Occidental Petroleum 2008 Annual Report Download - page 41

useful lives of Occidental’s chemical assets, which range from three 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 decrease significantly. 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, demand,
feedstock costs, energy prices, environmental regulations and technological changes.
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's net PP&E for chemicals is approximately $2.5 billion and its depreciation expense for 2009 is expected to be
approximately $260 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 $30 million per year.
Midstream, Marketing and Other Assets
The most critical accounting policies affecting Occidental’s midstream and marketing assets are accounting for derivative instruments
and the determination of the estimated useful lives of its PP&E.
Derivative instruments are carried at fair value. Occidental applies either fair value or cash flow hedge accounting when transactions
meet specified criteria for hedge accounting treatment. If the derivative does not qualify as a hedge or is not designated as a hedge, any fair
value gains or losses are recognized in earnings. If the derivative qualifies for hedge accounting and is designated and documented as a
hedge, the gain or loss on the derivative is either recognized in income with an offsetting adjustment to the basis of the item being hedged for
fair value hedges, or deferred in Other Comprehensive Income to the extent the hedge is effective for cash flow hedges. Cash flow hedge-
realized gains and losses, and any ineffectiveness, are classified within the net sales line item. Gains and losses are reported net in the
income statement and are also netted on the balance sheets when a right of offset exists.
A hedge is regarded as highly effective and qualifies for hedge accounting if, at inception and throughout its life, it is expected that
changes in the fair value or cash flows of the hedged item are almost fully offset by the changes in the fair value or changes in cash flows of
the hedging instrument and actual effectiveness is within a range of 80 to 125 percent. In the case of hedging a forecasted transaction, the
transaction must be probable and must present an exposure to variations in cash flows that could ultimately affect reported net income or
loss. Occidental discontinues hedge accounting when it determines that a derivative has ceased to be highly effective as a hedge; when the
derivative expires, or is sold, terminated, or exercised; when the hedged item matures or is sold or repaid; or when a forecasted transaction is
no longer deemed probable.
Occidental's midstream and marketing assets are depreciated using either the unit-of-production or straight-line method, based upon
the estimated useful lives of the assets. 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.
Environmental Liabilities and Expenditures
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Occidental records
environmental reserves for estimated remediation costs that relate to existing conditions from past operations when environmental
remediation efforts are probable and the costs can be reasonably estimated. In determining the reserves and the range of reasonably possible
additional loss, Occidental refers to currently available information, including relevant past experience, remedial objectives, available
technologies, applicable laws and regulations and cost-sharing arrangements. Occidental bases environmental reserves on management’s
estimate of the most likely cost to be incurred, using the most cost-effective technology reasonably expected to achieve the remedial objective.
Occidental periodically reviews reserves and adjusts them as new information becomes available. Occidental records environmental
reserves on a discounted basis only when the aggregate amount and the timing of cash payments are reliably determinable at the time the
reserves are established. The reserve methodology with respect to discounting for a specific site is not modified once it has been established.
Occidental generally records reimbursements or recoveries of environmental remediation costs in income when received. As of December
31, 2008, 2007 and 2006, Occidental has not accrued any reimbursements or recoveries.
Many factors could affect Occidental’s future remediation costs and result in adjustments to its environmental reserves and range of
reasonably possible additional loss. The most significant are: (1) cost estimates for remedial activities may be inaccurate; (2) the length of
time, type or amount of remediation necessary to achieve the remedial objective may change due to factors such as site conditions, the ability
to identify and control contaminant sources or the discovery of additional contamination; (3) the regulatory agency may ultimately reject or
modify Occidental’s proposed remedial plan; (4) improved or alternative remediation technologies may change remediation costs; and (5)
laws and regulations may impose more or less stringent remediation requirements or affect cost sharing or allocation of liability.
At sites involving multiple parties, Occidental provides environmental reserves based upon its expected share of liability. Occidental
evaluates the financial viability of other parties with whom it is alleged to be jointly liable, the degree of their commitment to participate and
the consequences to Occidental of their failure to participate when estimating Occidental's ultimate share of liability. Based on these factors,
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Occidental believes that it will not be required to assume a share of liability of such other potentially responsible parties in an amount that