Occidental Petroleum 2002 Annual Report Download - page 44

are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
costs of the properties will be subject to depreciation and depletion. If the
development work were to be unsuccessful, the capitalized costs of the
properties related to this unsuccessful work would be expensed in the year in
which the determination was made. The timing of any writedowns of these unproven
properties, if warranted, depends upon the nature, timing and extent of future
exploration and development activities and their results. Occidental believes
its exploration and development efforts will allow it to fully realize the
unproved property balance.
CHEMICAL ASSETS
The most critical accounting policy affecting Occidental's chemical assets
is the determination of the estimated useful lives of its property, plant and
equipment. The estimated useful lives of Occidental's chemical assets, which
range from 3 years to 50 years, are used to compute depreciation expense and are
also used for impairment tests. The estimated useful lives used for the chemical
facilities were based on the assumption that Occidental would provide an
appropriate level of annual capital expenditures while the plants are still in
operation. Without these continued capital expenditures, the useful lives of
these plants could significantly decrease. Other factors which could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, feedstock costs, energy prices, environmental regulations,
competition and technological changes.
Occidental is required to perform impairment tests on its assets whenever
events or changes in circumstances lead to a reduction in the estimated useful
lives or estimated future cash flows that would indicate that the carrying
amount may not be recoverable, or when management's plans change with respect to
those assets. Under the provisions of SFAS No. 144, Occidental must compare the
undiscounted future cash flows of an asset to its carrying value. The key
factors that could significantly affect future cash flows are future product
prices, feedstock costs, energy costs and remaining estimated useful life.
Due to a temporary decrease in demand for some of its products, Occidental
temporarily idled an EDC plant in June 2001, and a chlor-alkali plant in
December 2001. These facilities will remain idle until market conditions
improve. Management expects that both of these plants will become operational in
the future. The net book value of these two plants was $150 million at December
31, 2002. These facilities were tested for impairment at the time they were
temporarily idled and, based on the results, no impairment was deemed necessary
for these two facilities. Occidental continues to depreciate these facilities
based on their remaining estimated useful lives.
Occidental's chemical plants are depreciated using either the
unit-of-production or straight-line method based upon the estimated useful life
of the facilities. The change in the depreciation rate over the prior three
years has been immaterial.
If the estimated useful lives of Occidental's chemical plants were to
decrease based on the factors mentioned above, the most significant impact would
be on depreciation expense. If the estimated remaining useful lives were to
decrease by 10 percent, the annual depreciation charge would increase from $164
million to $182 million.
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ENVIRONMENTAL COSTS AND CONTINGENCIES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Reserves for estimated costs that relate to
existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, Occidental refers to currently available information, including
relevant past experience, available technology, regulations in effect, the
timing of remediation and cost-sharing arrangements. The environmental reserves
are based on management's estimate of the most likely cost to be incurred and
are reviewed periodically and adjusted as additional or new information becomes
available. For the years ended December 31, 2002 and 2001, Occidental has not