Occidental Petroleum 2001 Annual Report Download - page 50

recorded on the consolidated balance sheets along with a corresponding increase
in the accounts receivable balance. The consolidated income statement effect of
such an event would not be significant.
Under this program, Occidental serves as the collection agent with respect
to the receivables sold. An interest in new receivables is sold as collections
are made from customers. Fees and expenses under this program are included in
selling, general and administrative and other operating expenses. During the
years ended December 31, 2001, 2000 and 1999, the cost of this program amounted
to approximately 4.5 percent, 6.7 percent and 5.5 percent, respectively, of the
weighted average amount of proceeds received.
INVENTORIES
Product and raw-material inventories, except certain domestic chemicals,
are stated at cost determined on the first-in, first-out (FIFO) and average-cost
methods and did not exceed market value. The remaining product and raw-material
inventories are stated at cost using the last-in, first-out (LIFO) method and
also did not exceed market value. Inventories of materials and supplies are
valued at cost or less (see Note 5).
PROPERTY, PLANT AND EQUIPMENT
Property additions and major renewals and improvements are capitalized at
cost. Interest costs incurred in connection with major capital expenditures are
capitalized and amortized over the lives of the related assets (see Note 15).
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.
At December 31, 2000 corporate property, plant and equipment and
accumulated depreciation, depletion and amortization included $1.2 billion and
$436 million, respectively, for an intrastate gas pipeline owned by Occidental.
The entity that owned this pipeline was sold in 2001. See Note 3 for more
information.
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