Chevron 2004 Annual Report Download - page 43
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Please find page 43 of the 2004 Chevron annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 41
operates,includingtheUnitedStates.Ashasoccurredinthepast,
actionscouldbetakenbyhostgovernmentstoincreasepublic
ownershipofthecompany’spartiallyorwhollyownedbusinesses
ortoimposeadditionaltaxesorroyaltiesonthecompany’s
operationsorboth.
Incertainlocations,hostgovernmentshaveimposedrestric-
tions,controlsandtaxes,andinothers,politicalconditionshave
existedthatmaythreatenthesafetyofemployeesandthecom-
pany’scontinuedpresenceinthosecountries.Internalunrest,
actsofviolenceorstrainedrelationsbetweenahostgovernment
andthecompanyorothergovernmentsmayaffectthecompany’s
operations.Thosedevelopmentshaveattimessignificantly
affectedthecompany’srelatedoperationsandresultsandare
carefullyconsideredbymanagementwhenevaluatingthelevel
ofcurrentandfutureactivityinsuchcountries.
EquityRedetermination Forcrudeoilandnaturalgas
producingoperations,ownershipagreementsmayprovidefor
periodicreassessmentsofequityinterestsinestimatedcrude
oilandnaturalgasreserves.Theseactivities,individuallyor
together,mayresultingainsorlossesthatcouldbematerial
toearningsinanygivenperiod.Onesuchequityredetermina-
tionprocesshasbeenunderwaysince1996forChevronTexaco’s
interestsinfourproducingzonesattheNavalPetroleumReserve
atElkHills,California,forthetimewhentheremaininginterests
inthesezoneswereownedbytheU.S.DepartmentofEnergy.A
widerangeremainsforapossiblenetsettlementamountforthe
fourzones.ChevronTexacocurrentlyestimatesitsmaximum
possiblenetbefore-taxliabilityatapproximately$200million.
Atthesametime,apossiblemaximumnetamountthatcouldbe
owedtoChevronTexacoisestimatedatabout$50million.The
timingofthesettlementandtheexactamountwithinthisrange
ofestimatesareuncertain.
SuspendedWells Thecompanysuspendsthecostsofexplor-
atorywellspendingafinaldeterminationofthecommercial
potentialoftherelatedcrudeoilandnaturalgasfields.Theulti-
matedispositionofthesewellcostsisdependentontheresults
offuturedrillingactivityordevelopmentdecisionsorboth.If
thecompanydecidesnottocontinuedevelopment,thecostsof
thesewellsareexpensed.AtDecember31,2004,thecompany
had$671millionofsuspendedexploratorywellsincludedin
properties,plantandequipment,anincreaseof$122million
from2003andanincreaseof$193millionfrom2002.Thebal-
anceatyear-end2004primarilyreflectsdrillingactivitiesinthe
UnitedStatesandNigeria.
TheSEChasissuedseveralcommentletterstocompaniesin
theoilandgasindustryrelatedtotheaccountingforsuspended
exploratorywells,particularlyforthosesuspendedundercertain
circumstancesformorethanoneyear.
Thecompany’saccountingpolicyinthisregardistocapi-
talizethecostofexploratorywellspendingdeterminationof
whetherthewellsfoundprovedreserves.Costsofwellsthatfind
provedreservesremaincapitalized.Costsalsoarecapitalizedfor
wellsthatfindcommerciallyproduciblereservesthatcannotbe
classifiedasproved,pendingoneormoreofthefollowing:(1)
decisionsonadditionalmajorcapitalexpenditures,(2)theresults
ofadditionalexploratorywellsthatareunderwayorfirmly
planned,and(3)securingfinalregulatoryapprovalsfordevelop-
ment.Otherwise,wellcostsareexpensedifadeterminationasto
whetherprovedreserveswerefoundcannotbemadewithinone
yearfollowingcompletionofdrilling.Allotherexploratorywell
costsareexpensed.
ThistopicwasdiscussedattheSeptember2004meetingof
theEmergingIssuesTaskForce(EITF)asIssue04-9,“Accounting
forSuspendedWellCosts”(EITF04-9).Thediscussioncentered
onwhethercertaincircumstanceswouldpermitthecontinued
capitalizationofthecostsforanexploratorywellbeyondone
yearintheabsenceofplansforanotherexploratorywell.The
outcomeoftheSeptember2004EITFmeetingwasagreement
betweentheEITFandtheFASBthatthecircumstancesoutlined
wereinconsistentwiththeprovisionsinFASBStatementNo.19,
“FinancialAccountingandReportingbyOilandGasProducing
Companies”(FAS19),andanamendmentofFAS19wouldbe
requiredtoformallyadoptthisview.InFebruary2005,theFASB
issuedaproposedFASBStaffPosition(FSP)toamendFAS19.
RefertoNote21onpage69totheConsolidatedFinancialState-
mentsforadiscussionofthisFSP,theSEC’scommentlettersand
thecompany’scostsassociatedwithsuspendedexploratorywells.
Thefuturetrendofthecompany’sexplorationexpensescan
beaffectedbyamountsassociatedwithwellwrite-offs,including
wellsthathadbeenpreviouslysuspendedpendingdetermination
astowhetherthewellhadfoundreservesthatcouldbeclassified
asproved.Theeffectonexplorationexpensesinfutureperiods
forthe$671millionofsuspendedwellsatyear-end2004isuncer-
tain,giventhereferenceddeliberationsbytheSECandFASB,as
istheeffectonthenormalproject-evaluationandfuturedrilling
activitiesforallofthewellsthathavebeensuspended.
AccountingforBuy/SellContracts InJanuaryandFebru-
ary2005,theSecuritiesandExchangeCommission(SEC)issued
commentletterstoChevronTexacoandothercompaniesintheoil
andgasindustryrequestingdisclosureofinformationrelatedto
theaccountingforbuy/sellcontracts.Underabuy/sellcontract,a
companyagreestobuyaspecificquantityandqualityofacom-
moditytobedeliveredataspecificlocationwhilesimultaneously
agreeingtosellaspecifiedquantityandqualityofacommodity
atadifferentlocationtothesamecounterparty.Physicaldelivery
occursforeachsideofthetransaction,andtheriskandreward
ofownershipareevidencedbytitletransfer,assumptionofenvi-
ronmentalrisk,transportationscheduling,creditrisk,andriskof
nonperformancebythecounterparty.Bothpartiessettleeachside
ofthebuy/sellthroughseparateinvoicing.
Thecompanyroutinelyhasbuy/sellcontracts,primarily
intheUnitedStatesdownstreambusiness,associatedwith
crudeoilandrefinedproducts.Forcrudeoil,thesecontracts
areusedtofacilitatethecompany’scrudeoilmarketingactivity,
whichincludesthepurchaseandsaleofcrudeoilproduction,
fulfillmentofthecompany’ssupplyarrangementsastophysical
deliverylocationandcrudeoilspecifications,andpurchaseof
crudeoiltosupplythecompany’srefiningsystem.Forrefined
products,buy/sellarrangementsareusedtohelpfulfillthecom-
pany’ssupplyagreementstocustomerlocationsandspecifications.
Thecompanyaccountsforbuy/selltransactionsintheCon-
solidatedStatementofIncomethesameasanyothermonetary
transactionforwhichtitlepasses,andtheriskandrewardofown-
ershipareassumedbythecounterparties.AtissuewiththeSEC
iswhethertheindustry’saccountingforbuy/sellcontractsinstead
shouldbeshownnetontheincomestatementandaccountedfor
undertheprovisionsofAccountingPrinciplesBoard(APB)Opin-
ionNo.29,“AccountingforNonmonetaryTransactions”(APB29).
ThetopicisunderdeliberationbytheEmergingIssuesTask
Force(EITF)oftheFASBasIssueNo.04-13,“AccountingforPur-
chasesandSalesofInventorywiththeSameCounterparty.”The
EITFfirstdiscussedthisissueinNovember2004.Additional
researchisbeingperformedbytheFASBstaff,andthetopicwill