Occidental Petroleum 2008 Annual Report Download - page 23

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offsetting these improvements was the continued fallout from the eroding United States housing market, which resulted in lower domestic
demand and earnings in the PVC business.
Business Review

During 2008, demand and pricing for basic chemical products generally remained strong, although U.S. chlorine demand fell further
compared to 2007 due to the acceleration of the economic downturn late in the year. Exports of chlorine-derived products remained steady
throughout 2008 due to the weakness of the U.S. dollar along with various feedstock cost advantages. Domestic industry demand for caustic
soda in 2008 remained relatively stable until the fourth quarter when demand weakened due to the slowing economic conditions. The tight
caustic supply during 2008 was due in part to the demand weakness of the co-produced product chlorine. Caustic soda exports also remained
strong throughout the year. As a result, caustic soda pricing increased each quarter of 2008, which enabled the industry to realize improved
margins over 2007. OxyChem’s chlor-alkali operating rate for 2008 was 85 percent of capacity, which was higher than the industry average
operating rate, but lower than the 2007 operating rate of 92 percent.

Domestic demand for PVC in 2008 was 17 percent below 2007 as a result of the significant slump in housing and automotive
industries. This decline was partially offset by exports, which were up 27 percent in 2008 over 2007, resulting in an overall decline in PVC
demand of 13 percent. Compared to 2007, PVC prices increased 24 percent, but a 16-percent increase in ethylene costs and a significant
volume decline resulted in lower earnings in the PVC business.
Industry Outlook
Future performance will depend on the recovery of domestic housing and construction markets, global economic recovery, the
competitiveness of the United States in the world markets and feedstock and energy pricing.

Operating rates would continue to be challenged throughout the year if demand remains suppressed in chlorine, vinyls and various
chlorine-derivative markets. Demand for basic chemical products could decline further in 2009 as the U.S. housing, automotive and durable
goods sectors are expected to remain weak. Margins are expected to be similar to 2008 as pricing for caustic soda is generally expected to
remain strong. The anticipated strong caustic pricing is due to the continued weak demand for its co-product chlorine.

Industry-wide PVC operating rates are expected to be lower in 2009 as a result of weak demand, especially in housing. In addition,
exports are expected to decline in 2009 due to raw material cost parity with other industrialized regions.
MIDSTREAM, MARKETING AND OTHER SEGMENT
Business Environment
The midstream and marketing segment gathers, treats, processes, transports, stores, trades and markets crude oil, natural gas,
NGLs, condensate and CO2 and generates and markets power. Midstream and marketing’s 2008 earnings increased, reflecting an increase
in gas processing margins at the Dolphin Pipeline investment.
Business Review

The marketing and trading group markets substantially all of Occidental’s oil and gas production. Marketing and trading earnings are
affected primarily by margins in oil and gas transportation and storage programs. These operations periodically use derivative instruments to
maximize realized prices for Occidental's products and in third-party marketing and trading activities.
In 2008, Occidental’s marketing operations earnings declined due to lower margins in oil marketing.

Occidental processes its and third-party domestic wet gas to extract NGLs and other gas by-products, including CO 2, and deliver dry
gas to pipelines. Margins result from the difference between inlet costs of gas and market prices for NGLs.
In June 2008, Occidental signed an agreement for a third party to construct a west Texas gas processing plant and pipeline
infrastructure that will provide CO2 for Occidental’s EOR projects in the Permian Basin. Occidental will own and operate the new facility and
pipeline system and expects to incur capital expenditures of approximately $1.1 billion over several years of which it had spent approximately
$115 million as of December 31, 2008.
Occidental’s 2008 earnings from these operations improved due to higher gas processing margins.
18
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