Occidental Petroleum 2003 Annual Report Download - page 34

mentioned above, the most significant impact would be on the depreciation and
depletion rate. For example, a 5-percent increase in the amount of oil and gas
reserves would change the rate from $4.82/barrel to $4.58/barrel, which would
increase pre-tax income by $48 million annually. A 5-percent decrease in the oil
and gas reserves would change the rate from $4.82/barrel to $5.06/barrel and
would result in a decrease in pre-tax income of $48 million annually.
A portion of the carrying value of Occidental's oil and gas properties is
attributable to unproved properties. At December 31, 2003, the costs
attributable to unproved properties were approximately $900 million. These costs
are not currently being depreciated or depleted. As exploration and development
work progresses and the reserves on these properties are proven, capitalized
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costs attributable to the properties will be subject to depreciation and
depletion. If the exploration and 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 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. 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 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 are based on the assumption that Occidental will provide an
appropriate level of annual expenditures to maintain the facilities in good
operating condition. Without these continued expenditures, the useful lives of
these plants could significantly decrease. Other factors that could change the
estimated useful lives of Occidental's chemical plants include higher or lower
product prices, which are particularly affected by both domestic and foreign
competition, 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, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy costs, significantly increased regulation
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, a chlor-alkali plant in December
2001 and a portion of a chlor-alkali plant in June 2003. These facilities will
remain idle until market conditions improve. Management expects that these
plants will become operational in the future. The net book value of these plants
was $156 million at December 31, 2003. Based on year-end value, the chlor-alkali
plant that closed on December 1, 2001 has a 24-percent minority interest of $28
million. These facilities are periodically tested for impairment and, based on
the results, no impairment is deemed necessary at this time. Occidental
continues to depreciate these facilities based on their remaining estimated
useful lives.
Over the prior three years, the change in the depreciation rate due to
changes in estimated useful lives has been immaterial.
Occidental's net property, plant and equipment for chemicals is
approximately $2.6 billion and its annual depreciation expense is expected to be
approximately $225 million. If the estimated useful lives of Occidental's