HispanicBusiness

(a) Judgements. The key judgements made in applying accounting policies that have the most significant effect on the amounts recognized in these consolidated financial statements are as follows:

(i) Identification of cash generating units. Cash generating units are defined as the lowest grouping of integrated assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets. The classification of assets into cash generating units requires significant judgement and interpretations with respect to shared infrastructure, geographical proximity, petroleum type and similar exposure to market risk and materiality. The Company had previously grouped its development and production assets into the following CGUs: Horizontal Oil, Deep Gas, Shallow Gas and Non-Core. In 2012, the Deep Gas and Non-core assets have been grouped with the Shallow Gas assets to form the new Gas CGU. See note 3 (c) and note 7.

(ii) Fair value of derivatives. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Company uses its judgement to select a variety of methods and makes assumptions that are primarily based on market conditions existing at the end of each reporting period. The Company uses directly and indirectly observable inputs in measuring the value of financial instruments that are not traded in active markets, including quoted commodity prices and volatility. See note 19(d).

(b) Use of estimates. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are as follows:

(i) Estimates of oil and natural gas reserves. Depletion and depreciation as well as the amounts used in impairment calculations are based on estimates of oil and natural gas reserves. Reserves estimates are based on engineering data, estimated future prices, expected future rates of production and the timing of future capital expenditures, all of which are subject to many uncertainties and interpretations. At least once per year, a reserves estimate is prepared by independent qualified reserves evaluators. The Company expects that, over time, its reserves estimates will be revised upward or downward based on updated information such as the results of future drilling, testing and production levels, and may be affected by changes in commodity prices. See notes 6 and 7.

(ii) Recoverable amounts of CGUs. The recoverable amount of a CGU used in the assessment of impairment is the greater of its VIU and its FVLCTS.

VIU is determined by estimating the present value of the future net cash flows from the continued use of the CGU, and is subject to the risks associated with estimating the value of reserves.

FVLCTS refers to the amount obtainable from the sale of a CGU in an arm's length transaction between knowledgeable, willing parties, less costs of disposal. The criteria used in the estimation of this amount are discussed in note 5.

At December 31, 2012 the recoverable amounts of the Company's CGUs were based on their estimated FVLCTS. Note 5 outlines the factors considered in estimating these amounts. The key assumptions and estimates of the value of oil and gas reserves and the existing and potential markets for the Company's oil and gas assets are made at the time of reserves estimation and market assessment and are subject to change as new information becomes available. Changes in international and regional factors including supply and demand of commodities, inventory levels, drilling activity, currency exchange rates, weather, geopolitical and general economic environment factors may result in significant changes to the estimated recoverable amounts of CGUs. See note 7.