Baker Hughes 2007 Annual Report Download - page 108

2007 Form 10-K 25
a $10.6 million reduction to tax expense attributable to the
recognition of a deferred tax asset associated with our supple-
mental retirement plan.
Our tax filings for various periods are subject to audit by
the tax authorities in most jurisdictions where we conduct
business. These audits may result in assessment of additional
taxes that are resolved with the authorities or through the
courts. We believe these assessments may occasionally be based
on erroneous and even arbitrary interpretations of local tax law.
We have received tax assessments from various taxing authori-
ties and are currently at varying stages of appeals and/or litiga-
tion regarding these matters. We believe we have substantial
defenses to the questions being raised and will pursue all legal
remedies should an unfavorable outcome result. However, res-
olution of these matters involves uncertainties and there are
no assurances that the outcomes will be favorable. We provide
for uncertain tax positions pursuant to FIN 48, Accounting for
Uncertainty in Income Taxes: an Interpretation of FASB State-
ment No. 109.
Cumulative Effect of Accounting Change
On December 31, 2005, we adopted Financial Accounting
Standards Board (“FASB”) Interpretation No. 47, Conditional
Asset Retirement Obligations (“FIN 47”). FIN 47 clarifies that
the term “conditional asset retirement obligation” as used in
SFAS No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within
the control of the entity. The adoption of FIN 47 resulted in a
charge of $0.9 million, net of tax of $0.5 million, recorded as
the cumulative effect of accounting change in the consolidated
statement of operations. In conjunction with the adoption, we
recorded conditional asset retirement obligations of $1.6 mil-
lion as the fair value of the costs associated with the special
handling of asbestos related materials in certain facilities.
OUTLOOK
Worldwide Oil and Natural Gas Industry Outlook
This section should be read in conjunction with the factors
described in the “Risk Factors Related to the Worldwide Oil
and Natural Gas Industry” and the “Risk Factors Related to
Our Business” in Item 1A. Risk Factors and in the “Forward-
Looking Statements” section in Item 7, both contained herein.
These factors could impact, either positively or negatively, our
expectation for: oil and natural gas demand; oil and natural
gas prices; exploration and development spending and drilling
activity; and production spending.
Our outlook for exploration and development spending
is based upon our expectations for customer spending in the
markets in which we operate, and is driven primarily by our
perception of industry expectations for oil and natural gas
prices and their likely impact on customer capital and operating
budgets as well as other factors that could impact the economic
return oil and gas companies expect for developing oil and gas
reserves. Our energy price forecasts below are based on infor-
mation provided by our customers as well as market research
and analyst reports including the Short Term Energy Outlook
(“STEO”) published by the Energy Information Administration
of the U.S. Department of Energy (“DOE”), the Oil Market
Report published by the International Energy Agency (“IEA”)
and the Monthly Oil Market Report published by the Organiza-
tion for Petroleum Exporting Countries (“OPEC”). Our outlook
for production spending is based primarily on energy price
forecasts and forecasts of expected oil and natural gas produc-
tion levels.
Our outlook for activity outside of North America is heavily
influenced by our expectations for oil prices and our outlook
for activity in North America is heavily influenced by our
expectations for North American natural gas prices.
Expectations for Oil Prices – Demand for oil is expected
to increase in a range from 1.3 to 2.0 million barrels per day
in 2008 compared to 2007. Non-OPEC supply is expected to
increase 0.6 to 1.1 million barrels per day. The gap between
increased demand and non-OPEC supply is expected to be met
with increased OPEC supply and decreases in oil inventories.
Inventories and spare productive capacity, which buffer oil mar-
kets from supply disruptions, are expected to remain relatively
low reflecting the continuing tight balance between supply and
demand. In its January 2008 STEO, the DOE forecasted oil prices
to average $87/Bbl in 2008 and given the relatively low levels
of inventory and spare productive capacity, prices are expected
to remain volatile. The DOE expects increased production capac-
ity in 2009 to result in prices falling to $82/Bbl. Delays in either
OPEC or non-OPEC supply additions could impact this forecast.
We believe that these forecasts are similar to the forecasts
our customers are using to plan their current spending levels
and, with prices averaging between $60/Bbl and $100/Bbl, our
customers will continue to execute their capital budgets as
planned. Our customers are more likely to reduce their capital
budgets if the oil price were expected to trade below $60/Bbl
for an extended period of time. The risks to oil prices falling
significantly below $60/Bbl include: (1) a significant economic
recession in either the U.S. and/or China; (2) increases in non-
OPEC production; (3) any significant disruption to worldwide
demand; (4) reduced geo-political tensions; (5) poor OPEC
quota discipline; or (6) other factors that result in spare pro-
ductive capacity and higher oil inventory levels or decreased
demand. If prices were to rise significantly above $100/Bbl
there is a risk that the high energy price environment could
destroy demand and significantly slow economic growth. If
economic growth were to slow, our customers would likely
decrease their capital spending from current levels. The pri-
mary risk of oil prices exceeding $100/Bbl is a supply disrup-
tion in a major oil exporting country including Iran, Saudi
Arabia, Iraq, Venezuela, Nigeria or Norway.
Expectations for North American Natural Gas Prices –
In its January 2008 STEO, the DOE forecasted that U.S. natural
gas demand would increase 0.6% in 2008 compared to 2007
assuming normal weather. The demand for U.S. natural gas will
be met by production from fields in the U.S., pipeline imports
from Canada, and imports of LNG with natural gas storage
buffering demand and supply. At current U.S. drilling activity
levels, additions of new supply are expected to offset produc-
tion declines and U.S. supply is expected to increase 1.6%