Occidental Petroleum 2002 Annual Report Download - page 33

percent of sodium chlorate operations in Canada and Louisiana.
CAPITAL EXPENDITURES
Commitments at December 31, 2002 for major capital expenditures during 2003
and thereafter were approximately $158 million. Total capital expenditures for
2003 are estimated to be approximately $1.3 billion. Occidental will fund these
commitments and capital expenditures with cash from operations and proceeds from
existing credit facilities as necessary.
DERIVATIVE ACTIVITIES AND MARKET RISK
GENERAL
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument which
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
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ACCOUNTING FOR DERIVATIVES AND DEFINITIONS
Occidental accounts for its derivatives under the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS No. 137 and SFAS No. 138 (collectively SFAS No. 133). Under SFAS No.
133, recognition of the gain or loss that results from recording and adjusting a
derivative to fair market value depends on the purpose for issuing or holding
the derivative. Gains and losses from derivatives that are not designated as
hedges are recognized immediately in earnings. A hedge is considered effective
if changes in its value are offset exactly by changes in the value of the item
being hedged. A hedge is ineffective to the extent changes in its value are not
matched by offsetting changes in value for the item being hedged. If a
derivative is used to hedge the fair value of an asset or liability (fair value
hedge), the gains or losses from adjusting the derivative to its market value
are recognized in earnings immediately and to the extent the hedge is effective,
offset the concurrent recognition in earnings of changes in the fair value of
the hedged item. Gains or losses from derivatives used to hedge future cash
flows (cash flow hedges) are recorded on the balance sheet in accumulated other
comprehensive income (OCI), a component of stockholders' equity, until the
transaction that is hedged is recognized in earnings. However, to the extent the
value of the derivative differs from the value of the anticipated cash flows of
the hedged transaction, the hedge is considered partly ineffective and the
resulting gains or losses are recognized immediately in earnings.
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices. Based on current levels of production, if oil prices vary overall by
$1 per barrel, it would have approximately a $110 million annual effect on
income, before U.S. income tax. If natural gas prices vary by $0.10 per million
Btu (MMBtu), it would have approximately a $19 million annual effect on income,
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's results are also sensitive to fluctuations in chemical prices.
If chlorine or caustic soda prices vary by $10/ton, it would have approximately
a $10 million and $26 million, respectively, annual effect on income before U.S.
income taxes. If PVC prices vary by $.01/lb, it would have approximately a $35
million annual effect on income, before U.S. income taxes. If EDC prices vary by
$10/ton, it would have approximately a $6 million annual effect on income,
before U.S. income taxes. According to Chemical Market Associates, Inc.,
December 2002 average contract prices were: chlorine - $215/ton, caustic soda -
$148/ton, PVC - $0.37/lb and EDC - $220/ton.
MARKETING AND TRADING OPERATIONS