Occidental Petroleum 2008 Annual Report Download - page 57

RISKS AND UNCERTAINTIES
The process of preparing consolidated financial statements in conformity with United States generally accepted accounting principles
(GAAP) requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates
primarily relate to unsettled transactions and events as of the date of the consolidated financial statements. Accordingly, upon settlement,
actual results may differ from estimated amounts, but generally not by material amounts. Management believes that these estimates and
assumptions provide a reasonable basis for the fair presentation of Occidental’s financial position and results of operations.
Realization of deferred tax assets is dependent upon Occidental generating sufficient future taxable income. Occidental expects to
realize the recorded deferred tax assets, net of allowances, through future operating income and reversal of temporary differences.
The accompanying consolidated financial statements include assets of approximately $11.2 billion as of December 31, 2008, and net
sales of approximately $8.8 billion for the year ended December 31, 2008, 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, terrorism, insurgency, civil unrest, security problems, labor unrest, OPEC production restrictions, equipment import restrictions 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.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are readily convertible to cash. Cash equivalents totaled
approximately $1.8 billion and $2.0 billion at December 31, 2008 and 2007, respectively.
SHORT-TERM INVESTMENTS
Short-term investments are recorded at fair value with any unrealized gains or losses included in accumulated other comprehensive
income/loss (AOCI). Occidental sold all of its short-term investments in 2007.
INVENTORIES
For the oil and gas segment, materials and supplies are valued at the lower of average cost or market and are reviewed periodically for
obsolescence. Oil inventories and natural gas trading and storage inventory are valued at the lower of cost or market.
For the chemical segment, Occidental values most of its domestic inventories, other than materials and supplies, using the last-in,
first-out (LIFO) method as it better matches current costs and current revenue. For other countries, Occidental uses the first-in, first-out
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.
PROPERTY, PLANT AND EQUIPMENT
Oil and Gas
The carrying value of Occidental’s property, plant and equipment (PP&E) is based on the cost incurred to acquire the PP&E, including
any capitalized interest, 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. Interest costs incurred in connection with major capital expenditures are capitalized and
amortized over the lives of the related assets (see Note 17).
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 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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The following table summarizes the activity of capitalized exploratory well costs for the years ended December 31: