Occidental Petroleum 2001 Annual Report Download - page 42

of which are discussed in Note 1 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies." Occidental believes the most
critical accounting policy, including judgments in its application, that may
have an impact on Occidental's financial statements relates to the accounting
for capitalized, long-term assets. The rates at which these assets are
depreciated or otherwise written off are subject to a number of judgments about
future events, many of which are beyond management's control.
31
Oil and gas properties are accounted for using the successful-efforts
method. Costs of acquiring proved and unproved properties, costs of drilling
successful exploration wells and development costs are capitalized. Annual lease
rentals and exploration costs, including geological and geophysical costs and
exploratory dry-hole costs, are expensed as incurred. Depreciation and depletion
of oil and gas producing properties is determined principally by the
unit-of-production method and is based on estimated recoverable reserves. These
reserves are subject to revision based upon actual performance as well as
changes in the price of oil and gas. Significantly higher or lower product
prices will lead to changes in the amount of reserves due to economic limits or
the effects of production-sharing contracts. The process of estimation of
reserves is inherently judgmental, especially during the early life of a field.
Estimation of future production and development costs is also subject to change
partially due to factors beyond Occidental's control, such as energy costs and
inflation or deflation of oil field service costs. Thus, Occidental's
depreciation and depletion expense could change in the future. At December 31,
2001, the costs attributable to unproved properties were approximately $1.6
billion, as shown in Note 16 to the Consolidated Financial Statements. These
costs are not subject to depreciation or depletion on a current basis. As
development work progresses and the reserves on these properties are proven,
capitalized cost of the properties will be subject to depreciation and
depletion. If the development work were to be unsuccessful, the capitalized cost
of the properties related to this unsuccessful work would be expensed in the
year in which the determination was made. The rate at which these unproven
properties are written off, therefore, depends upon future exploration and
development activities as well as the product price environment. Occidental
believes its development and exploration efforts will result in the addition of
sufficient reserves to fully realize this investment in unproved properties.
Chemical facilities are depreciated using either the unit-of-production
method or straight-line method, both based upon the estimated productive life of
the facilities. Occidental makes annual capital renewal expenditures for its
chemical plants on a continual basis while the plants are in operation.
Impairment reserves are provided when a decision is made to dispose of a
property or when operations have been curtailed on other than a temporary basis.
Judgments about the useful life of a chemical plant can change depending on a
number of factors, such as sustained higher or lower energy prices,
environmental regulations, foreign competition and technological change. Thus,
Occidental's depreciation expense could be higher or lower depending on these
and other factors.
ADDITIONAL ACCOUNTING CHANGES
Listed below are additional changes in accounting principles applicable to
Occidental.
SFAS NO. 144
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The provisions of this statement are effective
for financial statements issued for fiscal years beginning after December 15,
2001. Occidental will adopt this statement in the first quarter of 2002 and it
is not expected to have an impact on the financial statements.
SFAS NO. 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No.143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The provisions of this
statement are effective for financial statements issued for fiscal years