter.

The Registrant periodically receives notices from EPA that it is a “potential responsible party” under the Superfund legislation with respect to various waste disposal sites. Under this legislation, all potentially responsible parties are jointly and severally liable. For certain sites, EPA’s claims or assertions of liability against the Corporation relating to these sites have not been fully developed. With respect to the remaining sites, EPA’s claims have been settled, or a proposed settlement is under consideration, in all cases for amounts that are not material. The ultimate impact of these proceedings, and of any related proceedings by private parties, on the

The Securities and Exchange Commission (SEC) notified the Registrant that on July 21, 2005, it commenced a private investigation into payments made to the government of Equatorial Guinea or to officials and persons affiliated with officials of the government of Equatorial Guinea. The SEC has requested documents and information from the Registrant and other oil and gas companies that have operations or interests in Equatorial Guinea. Registrant has provided the documents and information requested.

The Corporation is from time to time involved in other judicial and administrative proceedings, including proceedings relating to other environmental matters. Although the ultimate outcome of these proceedings cannot be ascertained at this time and some of them may be resolved adversely to the Corporation, no such proceeding is required to be disclosed under applicable rules of the SEC. In management’s opinion, based upon currently known facts and circumstances, such proceedings in the aggregate will not have a material adverse effect on the financial condition of the Corporation.

During the fourth quarter of 2008, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

The following table presents information as of February 1, 2009 regarding executive officers of the Registrant:

Except for Messrs. Hill, Bohling, Drennen, Goodell, Mehra, Shearer and Ms. Ryerkerk, each of the above officers has been employed by the Registrant or its subsidiaries in various managerial and executive capacities for more than five years. Prior to joining the Corporation, Mr. Hill served in senior executive positions in exploration and production operations of Royal Dutch Shell and its subsidiaries for 25 years. Mr. Bohling was employed in senior human resource positions with American Standard Corporation and CDI Corporation before joining the Registrant in 2004. Mr. Drennen served in senior executive positions in exploration and technology at ExxonMobil and its subsidiaries prior to joining the Corporation in 2007. Before joining the Corporation in 2009, Mr. Goodell

The common stock of Hess Corporation is traded principally on the New York Stock Exchange (ticker symbol: HES). High and low sales prices were as follows:

Set forth below is a line graph comparing the Corporation’s cumulative total shareholder return for five years, assuming reinvestment of dividends on common stock, with the cumulative total return of:

At December 31, 2008, there were 5,909 stockholders (based on number of holders of record) who owned a total of 326,132,740 shares of common stock.

Cash dividends on common stock totaled $.40 per share ($.10 per quarter) during 2008 and 2007.

Following is information on the Registrant’s equity compensation plans at December 31, 2008:

See Note 8, “Share-Based Compensation,” in the notes to the financial statements for further discussion of the Corporation’s equity compensation plans.

A five-year summary of selected financial data follows:

The Corporation is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity.

Net income in 2008 was $2,360 million compared with $1,832 million in 2007 and $1,920 million in 2006. Diluted earnings per share were $7.24 in 2008 compared with $5.74 in 2007 and $6.08 in 2006. A table of items affecting comparability between periods is shown on page 21.

The Corporation’s strategy for the E&P segment is to profitably grow reserves and production in a sustainable and financially disciplined manner. The Corporation’s total proved reserves were 1,432 million barrels of oil equivalent (boe) at December 31, 2008 compared with 1,330 million boe at December 31, 2007 and 1,243 million boe at December 31, 2006. Total proved reserves at year end 2008 increased 102 million boe or 8% from the end of 2007.

E&P net income was $2,423 million in 2008, $1,842 million in 2007 and $1,763 million in 2006. The improved results in 2008 as compared to 2007 were primarily driven by higher average crude oil selling prices. At December 31, 2008, crude oil selling prices were significantly below the average prices in 2008.

Production averaged 381,000 barrels of oil equivalent per day (boepd) in 2008 compared with 377,000 boepd in 2007 and 359,000 boepd in 2006. Production in 2008 increased 4,000 boepd or 1% from 2007. In 2009, the Corporation currently estimates total worldwide production to be approximately 380,000 boepd to 390,000 boepd.

During 2008, the Corporation progressed the following development projects that will add to its production in future years:

During 2008, the Corporation’s exploration activities included:

The Corporation’s strategy for the M&R segment is to deliver consistent operating performance and generate free cash flow. M&R net income was $277 million in 2008, $300 million in 2007 and $394 million in 2006. Earnings in 2008 and 2007 reflect lower average margins compared to the prior periods.

Refining operations contributed net income of $73 million in 2008, $193 million in 2007 and $240 million in 2006. The Corporation received cash distributions from HOVENSA totaling $50 million in 2008, $300 million in 2007 and $400 million in 2006. Gross crude runs at HOVENSA averaged 441,000 barrels per day in 2008 compared with 454,000 barrels per day in 2007 and 448,000 barrels per day in 2006. In 2007, HOVENSA successfully completed the first turnaround of its delayed coker unit. The Port Reading refinery operated at an average of 64,000 barrels per day in 2008 versus 61,000 barrels per day in 2007 and 63,000 barrels per day in 2006. Marketing earnings were $240 million in 2008, $83 million in 2007 and $108 million in 2006. Total refined product sales volumes averaged 472,000 barrels per day in 2008 compared with 451,000 barrels per day in 2007 and 459,000 barrels per day in 2006.

Net cash provided by operating activities was $4,567 million in 2008, $3,507 million in 2007 and $3,491 million in 2006, principally reflecting increased earnings. At December 31, 2008, cash and cash equivalents totaled $908 million compared with $607 million at December 31, 2007. Total debt was $3,955 million at December 31, 2008 compared with $3,980 million at December 31, 2007. The Corporation’s debt to capitalization ratio at December 31, 2008 was 24.3% compared with 28.9% at the end of 2007. The Corporation has debt maturities of $143 million in 2009 and $31 million in 2010. In February 2009, the Corporation issued $250 million of 5 year notes with a coupon of 7% and $1 billion of 10 year notes with a coupon of 8.125%.

Capital and exploratory expenditures were as follows for the years ended December 31:

The Corporation anticipates $3.2 billion in capital and exploratory expenditures in 2009, of which $3.1 billion relates to E&P operations.

The after-tax results by major operating activity are summarized below:

In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.

The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability between periods. The items in the table below are explained, and the pre-tax amounts are shown, on pages 25 through 27.

Following is a summarized income statement of the Corporation’s Exploration and Production operations:

After considering the Exploration and Production items in the table on page 21, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, production volumes, operating costs, exploration expenses, foreign exchange, and income taxes, as discussed below.

Selling prices:  Higher average selling prices increased Exploration and Production revenues by approximately $2,100 million in 2008 compared with 2007. At December 31, 2008, the selling prices of crude oil and natural gas had decreased significantly from the average 2008 selling prices indicated below. In 2007, an increase in average crude oil selling prices and reduced hedge positions compared with 2006 increased revenues by approximately $740 million.

The Corporation’s average selling prices were as follows:

The after-tax impacts of hedging reduced earnings by $423 million ($685 million before income taxes) in 2008, $244 million ($399 million before income taxes) in 2007 and $285 million ($449 million before income taxes) in 2006. In October 2008, the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts with the same counterparty covering 24,000 barrels per day from 2009 through 2012 at a per barrel price of $86.95 each year. The deferred after-tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. The estimated annual after-tax loss from the closed positions will be approximately $335 million from 2009 through 2012. The pretax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of the Corporation’s African production.

Production and sales volumes:  The Corporation’s crude oil and natural gas production was 381,000 boepd in 2008 compared with 377,000 boepd in 2007 and 359,000 boepd in 2006. The Corporation currently estimates that its 2009 production will average between 380,000 and 390,000 boepd.

The Corporation’s net daily worldwide production was as follows:

Operating costs and depreciation, depletion and amortization:   Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $321 million in 2008 and $409 million in 2007 compared with the corresponding amounts in prior years (excluding the charges for hurricane related costs in 2008 and vacated leased office space in 2006 that are discussed below). The increases in 2008 and 2007 were primarily due to higher production volumes, increased production taxes (due to higher realized selling prices), increased costs of services and materials and higher employee costs. Cash operating costs per barrel of oil equivalent were $15.49 in 2008, $13.36 in 2007 and $10.92 in 2006. Cash operating costs in 2009 are estimated to be in the range of $15.00 to $16.00 per barrel of oil equivalent.

Excluding the pre-tax amount of asset impairments, depreciation, depletion and amortization charges increased by $531 million and $232 million in 2008 and 2007, respectively. The increases were primarily due to higher production volumes and per barrel costs. Depreciation, depletion and amortization costs per barrel of oil equivalent were $13.79 in 2008, $10.11 in 2007 and $8.85 in 2006. Depreciation, depletion and amortization costs for 2009 are estimated to be in the range of $13.00 to $14.00 per barrel.

Exploration expenses:  Exploration expenses were higher in 2008 compared with 2007, principally due to higher dry hole costs. Exploration expenses were lower in 2007 compared with 2006, primarily reflecting lower dry hole costs, partially offset by increased seismic studies.

Income taxes:  After considering the items in the table below, the effective income tax rates for Exploration and Production operations were 49% in 2008, 50% in 2007 and 54% in 2006. The effective income tax rate for E&P operations in 2009 is estimated to be in the range of 57% to 61%. The increase from the 2008 effective rate largely reflects the impact of Libyan taxes in a lower commodity price environment.

Foreign Exchange:  The after-tax foreign currency loss was $84 million in 2008, compared with a loss of $7 million in 2007 and a gain of $10 million in 2006. The increased foreign currency loss reflects the effect of significant exchange rate movements in the fourth quarter of 2008 on the remeasurement of assets, liabilities and foreign currency forward contracts by certain foreign businesses.

Reported Exploration and Production earnings include the following items of income (expense) before and after income taxes: