Occidental Petroleum 2008 Annual Report Download - page 58

The following table summarizes the activity of capitalized exploratory well costs for the years ended December 31:
In millions 2008 2007 2006
Balance — Beginning of Year $17 $46 $46
Additions to capitalized exploratory well costs pending the determination of proved
reserves 69 18 24
Reclassifications to property, plant and equipment based on the determination of
proved reserves (3) (5) (23)
Capitalized exploratory well costs charged to expense (15) (42) (1)
Balance — End of Year $68 $17 $46
Proved oil and gas reserves are the estimated quantities of oil and natural gas 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.
A portion of the carrying value of Occidental’s oil and gas properties is attributable to unproved properties. At December 31, 2008, the
net capitalized costs attributable to unproved properties were $2.3 billion. The unproved amounts are not subject to DD&A or impairment until
a determination is made as to the existence of proved reserves. As exploration and development work progresses, if reserves on these
properties are proved, capitalized costs attributable to the properties will be subject to depreciation and depletion. If the exploration and
development work were to be unsuccessful, or management's plans changed with respect to these properties, as a result of economic,
operating or contractual conditions, the capitalized costs of the related properties would be expensed in the period in which the determination
was made. The timing of any writedowns of these unproved properties, if warranted, depends upon management's plans and the nature,
timing and extent of future exploration and development activities and their results. Occidental believes its current plans and exploration and
development efforts will allow it to realize its unproved property balance.
Additionally, Occidental performs impairment tests with respect to its proved properties generally when prices decline other than
temporarily, reserve estimates change significantly or other significant events occur that may impact the ability to realize the recorded asset
amounts. Impairment tests incorporate a number of assumptions involving expectations of future cash flows, which can change significantly
over time. These assumptions include estimates of future product prices, which Occidental bases on forward price curves, estimates of oil
and gas reserves and estimates of future expected operations and development costs. Current pricing, coupled with a sustained high
production cost environment, could cause management's plans to change, with respect to unproved properties, and could cause the carrying
values of proved properties to be unrealizable.
Chemical
The most critical accounting policy affecting Occidental's chemical assets is the determination of the estimated useful lives of its
PP&E. Occidental’s chemical plants are depreciated using either the unit-of-production or straight-line method, based upon the estimated
useful lives of the facilities. The estimated 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.
Midstream and Marketing
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.
ACCRUED LIABILITIES — CURRENT
Accrued liabilities include accrued payroll, commissions and related expenses of $352 million and $288 million at December 31,
2008 and 2007, respectively.
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ENVIRONMENTAL LIABILITIES AND EXPENDITURES