Chevron 2007 Annual Report Download - page 86

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as the unknown magnitude of possible contamination, the
unknown timing and extent of the corrective actions that
may be required, the determination of the company’s liability
in proportion to other responsible parties, and the extent to
which such costs are recoverable from third parties.
Refer to Note 23 below for a discussion of the company’s
Asset Retirement Obligations.
Equity Redetermination For oil and gas producing operations,
ownership agreements may provide for periodic reassess-
ments of equity interests in estimated crude oil and natural
gas reserves. These activities, individually or together, may
result in gains or losses that could be material to earnings in
any given period. One such equity redetermination process
has been under way since 1996 for Chevron’s interests in four
producing zones at the Naval Petroleum Reserve at Elk Hills,
California, for the time when the remaining interests in these
zones were owned by the U.S. Department of Energy. A wide
range remains for a possible net settlement amount for the
four zones. For this range of settlement, Chevron estimates
its maximum possible net before-tax liability at approxi-
mately $200, and the possible maximum net amount that
could be owed to Chevron is estimated at about $150. The
timing of the settlement and the exact amount within this
range of estimates are uncertain.
Other Contingencies Chevron receives claims from and sub-
mits claims to customers; trading partners; U.S. federal, state
and local regulatory bodies; governments; contractors; insur-
ers; and suppliers. The amounts of these claims, individually
and in the aggregate, may be significant and take lengthy
periods to resolve.
The company and its affiliates also continue to review
and analyze their operations and may close, abandon, sell,
exchange, acquire or restructure assets to achieve operational
or strategic benefits and to improve competitiveness and prof-
itability. These activities, individually or together, may result
in gains or losses in future periods.
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The company accounts for asset retirement obligations
(ARO) in accordance with Financial Accounting Standards
Board (FASB) Statement No. 143, Accounting for Asset
Retirement Obligations (FAS 143). This accounting standard
applies to the fair value of a liability for an ARO that is
recorded when there is a legal obligation associated with the
retirement of a tangible long-lived asset and the liability can
be reasonably estimated. Obligations associated with the
retirement of these assets require recognition in certain cir-
cumstances: (1) the present value of a liability and offsetting
asset for an ARO, (2) the subsequent accretion of that liability
and depreciation of the asset, and (3) the periodic review of
the ARO liability estimates and discount rates. In 2005, the
FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations – An Interpretation
of FASB Statement No. 143 (FIN 47), which was effective
for the company on December 31, 2005. FIN 47 clarifies
that the phrase “conditional asset retirement obligation,” as
used in FAS 143, refers to a legal obligation to perform asset
retirement activity for 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 company. The obliga-
tion to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or
method of settlement. Uncertainty about the timing and/or
method of settlement of a conditional ARO should be fac-
tored into the measurement of the liability when sufficient
information exists. FAS 143 acknowledges that in some cases,
sufficient information may not be available to reasonably
estimate the fair value of an ARO. FIN 47 also clarifies when
an entity would have sufficient information to reasonably
estimate the fair value of an ARO. In adopting FIN 47, the
company did not recognize any additional liabilities for con-
ditional AROs due to an inability to reasonably estimate the
fair value of those obligations because of their indeterminate
settlement dates.
FAS 143 and FIN 47 primarily affect the company’s
accounting for crude oil and natural gas producing assets.
No significant AROs associated with any legal obligations to
retire refining, marketing and transportation (downstream)
and chemical long-lived assets have been recognized, as inde-
terminate settlement dates for the asset retirements prevent
estimation of the fair value of the associated ARO. The com-
pany performs periodic reviews of its downstream and chemical
long-lived assets for any changes in facts and circumstances
that might require recognition of a retirement obligation.
The following table indicates the changes to the com-
pany’s before-tax asset retirement obligations in 2007, 2006
and 2005:
2007 2006 2005
Balance at January 1 $ 5,773 $ 4,304 $ 2,878
Liabilities assumed in the
Unocal acquisition – – 1,216
Liabilities incurred 178 153 90
Liabilities settled (818) (387) (172)
Accretion expense 399 * 275 187
Revisions in estimated cash flows 2,721 1,428 105
Balance at December 31 $ 8,253 $ 5,773 $ 4,304
* Includes $175 for revision to the ARO liability retained on properties that had
been sold.
In the table above, the amounts for 2007 and 2006
associated with “Revisions in estimated cash flows” reflect
increasing costs to abandon onshore and offshore wells,
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Notes to the Consolidated Financial Statements
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