Occidental Petroleum 2003 Annual Report Download - page 53

generally are under Occidental's control or relate to bankruptcy. 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, and natural gas trading inventory are valued at the lower of cost or
market. Natural gas trading inventory was valued at market prior to January 1,
2003 (see "Accounting Changes" in Note 4).
For the chemical segment, in countries where allowable, Occidental
generally values its inventories using the last-in, first-out (LIFO) method as
it better matches current costs and current revenue. Accordingly, Occidental
accounts for most of its 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.
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PROPERTY, PLANT AND EQUIPMENT
OIL AND GAS
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.
The carrying value of Occidental's property, plant and equipment (PP&E) is
based on the cost incurred to acquire the PP&E, net of accumulated depreciation
and net of any impairment charges. 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.
A portion of the carrying value of Occidental's oil and gas properties are
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
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.