Occidental Petroleum 2003 Annual Report Download - page 33

November 2007. Occidental operates six facilities that are subject to the SIP's
emissions reduction requirements and estimates that its future capital
expenditures will total approximately $25 to $30 million for environmental
control and monitoring equipment necessary to comply with the SIP. Occidental
expects expenditures to end in 2007, although the timing of the expenditures
will vary by facility.
Occidental presently estimates that capital expenditures for environmental
compliance (including the SIP discussed above) will be approximately $82 million
for 2004 and $97 million for 2005.
FOREIGN INVESTMENTS
Portions of Occidental's assets outside North America are exposed to
political and economic risks. Occidental conducts its financial affairs so as to
mitigate its exposure against those risks. At December 31, 2003, the carrying
value of Occidental's assets in countries outside North America aggregated
approximately $3.3 billion, or approximately 18 percent of Occidental's total
assets at that date. Of such assets, approximately $2.3 billion are located in
the Middle East, approximately $759 million are located in Latin America, and
substantially all of the remainder are located in Pakistan.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 and estimates that involve
the judgment of Occidental's management. There has been no material change to
these policies over the past three years. The selection and development of these
critical accounting policies and estimates have been discussed with the Audit
Committee of the Board of Directors.
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 that could
change Occidental's recorded oil and gas reserves. Occidental receives a share
of production from production-sharing contracts to recover its costs and an
additional share for 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 proved reserves
becomes uneconomical. 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.
These factors, in turn, could lead to a reduction in the quantity of recorded
proved reserves. An additional factor that could result in a change of proved
reserves is the reservoir decline rates being different from those assumed when
the reserves were initially recorded. Overall, Occidental's revisions to proved
reserves were positive for 2003, 2002 and 2001 and amounted to less than 1
percent of the total reserves for each year. Additionally, Occidental is
required to perform impairment tests pursuant to SFAS No. 144 generally when
prices decline and/or reserve estimates change significantly. There have been no
impairments of reserves 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