Occidental Petroleum 2003 Annual Report Download - page 16

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Continuing strength in natural gas and ethylene prices pushed costs higher
in PVC, and led to price increases of two cents per pound per month for four
consecutive months in early 2003, for a total increase of 22-percent. These
increases were in addition to the 43-percent increase in PVC resin prices in
2002, which was also driven by rising feedstock and energy costs.
Total year 2003 demand was lower by 2 percent compared with 2002.
For 2003, ethylene prices rose by over 5.5 cents per pound, and average
natural gas costs were nearly $2 per million British Thermal Units (MMBTU)
higher than 2002.
OxyChem operated its PVC facilities at an average operating rate of 88
percent for 2003, slightly above the North American industry average operating
rate of 86 percent.
In the fourth quarter of 2003, export markets for both PVC and VCM
strengthened notably, helped by VCM outages in the U.S. and overseas.
DISPOSITION OF EQUISTAR INTEREST AND ACQUISITION OF LYONDELL INTEREST
In August 2002, Occidental sold its 29.5-percent share of Equistar to
Lyondell and purchased a 21-percent equity interest in Lyondell. Occidental
entered into these transactions to diversify its petrochemicals interest. These
transactions reduced Occidental's direct exposure to the inherent volatility in
the petrochemicals markets, yet will allow it to participate, through its
Lyondell investment, in the economic recovery of the petrochemicals industry. In
connection with these transactions, Occidental wrote down its investment in the
Equistar partnership to fair value by recording a $412 million pre-tax charge as
of December 2001. When this transaction closed in the third quarter of 2002,
Occidental recorded an after-tax gain of $164 million. As a result of increases
in its investment during 2003, at December 31, 2003, Occidental owned 22 percent
(39.5 million shares) of Lyondell stock with a carrying value of $479 million.
DISPOSITION OF CHROME AND CALENDERING OPERATIONS
In the fourth quarter of 2002, Occidental sold its chrome business at
Castle Hayne, North Carolina for $25 million and its plastic calendering
operations in Rio de Janeiro, Brazil for a $6 million note receivable. In the
third quarter of 2002, Occidental recorded an after-tax impairment charge of $69
million and classified both of these businesses as discontinued operations.
CORPORATE AND OTHER
Corporate and other includes the investments in Lyondell and Premcor, Inc.,
a refining business, and a leased co-generation facility in Taft, Louisiana. In
2004, corporate and other will also include the results of a 1,300-mile oil
pipeline and gathering system located in the Permian Basin, which was acquired
in January 2004 and will be used in corporate-directed oil and gas marketing and
trading operations.
In July 2001, Occidental sold its interests in a subsidiary that owned a
Texas intrastate natural gas pipeline system and also sold its interest in a
liquefied natural gas (LNG) project in Indonesia. After-tax proceeds of
approximately $750 million from these transactions were used to reduce debt.
2004 OUTLOOK
OIL AND GAS
The petroleum industry is highly competitive and subject to significant
volatility due to numerous market forces. Crude oil and natural gas prices are
affected by market fundamentals such as weather, inventory levels, competing
fuel prices, overall demand and the availability of supply.
In the last half of 2003, worldwide oil prices strengthened due to
increasing concerns about the security and availability of ample supplies to
meet growing demand. Continued economic growth, resulting in increased demand
and concerns about supply availability, could result in continued high prices. A
lower growth rate could result in lower crude oil prices.
Sustained high oil prices will significantly affect profitability and
returns for Occidental and other upstream producers. However, the industry has
historically experienced wide fluctuations within price cycles. Although oil
prices cannot be predicted with any certainty, the WTI price has averaged
approximately $22.50/barrel over the past ten years.
While supply-demand fundamentals are a decisive factor affecting domestic
natural gas prices over the long term, day-to-day prices may be more volatile in
the futures markets, such as on the NYMEX and other exchanges, which make it
difficult to forecast prices with any degree of confidence. Over the last ten