Chevron 2006 Annual Report Download - page 45

CHEVRON CORPORATION 2006 ANNUAL REPORT 43
Other Contingencies Chevron receives claims from and
submits claims to customers, trading partners, U.S. federal,
state and local regulatory bodies, governments, contractors,
insurers, and suppliers. The amounts of these claims, indi-
vidually and in the aggregate, may be signifi cant and take
lengthy periods to resolve.
The company and its affi liates also continue to review
and analyze their operations and may close, abandon, sell,
exchange, acquire or restructure assets to achieve operational
or strategic benefi ts and to improve competitiveness and prof-
itability. These activities, individually or together, may result
in gains or losses in future periods.
ENVIRONMENTAL MATTERS
Virtually all aspects of the businesses in which the company
engages are subject to various federal, state and local envi-
ronmental, health and safety laws and regulations. These
regulatory requirements continue to increase in both number
and complexity over time and govern not only the manner
in which the company conducts its operations, but also the
products it sells. Most of the costs of complying with laws
and regulations pertaining to company operations and prod-
ucts are embedded in the normal costs of doing business.
Accidental leaks and spills requiring cleanup may occur
in the ordinary course of business. In addition to the costs
for environmental protection associated with its ongoing
operations and products, the company may incur expenses
for corrective actions at various owned and previously owned
facilities and at third-party-owned waste-disposal sites used
by the company. An obligation may arise when operations are
closed or sold or at non-Chevron sites where company products
have been handled or disposed of. Most of the expenditures
to fulfi ll these obligations relate to facilities and sites where
past operations followed practices and procedures that were
considered acceptable at the time but now require investigative
or remedial work or both to meet current standards.
Using defi nitions and guidelines established by the
American Petroleum Institute, Chevron estimated its world-
wide environmental spending in 2006 at approximately
$2.2 billion for its consolidated companies. Included in
these expenditures were approximately $870 million of
environmental capital expenditures and $1.3 billion of
costs associated with the prevention, control, abatement or
elimination of hazardous substances and pollutants from
operating, closed or divested sites, and the abandonment
and restoration of sites.
For 2007, total worldwide environmental capital expen-
ditures are estimated at $1.2 billion. These capital costs are
in addition to the ongoing costs of complying with envi-
ronmental regulations and the costs to remediate previously
contaminated sites.
It is not possible to predict with certainty the amount
of additional investments in new or existing facilities or
amounts of incremental operating costs to be incurred in the
future to: prevent, control, reduce or eliminate releases of
hazardous materials into the environment; comply with exist-
ing and new environmental laws or regulations; or remediate
and restore areas damaged by prior releases of hazardous
materials. Although these costs may be signifi cant to the
results of operations in any single period, the company does
not expect them to have a material effect on the company’s
liquidity or fi nancial position.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
Management makes many estimates and assumptions in
the application of generally accepted accounting principles
(GAAP) that may have a material impact on the company’s
consolidated fi nancial statements and related disclosures
and on the comparability of such information over different
reporting periods. All such estimates and assumptions affect
reported amounts of assets, liabilities, revenues and expenses,
as well as disclosures of contingent assets and liabilities.
Estimates and assumptions are based on management’s expe-
rience and other information available prior to the issuance
of the fi nancial statements. Materially different results can
occur as circumstances change and additional information
becomes known.
The discussion in this section of “critical” accounting
estimates or assumptions is according to the disclosure guide-
lines of the Securities and Exchange Commission (SEC),
wherein:
1. the nature of the estimates or assumptions is material
due to the levels of subjectivity and judgment neces-
sary to account for highly uncertain matters or the
susceptibility of such matters to change; and
2. the impact of the estimates and assumptions on the
company’s fi nancial condition or operating perfor-
mance is material.
Besides those meeting these “critical” criteria, the com-
pany makes many other accounting estimates and assumptions
in preparing its fi nancial statements and related disclosures.
Although not associated with “highly uncertain matters,”
these estimates and assumptions are also subject to revision as
circumstances warrant, and materially different results may
sometimes occur.
For example, the recording of deferred tax assets requires
an assessment under the accounting rules that the future real-
ization of the associated tax benefi ts be “more likely than not.”
Another example is the estimation of crude oil and natural
gas reserves under SEC rules that require “... geological and
engineering data (that) demonstrate with reasonable certainty
(reserves) to be recoverable in future years from known reser-
voirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made.” Refer to
Table V, “Reserve Quantity Information,” beginning on page
92, for the changes in these estimates for the three years end-
ing December 31, 2006, and to Table VII, “Changes in the
Standardized Measure of Discounted Future Net Cash Flows
From Proved Reserves” on page 100 for estimates of proved-
reserve values for each of the three years ending December 31,
2004 through 2006, which were based on year-end prices at
the time. Note 1 to the Consolidated Financial Statements,
beginning on page 56, includes a description of the “successful
efforts” method of accounting for oil and gas exploration and
production activities. The estimates of crude oil and natural
gas reserves are important to the timing of expense recognition
for costs incurred.