Occidental Petroleum 2008 Annual Report Download - page 22

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Occidental also obtains reserve additions from extensions and discoveries, which are dependent on successful exploitation programs.
In 2008, as a result of such programs, Occidental added proved reserves of 24 million BOE, primarily associated with its California
operations.
The success of extension and discovery projects depends on reservoir characteristics and technology improvements, as well as oil and
gas prices, capital costs and operating costs. Many of these factors are outside of management's control, and will affect whether or not these
historical sources of proved reserve additions continue at similar levels.
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In 2008, Occidental purchased proved reserves of 210 million BOE (207 million BOE net of divestitures), all of which were in the
United States. Occidental continues to add reserves through acquisitions when properties are available at prices it deems reasonable. As
market conditions change, the available supply of properties may increase or decrease accordingly.
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In 2008, Occidental had proved undeveloped reserve additions of 317 million BOE resulting from improved recovery, extensions and
discoveries and purchases, primarily in the Midcontinent and Rockies, the Permian Basin, Elk Hills, and Oman . These proved undeveloped
reserve additions were offset by reserves transfers of 99 million BOE to the proved developed category as a result of the 2008 development
programs. In the United States, the Elk Hills and Permian Basin properties both transferred 22 million BOE into proved developed reserves
from proved undeveloped reserves.
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A senior corporate officer of Occidental is responsible for the internal audit and review of its oil and gas reserves data. In addition, a
Corporate Reserves Review Committee (Reserves Committee) has been established, consisting of senior corporate officers, to monitor and
review Occidental's oil and gas reserves. The Reserves Committee reports to the Audit Committee of Occidental's Board of Directors
periodically throughout the year. Occidental has retained Ryder Scott Company, L.P. (Ryder Scott), independent petroleum engineering
consultants, to review its annual oil and gas reserve estimation processes since 2003.
In 2008, Ryder Scott compared Occidental’s methods and procedures for estimating oil and gas reserves to generally accepted
industry standards and reviewed certain pertinent facts interpreted and assumptions made in estimating the proved reserves volumes,
preparing the economic evaluations and determining reserves classifications. Ryder Scott reviewed the specific application of such methods
and procedures for selected oil and gas properties considered to be a valid representation of Occidental’s total reserves portfolio. In 2008,
Ryder Scott reviewed approximately 22 percent of Occidental’s proved oil and gas reserves. Since being engaged in 2003, Ryder Scott has
reviewed the specific application of Occidental’s reserve estimation methods and procedures for approximately 66 percent of Occidental’s
proved oil and gas reserves.
Based on its reviews, including the data, technical processes and interpretations presented by Occidental, Ryder Scott has concluded
that the overall procedures and methodologies utilized in determining the proved reserves for the reviewed properties as estimated by
Occidental are reasonable and consistent with generally accepted industry standards and comply with current Securities and Exchange
Commission (SEC) standards. Ryder Scott has not been engaged to render an opinion as to the reasonableness of reserves quantities
reported by Occidental.
Industry Outlook
The petroleum industry is highly competitive and subject to significant volatility due to numerous market forces affecting supply and
demand. Worldwide oil prices experienced a high degree of volatility during 2008. WTI settled at $145.31 per barrel on July 3, 2008, up from
$95.98 per barrel as of December 31, 2007, and then dropped to $44.60 per barrel at the end of 2008. While many factors precipitated these
price fluctuations, the worldwide drop in demand for oil caused by the global economic crisis appears to have been the major contributor to the
significant and steady drop in oil prices in the second half of 2008.
In the near term, a continued global economic downturn could have a depressing effect on oil prices, while recently announced and
enacted production cuts by OPEC members and certain other producing nations, as well as other potential similar future actions of these
countries, could offset the effects of falling demand. In the longer term, a recovery in global economic conditions should result in increased
demand, which, coupled with concerns about supply availability, could result in higher prices. A lower long-term demand growth rate could
result in lower oil prices. The factors discussed above make it impossible to predict the future direction of oil prices with a reliable degree of
certainty. However, Occidental is adjusting to current economic conditions by reducing its operating expenses and adjusting capital
expenditures with the goal of keeping returns well above its cost of capital. Typical industry response to sustained deterioration in product
prices would be to limit drilling and other growth activities.
While local supply and demand fundamentals, as well as availability of transportation capacity from producing areas, are decisive
factors affecting domestic natural gas prices over the long term, day-to-day prices may be more volatile in the futures markets, such as on the
NYMEX and other exchanges, making it difficult to forecast prices with any degree of confidence. Over the last ten years, the NYMEX gas
price has averaged approximately $5.72 per Mcf.
CHEMICAL SEGMENT
Business Environment
The chemical segment earnings increased in 2008 despite the deepening global economic downturn. Higher prices and margins for
caustic soda were the primary drivers of the earnings improvement. Increased demand for and competitiveness of domestically produced
products in export markets, aided by favorable feedstock prices and foreign currency exchange rates, also contributed to the improved
earnings. Partially
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offsetting these improvements was the continued fallout from the eroding United States housing market, which resulted in lower domestic