Occidental Petroleum 2008 Annual Report Download - page 59

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,
Occidental believes that it will not be required to assume a share of liability of such other potentially responsible parties in an amount that
would have a material effect on Occidental’s consolidated financial position, liquidity or results of operations.
Most cost-sharing arrangements with other parties fall into one of the following three categories: (1) environmental proceedings that
result in a negotiated or prescribed allocation of remediation costs among Occidental and other alleged potentially responsible parties; (2) oil
and gas ventures in which each participant pays its proportionate share of remediation costs reflecting its working interest; or (3) contractual
arrangements, typically relating to purchases and sales of properties, in which the parties to the transaction agree to methods of allocating
remediation costs.
In all three of these categories, Occidental records reserves at its expected net cost of remedial activities.
In addition to the costs of investigations and cleanup measures, which often take in excess of ten years at Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) National Priorities List (CERCLA NPL) sites, Occidental’s reserves
include management’s estimates of the costs to operate and maintain remedial systems. If remedial systems are modified over time in
response to significant changes in site-specific data, laws, regulations, technologies or engineering estimates, Occidental reviews and
adjusts its reserves accordingly.
ASSET RETIREMENT OBLIGATIONS
In the period in which an asset retirement obligation is incurred and becomes reasonably estimable, Occidental recognizes the fair
value of the liability if there is a legal obligation to dismantle the asset and reclaim or remediate the property at the end of its useful life. The
liability amounts are based on future retirement cost estimates and incorporate many assumptions such as time to abandonment,
technological changes, future inflation rates and the adjusted risk-free rate of interest. When the liability is initially recorded, Occidental
capitalizes the cost by increasing the related PP&E balances. Over time, the liability is increased and expense is recognized for changes in its
present value, and the initial capitalized cost is depreciated over the useful life of the asset. No market risk premium has been included in
Occidental’s liability since no reliable estimate can be made at this time.
Occidental has identified conditional asset retirement obligations at a certain number of its facilities that are related mainly to plant
decommissioning. Occidental believes that there is an indeterminate settlement date for these asset retirement obligations because the
range of time over which Occidental may settle these obligations is unknown or cannot be estimated. Therefore, Occidental cannot
reasonably estimate the fair value of these liabilities. Occidental will recognize these conditional asset retirement obligations in the periods in
which sufficient information becomes available to reasonably estimate their fair values.
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The following table summarizes the activity of the asset retirement obligation, of which $480 million and $445 million is included in