Occidental Petroleum 2006 Annual Report Download - page 54

Included in the accompanying consolidated balance sheet are deferred tax assets of $1.4 billion as of December 31, 2006, the noncurrent
portion of which is netted against deferred income tax liabilities. Realization of these assets is dependent upon Occidental generating sufficient
future taxable income. Occidental expects to realize the recorded deferred tax assets through future operating income and reversal of temporary
differences.
The accompanying consolidated financial statements include assets of approximately $9.2 billion as of December 31, 2006, and net sales of
approximately $5.6 billion for the year ended December 31, 2006, relating to Occidental’s operations in countries outside North America.
Occidental operates some of its oil and gas business in countries that occasionally have experienced political instability, armed conflict, civil
unrest, security problems, restrictions on production equipment imports and sanctions that prevent continued operations, all of which increase
Occidental's risk of loss or delayed or restricted production or may result in other adverse consequences. Occidental attempts to conduct its
financial affairs so as to mitigate its exposure against such risks and would seek compensation in the event of nationalization.
Since Occidental’s major products are commodities, significant changes in the prices of oil and gas and chemical products may have a
significant impact on Occidental’s results of operations for any particular year.
Also, see "Property, Plant and Equipment" below.
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Cash equivalents are short-term, highly liquid investments that are readily convertible to cash. Cash equivalents totaled approximately $1.3
billion and $2.2 billion at December 31, 2006 and 2005, respectively.
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Occidental’s short-term investments consist of highly liquid debt securities classified as available-for-sale. Short-term investments are marked-
to-market with any unrealized gains or losses included in accumulated other comprehensive income (AOCI). At December 31, 2006 and 2005,
Occidental's short-term investments solely comprise auction-rate securities.
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For the oil and gas segment, materials and supplies are valued at the lower of average cost or market. Inventories are reviewed periodically for
obsolescence. Oil and natural gas liquids (NGLs) inventories and natural gas trading and storage inventory are valued at the lower of cost or
market.
For the chemical segment, 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). Occidental accounts for materials and supplies using
a weighted average cost method.
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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 18).
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.
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