Occidental Petroleum 2002 Annual Report Download - page 43

value of Occidental's assets in countries outside North America aggregated
approximately $2.8 billion, or approximately 17 percent of Occidental's total
assets at that date. Of such assets, approximately $1.9 billion are located in
the Middle East, approximately $628 million are located in Latin America, and
substantially all of the remainder are located in Pakistan.
CRITICAL ACCOUNTING POLICIES
The process of preparing financial statements in accordance with GAAP
requires the management of Occidental to make estimates and judgments regarding
certain items and transactions. It is possible that materially different amounts
could be recorded if these estimates and judgments change or if the actual
results differ from these estimates and judgments. Occidental considers the
following to be its most critical accounting policies which involve the judgment
of Occidental's management.
OIL AND GAS PROPERTIES
Occidental uses the successful efforts method to account for its oil and
gas properties. Under this method, costs of acquiring properties, costs of
drilling successful exploration wells and development costs are capitalized.
Annual lease rentals, exploration costs, geological, geophysical and seismic
costs and exploratory dry-hole costs are expensed as incurred.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids (NGLs) that geological and engineering data
demonstrate with reasonable certainty can be recovered in future years from
known reservoirs under existing economic and operating conditions considering
future production and development costs. There are several factors which could
change Occidental's recorded oil and gas reserves. Significantly higher or lower
product prices could lead to changes in the amount of reserves due to economic
limits or the effects of production-sharing contracts. Occidental receives a
share of production from production-sharing contracts to recover its costs and
an additional share for
28
profit. Occidental's share of production from these contracts decreases when oil
prices improve and increases when oil prices decline. Overall, Occidental's net
economic benefit from these contracts is greater at higher oil prices. In other
contractual arrangements, sustained lower product prices may lead to a situation
where production of reserves becomes uneconomical. This, in turn, could lead to
a reduction in the quantity of recorded reserves. An additional factor that
could result in a change of recorded reserves is the reservoir decline rates
being different than those assumed when the reserves were initially recorded.
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. Overall, Occidental's
revisions to recorded proved reserves were positive for 2002, 2001 and 2000 and
amounted to less than 1 percent, 1 percent and 7 percent, respectively.
Additionally, Occidental is required to perform impairment tests pursuant to
SFAS No. 144 when prices decline and/or reserve estimates change significantly.
There have been no impairments over the past three years.
Depreciation and depletion of oil and gas producing properties is
determined by the unit-of-production method and could change with revisions to
estimated proved recoverable reserves. The change in the depreciation and
depletion rate over the past three years due to revisions of previous reserve
estimates has been immaterial.
If Occidental's oil and gas reserves were to change based on the factors
mentioned above, the most significant impact would be on the depreciation and
depletion rate. A 5 percent increase in the amount of oil and gas reserves would
change the rate from $4.27/barrel to $4.06/barrel, which would increase net
income by $26 million annually. A 5 percent decrease in the oil and gas reserves
would change the rate from $4.27/barrel to $4.48/barrel and would result in a
decrease in net income of $26 million annually.
A portion of the carrying value of Occidental's oil and gas properties are
attributable to unproved properties. At December 31, 2002, the costs
attributable to unproved properties were approximately $1.3 billion. These costs