b'KOSMOS ENERGY LTD.Notes to Consolidated Financial Statements (Continued)2. Accounting Policies (Continued)is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of the asset. That assessment shall be based on the carrying amount of theasset at the date it is tested for recoverability, whether in use or under development. An impairmentloss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fairvalue. Assets to be disposed of and assets not expected to provide any future service potential to theCompany are recorded at the lower of carrying amount or fair value less cost to sell.We believe the assumptions used in our undiscounted cash flow analysis to test for impairment areappropriate and result in a reasonable estimate of future cash flows. The undiscounted cash flows fromthe analysis exceeded the carrying amount of our long-lived assets. The most significant assumptionsare the pricing and production estimates used in undiscounted cash flow analysis. Where unprovedreserves exist, an appropriately risk-adjusted amount of these reserves may be included in theevaluation. In order to evaluate the sensitivity of the assumptions, we assumed a hypothetical reductionin our production profile which still showed no impairment. If we experience declines in oil pricing,increases in our estimated future expenditures or a decrease in our estimated production profile ourlong-lived assets could be at risk for impairment.Derivative Instruments and Hedging ActivitiesWe utilize oil derivative contracts to mitigate our exposure to commodity price risk associated withour anticipated future oil production. These derivative contracts consist of collars, put options, calloptions and swaps. We also have used interest rate derivative contracts to mitigate our exposure tointerest rate fluctuations related to our long-term debt. Our derivative financial instruments arerecorded on the balance sheet as either assets or liabilities and are measured at fair value. We do notapply hedge accounting to our derivative contracts. See Note 9Derivative Financial Instruments.Estimates of Proved Oil and Natural Gas ReservesReserve quantities and the related estimates of future net cash flows affect our periodiccalculations of depletion and assessment of impairment of our oil and natural gas properties. Proved oiland natural gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquidsthat geological and engineering data demonstrate with reasonable certainty to be recoverable in futureperiods from known reservoirs under existing economic and operating conditions. As additional provedreserves are discovered, reserve quantities and future cash flows will be estimated by independentpetroleum consultants and prepared in accordance with guidelines established by the Securities andExchange Commission (SEC) and the Financial Accounting Standards Board (FASB). Theaccuracy of these reserve estimates is a function of:\x7f the engineering and geological interpretation of available data;\x7f estimates of the amount and timing of future operating cost, production taxes, development costand workover cost;\x7f the accuracy of various mandated economic assumptions; and\x7f the judgments of the persons preparing the estimates.114'