Occidental Petroleum 2006 Annual Report Download - page 37

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 changes 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 estimated when the reserves were
initially recorded. Occidental’s revisions to proved reserves were positive for 2006 and amounted to less than 1 percent of the total reserves for the
year. In 2005, revisions to proved reserves were negative and amounted to less than 1 percent of the total reserves for the year. In 2004, revisions
to proved reserves were positive and amounted to approximately 2 percent of the total reserves. 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
SFAS No. 144 impairments of oil and gas assets over the past three years.
If Occidental’s consolidated oil and gas reserves were to change based on the factors mentioned above, the most significant impact would be on
the DD&A rate. For example, a 5-percent increase in the amount of consolidated oil and gas reserves would change the rate from $8.35 per barrel
to $7.94 per barrel, which would increase pre-tax income by $88 million annually. A 5-percent decrease in the oil and gas reserves would change
the rate from $8.35 per barrel to $8.77 per barrel and would result in a decrease in pre-tax income of $88 million annually.
DD&A of oil and gas producing properties is determined by the unit-of-production method and could change with revisions to estimated proved
reserves. The change in the DD&A rate over the past three years due to revisions of previous proved reserve estimates has been immaterial.
A portion of the carrying value of Occidental’s oil and gas properties is attributable to unproved properties. At December 31, 2006, the
capitalized costs attributable to unproved properties, net of accumulated valuation allowance, were $1.7 billion. The acquisition of Vintage resulted
in an addition of $1.3 billion of unproved properties in 2006. No goodwill was recorded on this transaction. During 2006, approximately $300 million
of the unproved property amount was moved to proved properties. The unproved amounts are not subject to DD&A or impairment until a
determination is made as to the existence of proven reserves. As exploration and development work progresses, if 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.
Chemical Assets
The most critical accounting policy affecting Occidental’s chemical assets is the determination of the estimated useful lives of its PP&E.
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 ensure productive capacity is sustained. 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 sustained higher or lower product prices, which are particularly affected by both domestic and foreign
competition, feedstock costs, energy prices, environmental regulations and technological changes. Over the prior three years, the change in the
depreciation rate due to changes in estimated useful lives has been immaterial.
Occidental performs 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. Occidental compares 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, regulations and remaining estimated useful life. Impaired assets are written down to their estimated fair values.
Subsequent to the purchase of the Vulcan chemical assets, Occidental reviewed all of its chemical assets and decided to close its least
competitive plants and upgrade the remaining operations. As a result of this review, Occidental recorded a $139 million pre-tax charge for the
write-off of two previously idled chemical plants and one operating plant and a pre-tax additional charge of $20 million for the write-down of another
chemical plant in 2005.
Occidental's net PP&E for chemicals is approximately $2.6 billion and its depreciation expense for 2007 is expected to be approximately $256
million. If the estimated useful lives of Occidental’s chemical plants were to decrease based on the factors mentioned above, the most significant
impact would be on depreciation expense. For example, a reduction in the remaining useful lives of one year would increase depreciation and
reduce pre-tax earnings by approximately $17 million per year.
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