Occidental Petroleum 2006 Annual Report Download - page 36

Active Facilities
Certain subsidiaries of OPC are currently addressing releases of substances from past operations at 21 active facilities. Five facilities — a
chemical plant in Louisiana, a phosphorus recovery operation in Tennessee, a chemical plant in Texas, a chemical plant in Kansas and certain oil
and gas properties in the southwestern United States — account for 69 percent of the reserves associated with these facilities.
Closed or Sold Facilities
There are 40 sites formerly owned or operated by certain subsidiaries of OPC that have ongoing environmental remediation requirements in
which OPC or its subsidiaries are involved. Five sites account for 70 percent of the reserves associated with this group. The five sites are: an
active refinery in Louisiana where Occidental indemnifies the current owner and operator for certain remedial actions, a water treatment facility at
a former coal mine in Pennsylvania, a closed OCC chemical plant in Pennsylvania, a closed landfill in western New York and a water treatment
facility at a former OCC chemical plant in North Carolina.
Environmental Costs
Occidental’s costs, some of which may include estimates, relating to compliance with environmental laws and regulations, are shown below for
each segment:
   

      
   
     

      
   
     

      
Operating expenses are incurred on a continual basis. Capital expenditures relate to longer-lived improvements in currently operating
facilities. Remediation expenses relate to existing conditions caused by past operations and do not contribute to current or future revenue
generation. Although total costs may vary in any one year, over the long term, segment operating and capital expenditures for environmental
compliance generally are expected to increase.
Occidental presently estimates that capital expenditures for environmental compliance will be approximately $94 million for 2007 and $100
million for 2008.

Portions of Occidental’s assets are located outside of North America. Occidental conducts its financial affairs so as to mitigate its exposure
against risks associated with the locations of these assets. At December 31, 2006, the carrying value of Occidental’s assets in countries outside
North America aggregated approximately $9.2 billion, or approximately 28 percent of Occidental’s total assets at that date. Of such assets,
approximately $5.0 billion are located in the Middle East/North Africa, approximately $3.9 billion are located in Latin America, and substantially all
of the remainder are located in the Other Eastern Hemisphere region. For the year ended December 31, 2006, net sales outside North America
totaled $5.6 billion, or approximately 31 percent of total net sales.

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. The costs of exploratory wells are initially capitalized pending a
determination of whether proved reserves have been found. At the completion of drilling activities, the costs of exploratory wells remain capitalized
if a determination is made that proved reserves have been found. If no proved reserves have been found, the costs of each of the related
exploratory wells are charged to expense. In some cases, a determination of proved reserves cannot be made at the completion of drilling,
requiring additional testing and evaluation of the wells. Occidental's practice is to expense the costs of such exploratory wells if a determination of
proved reserves has not been made within a twelve-month period after drilling is complete. Occidental has no proved oil and gas reserves for
which the determination of commercial viability is subject to the completion of major additional capital expenditures.
Annual lease rentals and geological, geophysical and seismic 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.
Several factors could change Occidental’s recorded oil and gas reserves. Occidental receives a share of production from PSCs to recover its
costs and an additional share for profit. Occidental’s share of production and reserves from these contracts decreases when oil prices rise 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
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