Occidental Petroleum 2002 Annual Report Download - page 56

program is used by Occidental as a low-cost source of working capital funding.
The balance of receivables sold at December 31, 2002 and 2001 was $360 million.
This amount is not included in the debt and related trade receivables accounts,
respectively, on Occidental's consolidated balance sheets. Receivables must meet
certain criteria to qualify for the program.
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, 2002, 2001 and 2000, the cost of this program amounted
to approximately 2.1 percent, 4.5 percent and 6.7 percent, respectively, of the
weighted average amount of the receivables sold in each year. The fair value of
any retained interests in the receivables sold is not material. The buyers of
the receivables are protected against significant risk of loss on their purchase
of receivables. Occidental provides for allowances for any doubtful receivables
based on its periodic evaluation of such receivables. The provisions for such
receivables were not material in the years ended December 31, 2002, 2001 and
2000.
The program terminates upon certain events, including Occidental's senior
debt rating falling below investment grade. In such an event, alternative
funding would have to be arranged, which could result in an increase in debt
recorded on the consolidated balance sheet, with a corresponding increase in the
accounts receivable balance. The consolidated income statement effect of such an
event would not be significant.
INVENTORIES
For the oil and gas segment, materials and supplies are valued at the lower
of average cost or market. Inventories are reviewed periodically (at least
annually) for obsolescence. Oil and natural gas liquids (NGLs) inventories,
which typically represent the last few days of production at the end of each
period, are valued at the lower of cost or market. Natural gas trading inventory
is valued at market. (See "Accounting Changes" in Note 4).
For the chemical segment, in countries where allowable, Occidental values
its inventories using the last-in, first-out (LIFO) method as it better matches
current costs and current revenue. Accordingly, Occidental accounts for domestic
inventories in its chemical business, other than materials and supplies, on the
LIFO method. For other countries, Occidental uses the first-in, first-out (FIFO)
method (if the costs of goods are specifically identifiable) or the average-cost
method (if the costs of goods are not specifically identifiable). Materials and
supplies are accounted for using a weighted average cost method.
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 16).
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 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. Depreciation and depletion of oil and gas producing
properties is determined by the unit-of-production method.
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
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