Occidental Petroleum 2006 Annual Report Download - page 38

Environmental Liabilities and Expenditures
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Reserves for estimated costs that
relate to existing conditions caused by past operations and that do not contribute to current or future revenue generation are recorded when
environmental remedial efforts are probable and the costs can be reasonably estimated. In determining the reserves and the reasonably possible
range of loss, Occidental refers to currently available information, including relevant past experience, available technology, regulations in effect,
the timing of remediation and cost-sharing arrangements. The environmental reserves are based on management’s estimate of the most likely cost
to be incurred and are reviewed periodically and adjusted as additional or new information becomes available. Environmental reserves are
recorded on a discounted basis only when a reserve is initially established and the aggregate amount of the estimated costs for a specific site and
the timing of cash payments are reliably determinable. The reserve methodology for a specific site is not modified once it has been established.
Recoveries and reimbursements are recorded in income when receipt is probable. As of December 31, 2006 and 2005, Occidental has not accrued
any reimbursements or indemnification recoveries for environmental remediation matters as assets.
Many factors could result in changes to Occidental’s environmental reserves and reasonably possible range of loss. The most significant are:
ØThe original cost estimate may have been inaccurate.
ØModified remedial measures might be necessary to achieve the required remediation results. Occidental generally assumes that the remedial
objective can be achieved using the most cost-effective technology reasonably expected to achieve that objective. Such technologies may
include air sparging or phyto-remediation of shallow groundwater, or limited surface soil removal or in-situ treatment producing acceptable risk
assessment results. Should such remedies fail to achieve remedial objectives, more intensive or costly measures may be required.
ØThe remedial measure might take more or less time than originally anticipated to achieve the required contaminant reduction. Site-specific
time estimates can be affected by factors such as groundwater capture rates, anomalies in subsurface geology, interactions between or among
water-bearing zones and non-water-bearing zones, or the ability to identify and control contaminant sources.
ØThe regulatory agency might ultimately reject or modify Occidental’s proposed remedial plan and insist upon a different course of action.
Additionally, other events might occur that could affect Occidental’s future remediation costs, such as:
ØThe discovery of more extensive contamination than had been originally anticipated. For some sites with impacted groundwater, accurate
definition of contaminant plumes requires years of monitoring data and computer modeling. Migration of contaminants may follow unexpected
pathways along geologic anomalies that could initially go undetected. Additionally, the size of the area requiring remediation may change
based upon risk assessment results following site characterization or interim remedial measures.
ØImproved remediation technology might decrease the cost of remediation. In particular, for groundwater remediation sites with projected long-
term operation and maintenance, the development of more effective treatment technology, or acceptance of alternative and more cost-effective
treatment methodologies such as bioremediation, could significantly affect remediation costs.
ØLaws and regulations might change to impose more or less stringent remediation requirements.
At sites involving multiple parties, Occidental provides environmental reserves based upon its expected share of liability. When other parties
are jointly liable, the financial viability of the parties, the degree of their commitment to participate and the consequences to Occidental of their
failure to participate are evaluated when estimating Occidental's ultimate share of liability. Based on these factors, Occidental believes that it will
not be required to assume a share of liability of other potentially responsible parties, with whom it is alleged to be jointly liable, in an amount that
would have a material effect on Occidental’s consolidated financial position, liquidity or results of operations.
Most cost sharing arrangements with other parties fall into one of the following three categories:
Category 1: CERCLA or state-equivalent sites wherein Occidental and other alleged potentially responsible parties share the cost of
remediation in accordance with negotiated or prescribed allocations;
Category 2: Oil and gas joint ventures wherein each joint venture partner pays its proportionate share of remedial cost; and
Category 3: Contractual arrangements typically relating to purchases and sales of property wherein the parties to the transaction agree to
methods of allocating the costs of environmental remediation.
In all three of these categories, Occidental records as a reserve its expected net cost of remedial activities, as adjusted by recognition for any
nonperforming parties.
In addition to the costs of investigating and implementing remedial measures, which often take in excess of ten years at CERCLA sites,
Occidental’s reserves include management’s estimates of the cost of operation and maintenance of remedial systems. To the extent that the
remedial systems are modified over time in response to significant changes in site-specific data, laws, regulations, technologies or engineering
estimates, Occidental reviews and changes the reserves accordingly on a site-specific basis.
If the environmental reserve balance were to either increase or decrease based on the factors mentioned above, the amount of the increase or
decrease would be immediately recognized in earnings. For example, if the reserve balance were to decrease by 10 percent, Occidental would
record a pre-tax gain of $41 million. If the reserve balance were to increase by 10 percent, Occidental would record an additional remediation
expense of $41 million.
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