Occidental Petroleum 2003 Annual Report Download - page 40

Statement No. 142, Goodwill and Other Intangible Assets, to Oil and Gas
Companies." These proposed statements will determine whether contract-based oil
and gas mineral rights are classified as tangible or intangible assets based on
the EITF's interpretation of SFAS No. 141 and SFAS No. 142. Historically,
Occidental has classified all of its contract-based mineral rights within
property, plant and equipment and has generally not identified these amounts
separately. If the EITF determines that these mineral rights should be presented
as intangible assets, Occidental would have to reclassify its contract-based oil
and gas mineral rights acquired after June 30, 2001 to intangible assets and
make additional disclosures in accordance with SFAS No. 142. If Occidental
adopted this change, approximately $492 million and $226 million of the
property, plant and equipment balance would be reclassified to intangible assets
at December 31, 2003 and 2002, respectively. These amounts, which are net of
accumulated depreciation, depletion and amortization, include approximately $475
million and $210 million of mineral rights related to proved properties at
December 31, 2003 and 2002, respectively. Occidental has been amortizing these
amounts under the unit-of-production method and would continue to amortize the
mineral rights under this method. Based on its understanding of the scope of the
EITF deliberations, Occidental believes the adoption of this potential decision
would have no material effect on its results of operations.
DERIVATIVE ACTIVITIES AND MARKET RISK
GENERAL
Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument which
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
ACCOUNTING FOR DERIVATIVES AND DEFINITIONS
Occidental applies either fair value or cash flow hedge accounting when
transactions meet specified criteria to obtain hedge accounting treatment. If
the derivative does not qualify as a hedge or is not designated as a hedge, the
gain or loss is immediately recognized in earnings. If the derivative qualifies
for hedge accounting, the gain or loss on the derivative is either recognized in
income with an offsetting adjustment to the basis of the item being hedged for
fair value hedges, or deferred in OCI to the extent the hedge is effective for
cash flow hedges.
A hedge is regarded as highly effective and qualifies for hedge accounting
if, at inception and throughout its life, it is expected that changes in the
fair value or cash flows of the hedged item are almost fully offset by the
changes in the fair value or changes in cash flows of the hedging instrument and
actual effectiveness is within a range of 80 percent to 125 percent. In the case
of hedging a forecasted transaction, the transaction must be highly probable and
must present an exposure to variations in cash flows that could ultimately
affect reported net profit or loss. Occidental discontinues hedge accounting
when it is determined that a derivative has ceased to be highly effective as a
hedge; when the derivative expires, or is sold, terminated, or exercised; when
the hedged item matures or is sold or repaid; or when a forecasted transaction
is no longer deemed highly probable.
COMMODITY PRICE RISK
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices. Based on current levels of production, if oil prices vary overall by
$1 per barrel, it would have approximately a $125 million annual effect on
income before U.S. income tax. If natural gas prices vary by $0.25 per MCF, it
would have approximately a $48 million annual effect on income before U.S.
income tax. If production levels change in the future, the sensitivity of
Occidental's results to oil and gas prices also would change.
Occidental's results are also sensitive to fluctuations in chemical prices.
If chlorine and caustic soda prices vary by $10/ton, it would have approximately
a $12 million and $25 million, respectively, annual effect on income before U.S.
income taxes. If PVC prices vary by $.01/lb, it would have approximately a $27
million annual effect on income before U.S. income taxes. If EDC prices vary by