Occidental Petroleum 2001 Annual Report Download - page 35

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transactions, Occidental owns 100 percent of the stock of INDSPEC.
YEMEN ASSET SWAP WITH UNOCAL
In the third quarter of 1999, Occidental acquired oil and gas interests in
Yemen from Unocal International Corporation (UNOCAL) and UNOCAL acquired
Occidental's properties in Bangladesh. The results, after tax benefits, did not
have a significant impact on earnings.
OXYVINYLS PARTNERSHIP
Effective April 30, 1999, Occidental and PolyOne formed two partnerships.
Occidental has a 76-percent interest in OxyVinyls, the PVC commodity resin
partnership, which is the larger of the partnerships, and a 10-percent interest
in a PVC powder compounding partnership. OxyVinyls also has entered into
long-term
26
agreements to supply PVC resin to PolyOne and VCM to Occidental and PolyOne. In
addition, Occidental sold its pellet compounding plant in Pasadena, Texas and
its vinyl film assets in Burlington, New Jersey to PolyOne. As part of the
transaction, PolyOne received $104 million through the retention of working
capital and the distribution of cash from OxyVinyls, and OxyVinyls undertook
approximately $180 million in obligations, for certain PolyOne plant facilities,
which are treated as operating leases for accounting purposes. Occidental did
not record a significant gain or loss on the transaction.
CAPITAL EXPENDITURES
Commitments at December 31, 2001 for major capital expenditures during 2002
and thereafter were approximately $167 million. Total capital expenditures for
2002 are estimated to be approximately $1.1 billion. Occidental will fund these
commitments and capital expenditures with cash from operations and proceeds from
existing credit facilities as necessary.
DERIVATIVE AND HEDGING ACTIVITIES
GENERAL
Occidental's market-risk exposures relate primarily to commodity prices,
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental's results are sensitive mainly to crude oil and natural gas prices
and fluctuations in those prices have an impact on Occidental's results. Based
on current levels of production, if oil prices vary overall by $1 per barrel,
they would have approximately a $108 million annual affect, before U.S. income
tax. If natural gas prices vary by $0.25 per million Btu (MMBtu), they would
have approximately a $60 million annual effect, before U.S. income tax. If
production levels change in the future, the sensitivity of Occidental's results
to oil and gas prices also would change. Occidental may periodically use
different types of derivative instruments to achieve the best prices for oil and
gas, to reduce its exposure to price volatility and thus mitigate fluctuations
in commodity-related cash flows. Usually Occidental remains unhedged to
long-term oil and gas prices. Overall, Occidental's use of derivatives in
hedging activity remains at a relatively low level. However, current rules
require extensive disclosure regarding any level of derivative use. The
following disclosures describe each area of Occidental's derivative activity in
detail.
Effective January 1, 1999, Occidental adopted the provisions of Emerging
Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities", which establishes accounting and
reporting standards for certain energy trading contracts. EITF 98-10 requires
that energy trading contracts must be marked to fair value with gains and losses
included in earnings and separately disclosed in the financial statements or
accompanying footnotes. The initial adoption of EITF 98-10 resulted in a first
quarter non-cash after-tax benefit of $2 million, recorded as a cumulative
effect of a change in accounting principle in 1999.
Effective January 1, 2001, Occidental adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138
(collectively SFAS No. 133, as amended). These statements establish accounting
and reporting standards for derivative instruments and hedging activities and
require an entity to recognize all derivatives in the statement of financial
position and measure those instruments at fair value unless the instrument