Occidental Petroleum 2002 Annual Report Download - page 45

accrued any reimbursements or recoveries as assets. Recoveries and
reimbursements are recorded in income when receipt is probable. Environmental
reserves are recorded on a discounted basis only when a reserve is initially
established and the aggregate amount of the estimated costs for a specific site
and the timing of cash payments are reliably determinable. The reserve
methodology for a specific site is not modified once it has been established.
At sites involving multiple parties, Occidental provides environmental
reserves based upon its expected share of liability. When other parties are
jointly liable, the financial viability of the parties, the degree of their
commitment to participate and the consequences to Occidental of their failure to
participate are evaluated when estimating the company's ultimate share of
liability. Occidental believes that it will not be required to assume a share of
liability of other potentially responsible parties, with whom it is alleged to
be jointly liable, in an amount that would have a material effect on
Occidental's consolidated financial position or liquidity or results of
operations.
Most cost sharing arrangements with other parties fall into one of the
following three categories:
Category 1: CERCLA or state-equivalent sites wherein Occidental and other
alleged potentially responsible parties share the cost of remediation in
accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner
pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and
sales of property wherein the parties to the transaction agree to methods of
allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its
expected net cost of remedial activities, as adjusted by recognition for any
non-performing parties.
In addition to the costs of investigating and implementing remedial
measures, which often take in excess of ten years at CERCLA sites, Occidental's
reserves include management's estimates of the cost of operation and maintenance
of remedial systems. To the extent that the remedial systems are modified over
time in response to significant changes in site-specific data, laws,
regulations, technologies or engineering estimates, Occidental reviews and
changes the reserves accordingly on a site-specific basis.
The following table shows environmental reserve activity for the past three
reporting periods:
In millions 2002 2001 2000
===================================== ======== ======== ========
Balance - Beginning of Year $ 454 $ 402 $ 454
Increases to provision including
interest accretion 25 111 2
Changes from
acquisitions/dispositions -- 5 23
Payments (84) (75) (85)
Other (2) 11 8
-------- -------- --------
Balance - End of Year $ 393 $ 454 $ 402
===================================== ======== ======== ========
Occidental expects to expend funds equivalent to about half of the current
environmental reserve over the next three years and the balance over the next
ten or more years.
If the environmental reserve balance were to either increase or decrease
based on the factors mentioned above, the amount of the increase or decrease
would be immediately recognized in earnings. If the reserve balance were to
decrease by 10 percent, the company would record a pre-tax gain of $39 million.
If the reserve balance were to increase by 10 percent, the company would record