Occidental Petroleum 2006 Annual Report Download - page 55

The following table summarizes the activity of capitalized exploratory well costs for the past three years:
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   
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   
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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, depletion and amortization (DD&A) and net of any impairment charges. For acquisitions of a business, PP&E cost is
determined by an allocation of total purchase price to the components of PP&E based on their estimated fair values at the date of acquisition.
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. Occidental assesses assets for impairment by comparing undiscounted future cash flows of an asset to its
carrying value. Impaired assets are written down to their estimated fair values, generally their estimated discounted future net pre-tax cash flows.
A portion of the carrying value of Occidental’s oil and gas properties are 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
Petroleum, Inc. (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
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.
Occidental performs impairment tests on its chemical 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.
Due to a temporary decrease in demand for some of its products, Occidental temporarily idled an ethylene dichloride plant in June 2001 and a
chlor-alkali plant in December 2001. Subsequent to the purchase of the Vulcan Materials Company (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 an
additional pre-tax charge of $20 million for the write-down of another chemical plant in 2005.
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