OCCIDENTAL PETROLEUM CORPORATION The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this Form 10-K in Item 8, and the information set forth in Risk Factors under Item 1A. INDEX PAGE Strategy 19 Oil and Gas Segment 19 Chemical Segment 30 Marketing and Midstream Segment 31 Segment Results of Operations and Items Affecting Comparability 33 Income Taxes 37 Consolidated Results of Operations 37 Liquidity and Capital Resources 40 Off-Balance Sheet Arrangements 42 Commitments and Obligations 42 Lawsuits, Claims, Commitments and Contingencies 43 Environmental Liabilities and Expenditures 44 Global Investments 46 Critical Accounting Policies and Estimates 46 Significant Accounting and Disclosure Changes 49 Safe Harbor Discussion Regarding Outlook and Other Forward-Looking Data 50 18 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
STRATEGY GENERAL Occidental is focused on delivering a unique shareholder value proposition through continual enhancements to its asset quality, organizational capability and innovative technical applications that provide competitive advantages. Occidental's integrated business provides conventional and unconventional opportunities through which to grow value. Occidental aims to maximize shareholder returns through a combination of: Ø Maintaining a sustainable and sector-leading dividend;
Ø Allocating capital to high-return, short-cycle and long-cycle, cash-flow
generating opportunities across its integrated business;
Ø Generating free cash flow growth to reduce debt and return cash to
shareholders;
Ø Achieving production growth rates of up to 5% over the long-term; and
Ø Maintaining a strong balance sheet to secure business and enhance
shareholder value.
Occidental conducts its operations with a focus on sustainability, health,
safety and environmental and social responsibility. Capital is employed to
operate all assets in a safe and environmentally sound manner. Price volatility
is inherent in the oil and gas business, and Occidental's strategy is to
position the business to thrive in an up- or down-cycle commodity price
environment.
On August 8, 2019 , Occidental closed on its acquisition of Anadarko. The
Acquisition added to Occidental's oil and gas portfolio, primarily in the
Permian Basin , DJ Basin and Gulf of Mexico , as well as a significant economic
interest in WES. Post-Acquisition, Occidental's diversified portfolio provides
numerous competitive advantages. Occidental is now the largest oil and gas
leaseholder in the United States on a net acreage basis with ample opportunities
in the Permian Basin , DJ Basin , Powder River Basin and the Gulf of Mexico with
the ability to selectively deploy capital in a way that optimizes capital
intensity. As the acquired assets are integrated and developed, Occidental will
utilize its subsurface and operating expertise to improve productivity and
reduce full cycle costs.
KEY PERFORMANCE INDICATORS
Occidental seeks to meet its strategic goals by continually measuring its
success against key performance metrics that drive total stockholder return. In
addition to efficient capital allocation and deployment discussed below,
Occidental believes the following are its most significant metrics:
Ø Health, safety and environmental and sustainability-related performance
measures;
Ø Achieving debt reduction targets;
Ø Total shareholder return, including dividends;
Ø Maintaining investment grade credit metrics;
Ø Return on capital employed (ROCE) and cash return on capital employed (CROCE);
Ø Specific measures such as earnings per share, per-unit profit, production
cost, cash flow, finding and development costs and reserves replacement
percentages; and
Ø Acquisition-related synergy and divestiture targets.
OIL AND GAS SEGMENT BUSINESS STRATEGY Occidental's oil and gas segment focuses on long-term value creation and leadership in sustainability, health, safety and the environment. In each core operating area, Occidental's operations benefit from scale, technical expertise, decades of high-margin inventory, environmental and safety leadership, and commercial and governmental collaboration. These attributes allow Occidental to bring additional production quickly to market, extend the life of older fields at lower costs, and provide low-cost returns-driven growth opportunities with advanced technology. With the completion of the Acquisition, Occidental became the largestU.S. producer of oil and liquids in the second half of 2019, allowing Occidental to maximize cash margins on a BOE basis. Through the Acquisition, Occidental acquired modern 3D seismic data pertaining to approximately 450,000 square miles of core domestic development areas. This resulted in a 40% increase in Occidental's Permian seismic inventory. The advantages that Occidental's diversified portfolio provides, coupled with unmatched subsurface characterization ability and the proven ability to execute, ensures that Occidental is positioned for full-cycle success in the years ahead. The oil and gas segment continues to focus on integration of the newly acquired assets and efforts to realize synergies at an early stage to deliver lower breakeven costs and generate excess free cash flow.
OXY 2019 FORM 10-K 19
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As a result of Occidental's strategic positioning, Occidental's assets provide current production and a future portfolio of projects that are flexible and have short-cycle investment paybacks. Together with Occidental's technical capabilities, the oil and gas segment strives to achieve low development and operating costs to maximize full-cycle value of the assets. The oil and gas business implements Occidental's strategy primarily by: Ø Operating and developing areas where reserves are known to exist and optimizing capital intensity in core areas, primarily in thePermian Basin ,DJ Basin ,Gulf of Mexico ,UAE ,Oman ,Qatar andColombia ; Ø Maintaining a disciplined and prudent approach to capital expenditures with a focus on high-return, short-cycle, cash-flow-generating opportunities and an emphasis on creating value and further enhancing Occidental's existing positions; Ø Focusing Occidental's subsurface characterization and technical activities on unconventional opportunities, primarily in thePermian Basin ; Ø Using enhanced oil recovery techniques, such as CO2, water and steam floods in mature fields; and Ø Focusing on cost-reduction efficiencies and innovative technologies to reduce carbon emissions. In 2019, oil and gas capital expenditures were approximately$5.5 billion and primarily focused on Occidental's assets in thePermian Basin , theDJ Basin ,Gulf of Mexico andOman . BUSINESS ENVIRONMENT Oil and gas prices are the major variables that drive the industry's financial performance. The following table presents the average dailyWest Texas Intermediate (WTI),Brent andNew York Mercantile Exchange (NYMEX) prices for 2019 and 2018: 2019 2018 % Change WTI oil ($/barrel)$ 57.03 $ 64.77 (12 )% Brent oil ($/barrel)$ 64.18 $ 71.53 (10 )% NYMEX gas ($/Mcf)$ 2.67 $ 2.97 (10 )%
The following table presents Occidental's average realized prices for continuing operations as a percentage of WTI, Brent and NYMEX for 2019 and 2018:
2019 2018
Worldwide oil as a percentage of average WTI 98 % 94 % Worldwide oil as a percentage of average Brent 87 % 85 % Worldwide NGL as a percentage of average WTI 30 % 41 % Worldwide NGL as a percentage of average Brent 27 % 37 % Domestic natural gas as a percentage of NYMEX 49 % 54 %
Prices and differentials can vary significantly, even on a short-term basis, making it difficult to predict realized prices with a reliable degree of certainty.
DOMESTIC INTERESTS BUSINESS REVIEW Occidental conducts its domestic operations through land leases, subsurface mineral rights it owns, or a combination of both. Occidental's domestic oil and gas leases have a primary term ranging from one to ten years, which is extended through the end of production once it commences. Occidental has leasehold and mineral interests in 14.4 million net acres, of which approximately 39% is leased, 55% is owned subsurface mineral rights and 6% is owned land with mineral rights. Included in Occidental's total net acres is approximately 7 million net acres of primarily undeveloped minerals that pass throughColorado ,Wyoming and intoUtah . Occidental holds fee ownership of oil and gas, mineral and hardrock mineral rights in this area. 20 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
The following chart shows Occidental's domestic production volumes for the last five years: [[Image Removed: chart-6dfe74b24e392041a70.jpg]] Note: Operations sold includeSouth Texas (sold inApril 2017 ), Piceance (sold inMarch 2016 ) and Williston (sold inNovember 2015 ). DOMESTIC ASSETS [[Image Removed: graphic_mapusa02.jpg]] 1.Powder River Basin 2.DJ Basin 3. Greater Natural Buttes 4.Permian Basin 5.Gulf of Mexico Permian Basin The Permian Basin extends throughoutWest Texas and southeastNew Mexico and is one of the largest and most active oil basins inthe United States , accounting for more than 30% of totalUnited States oil production in 2019. Occidental manages itsPermian Basin operations through two business units: Permian Resources, which includes growth-oriented unconventional opportunities, and Permian EOR, which utilizes enhanced oil recovery techniques such as CO2 floods and waterfloods. Occidental has a leading position in thePermian Basin , producing approximately 11% of total oil in the basin. Occidental's position in the Texas Delaware sub-basin was further enhanced through assets acquired as part of the Acquisition. By exploiting the natural synergies between Permian Resources and Permian EOR, Occidental is able to deliver unique short- and long-term advantages, efficiencies and expertise across itsPermian Basin operations. Occidental expects to decrease itsPermian Basin full-cycle breakeven costs, while continuing to expand its high-quality, low-cost OXY 2019 FORM 10-K 21
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breakeven inventory. Occidental expects the combined technical advancements, infrastructure utilization opportunities and operations across over 3.1 million net acres will provide sustainability of Occidental's low-cost position in thePermian Basin . In the next few years, growth withinOccidental's Permian Basin portfolio is expected to be focused in the Permian Resources unconventional assets. In 2019, Occidental spent approximately$3.8 billion of capital in thePermian Basin , of which over 85% was spent on Permian Resources assets. In 2020, Occidental expects to allocate approximately 40% of its worldwide capital budget to Permian Resources for development and approximately 8% to Permian EOR for the expansion of existing facilities to increase CO2 production and injection capacity. InNovember 2019 , Occidental and Ecopetrol formed a joint venture to explore and develop approximately 97,000 net acres of Occidental's Midland sub-basin properties in thePermian Basin . Occidental owns a 51% interest in the joint venture and is the operator. In exchange for its 49% interest, Ecopetrol paid$750 million in cash to Occidental at closing and will carry 75% of Occidental's share of capital expenditures, up to$750 million . The joint venture allows Occidental to accelerate its development plans in theMidland Basin , where it currently has minimal activity. Occidental will retain production and cash flow from its existing operations in theMidland Basin . [[Image Removed: option1graphicmaptexasnewmex.jpg]] 1.Delaware Basin 2. Central Basin Platform 3.Midland Basin Permian Resources Permian Resources unconventional oil development projects provide very short-cycle investment payback, averaging less than two years, and generate some of the highest margin and returns of any oil and gas projects in the world. These investments contribute cash flow and production growth, while increasing long-term value and sustainability through higher return on capital employed. As part of the Acquisition, Occidental acquiredAnadarko's oil and gas operations in Permian Resources which included approximately 370,000 net acres, including 240,000 net acres located primarily within Loving and Reeves Counties. A new well design and flowback method will be implemented in 2020, which is expected to lower the overall well cost while improving completion efficiency. The 2020 plan contemplates the continued development of the newly acquired acreage. Occidental's share of production from the acquired assets in Permian Resources was approximately 159 thousand BOE per day (MBOE/d) from the Acquisition date throughDecember 31, 2019 . Overall in 2019, Permian Resources produced approximately 355 MBOE/d from approximately 7,600 gross wells. In 2019, Permian Resources added 173 MMBOE to Occidental's proved reserves for improved recovery additions. Permian EORThe Permian Basin's concentration of large conventional reservoirs, favorable CO2 flooding performance and the proximity to naturally occurring CO2 supply has resulted in decades of high-value enhanced oil production. With 34 active CO2 floods and over 40 years of experience, Occidental is the industry leader inPermian Basin CO2 flooding, which can increase ultimate oil recovery by 10% to 25%. Technology improvements, such as the recent trend toward vertical expansion of the CO2 flooded interval into residual oil zone targets, continue to yield more recovery from existing projects. Occidental utilizes workover rigs to drill extra depth into additional CO2 floodable sections of the reservoir. Occidental completed 72 well workovers in 2019 and has plans to complete 81 well workovers in 2020. In 2019, Permian EOR added 14 MMBOE to Occidental's proved
22 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
reserves for improved recovery additions, primarily as a result of executing CO2 flood development projects and expansions. Occidental's share of production from Permian EOR was approximately 154 MBOE/d in 2019. Significant opportunities also remain to gain additional recovery by expanding Occidental's existing CO2 projects into new portions of reservoirs that have only been water-flooded. Permian EOR has a large inventory of future CO2 projects, which could be developed over the next 20 years or accelerated, depending on market conditions. In addition, OLCV continues making progress towards supplying anthropogenic, or man-made, CO2 for the purpose of carbon capture, utilization and storage in Occidental's Permian EOR operations.DJ Basin Through the Acquisition, Occidental isColorado's top oil and gas producer with interest in approximately 650,000 net acres. Production is derived from 2,700 operated vertical wells and 2,000 operated horizontal wells primarily focused in 460,000 net acres in theNiobrara and Codell formations.The DJ Basin provides competitive economics, low breakeven costs and free cash-flow generation. Occidental's share of production from theDJ Basin was approximately 303 MBOE/d from the Acquisition date throughDecember 31, 2019 . Horizontal drilling results in the field continue to be strong, with improved operational efficiencies in drilling and completions. License to operate continues to be a key focus moving into 2020. Occidental has a majority of its planned 2020 completions activity permitted. Occidental maintains optionality by flexing resources betweenDJ Basin and another emerging high rate- of-return program in thePowder River Basin .Powder River In the southernPowder River Basin , Occidental acquired through the Acquisition approximately 400,000 net acres mainly located inConverse County, Wyoming . The field contains the Turner,Niobrara , Mowry andParkman formations that hold both liquids and natural gas. Greater Natural Buttes The Greater Natural Buttes area in easternUtah is a tight-gas asset producing primarily from the Mesa Verde,Wasatch and Blackhawk formations. Occidental uses cryogenic and refrigeration processing facilities in this area to extract NGLs from the natural-gas stream. There was no development activity in this field during 2019 due to capital being allocated to higher-margin projects. OFFSHORE DOMESTIC ASSETSGulf of Mexico Occidental owns a working interest in 230 blocks in theGulf of Mexico , operates 10 active floating platforms and holds interests in 18 active fields. In 2020, Occidental will take advantage of its extensive infrastructure across theGulf of Mexico to execute its long-term plan for development and exploration. It will operate one floating drillship and three platform rigs together with a floating well service rig to cost effectively develop known resources and perform exploration activities to identify tie-back opportunities near existing facilities. The following table shows areas of continuing development in theGulf of Mexico along with the corresponding working interest in those areas. Acquired assets in theGulf of Mexico produced approximately 147 MBOE/d from the Acquisition date throughDecember 31, 2019 . In addition to its portfolio of undeveloped leases, Occidental'sGulf of Mexico exploration assets are primarily related to a deepwater discovery located with tie-back proximity to theHorn Mountain platform. Development Area Working InterestHorn Mountain 100 % Marlin 100 % Holstein 100 %Caesar Tonga 34 % Constellation 33 % Lucius 49 %K2 Complex 42 % OXY 2019 FORM 10-K 23
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
INTERNATIONAL INTERESTS BUSINESS REVIEW Occidental conducts its ongoing international operations in two sub-regions: theMiddle East andLatin America . Its activities include oil, natural gas and NGL production through direct working-interest and production sharing contracts (PSC). Production Sharing Contracts Occidental's interest inOman and Dolphin are subject to PSCs. Under such contracts, Occidental records a share of production and reserves to recover certain development and production costs and an additional share for profit. In addition, certain contracts inColombia are subject to contractual arrangements similar to a PSC. These contracts do not transfer any right of ownership to Occidental and reserves reported from these arrangements are based on Occidental's economic interest as defined in the contracts. Occidental's share of production and reserves from these contracts decreases when product prices rise and increases when prices decline. Overall, Occidental's net economic benefit from these contracts is greater when product prices are higher. The following chart shows Occidental's international production volumes for the last five years: [[Image Removed: chart-135ec38c3408b941c74.jpg]] Note: Operations sold, exited or held for sale include the Africa Assets (sold in 2019 or held for sale atDecember 31, 2019 ),Qatar (exited in 2019) and otherMiddle East andNorth Africa operations exited in 2016 and 2015.MIDDLE EAST ASSETS [[Image Removed: graphic_mapmiddleeasta01.jpg]] 24 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
InOman , Occidental is the operator of Block 9 with a 50% working interest, Block 27 with a 65% working interest, Block 53 with a 45% working interest and Block 62 with a 100% working interest. In 2018 and 2019, Occidental entered into Exploration and Production Sharing Agreements for Blocks 30, 51, 65 and 72, which increased the acreage that Occidental holds inOman from 2.3 million to 6.0 million gross acres and the potential well inventory locations to approximately 10,000. In 2019, Occidental's share of production was 89 MBOE/d. The Block 9 contract expires in 2030 and the Block 27 contract expires in 2035. Occidental's share of production for Blocks 9 and 27 was 27 MBOE/d and 7 MBOE/d in 2019, respectively. The Block 53 (Mukhaizna Field) contract expires in 2035 and is a major world-class pattern steam flood project for enhanced oil recovery that utilizes some of the largest mechanical vapor compressors ever built. Since assuming operations in Mukhaizna in 2005, Occidental has drilled over 3,450 new wells and has increased gross production by over 15 fold. Occidental's share of production for Block 53 was 33 MBOE/d in 2019. Subject to declaration of commerciality, Block 62 will expire in 2028. Occidental's share of production for Block 62 was 22 MBOE/d in 2019.United Arab Emirates In 2011, Occidental acquired a 40% participating interest inAl Hosn Gas , joining with theAbu Dhabi National Oil Company (ADNOC) in a 30-year joint venture agreement. In 2019, Occidental's share of production fromAl Hosn Gas was 251 MMcf per day of natural gas and 40,000 barrels per day of NGL and condensate.Al Hosn Gas includes gas processing facilities which are discussed further in "Marketing and Midstream Segment - Gas Processing, Gathering and CO2 ." In 2019, Occidental acquired a 9-year exploration concession and, subject to a declaration of commerciality, a 35-year production concession for onshore Block 3 which covers an area of approximately 1.5 million acres and is adjacent toAl Hosn Gas . Occidental conducts a majority of itsMiddle East business development activities through its office in Abu Dhabi, which also provides various support functions for Occidental'sMiddle East oil and gas operations.
InQatar , Occidental partners in theDolphin Energy project, an investment that is comprised of two separate economic interests. Occidental has a 24.5% interest in the upstream operations to develop and produce natural gas, NGL and condensate fromQatar's North Field through mid-2032. Occidental also has a 24.5% interest inDolphin Energy Limited , which operates a pipeline and is discussed further in "Marketing and Midstream Segment - Pipeline." Occidental's net share of production from the Dolphin upstream operations was 42 MBOE/d in 2019. In 2019, Occidental's contract forIdd El Shargi North Dome (ISND) expired, and there was a mutually agreed early termination of its Idd El Shargi South Dome (ISSD) contract.LATIN AMERICA ASSETS 1. La Cira-Infantas Waterflood Area 2.Llanos Norte Basin 3. Teca Heavy Oil Area
[[Image Removed: graphic_maplatinamericaa01.jpg]] 4.
Occidental has working interests in the La Cira-Infantas and Teca areas and has operations within theLlanos Norte Basin . Occidental's interests range from 39% to 61% and certain interests expire between 2023 and 2038, while others extend through the economic limit of the areas.
OXY 2019 FORM 10-K 25
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
In 2019, Occidental and Ecopetrol initiated Teca steam flood project second phase development activities. During 2019, 17 new wells were drilled, and the initial facility upgrade project began. Occidental also farmed into two additional blocks in the prospectivePutumayo Basin , consolidating a position of 1.6 million gross acres in the basin. Occidental's net share of production fromColombia was 33 MBOE/d in 2019.AFRICA ASSETS InSeptember 2019 , Occidental completed the sale of Mozambique LNG assets to Total for approximately$4.2 billion . InJanuary 2020 , Occidental completed the sale ofSouth Africa assets to Total. Occidental and Total continue to work toward completing the sales of the remaining Africa Assets during 2020. The results of the Africa Assets are presented as discontinued operations in the Consolidated Statements of Operations and Cash Flows. The remainingAfrica Assets are classified as held-for-sale and not considered part of Occidental's ongoing international operations as ofDecember 31, 2019 . Operations inAlgeria involve production and development activities in Blocks 404A and 208 ofAlgeria's Sahara Desert. The El Merk Central Processing Facility (CPF) in Block 208 processed produced oil and NGL, while the Hassi Berkine South and Ourhoud CPFs in Block 404A processed only produced oil.Ghana operations include production and development activities located offshore in the WestCape Three Point Block and the Deepwater Tano Block. PROVED RESERVES Proved oil, NGL and natural gas reserves were estimated using the unweighted arithmetic average of the first-day-of-the-month price for each month within the year, unless prices were defined by contractual arrangements. Oil, NGL and natural gas prices used for this purpose were based on posted benchmark prices and adjusted for price differentials including gravity, quality and transportation costs. The following table shows the 2019, 2018 and 2017 calculated average prices for both WTI and Brent oil prices, as well as the NYMEX gas prices: 2019 2018 2017
WTI oil ($/barrel)
Occidental had proved reserves from continuing operations at year-end 2019 of
3,827 million barrels of oil equivalent (MMBOE) (excluding the Africa Assets),
compared to the year-end 2018 amount of 2,752 MMBOE. Proved developed reserves
represented approximately 76% and 73% of Occidental's total proved reserves at
year-end 2019 and 2018, respectively. The following table shows the breakout of
Occidental's proved reserves from continuing operations by commodity as a
percentage of total proved reserves:
2019 2018
Oil 52 % 57 %
Natural gas 29 % 25 %
NGL 19 % 18 %
Occidental does not have any reserves from non-traditional sources. For further
information regarding Occidental's proved reserves, see "Supplemental Oil and
Gas Information."
The following table details the proved developed and undeveloped reserves
related to the Africa Assets that were presented as held for sale at December
31, 2019 :
Natural Gas
Oil (MMbbl) NGL(MMbbl) (Bcf) Total (MMBOE)
Proved developed reserves 99 7 19 109
Proved undeveloped reserves 14 - 11 16
26 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
CHANGES IN PROVED RESERVES Occidental's total proved reserves from continuing operations increased 1,075 MMBOE in 2019, which was primarily driven by additions of 1,311 MMBOE primarily from the Acquisition and 356 MMBOE from Occidental's development program. Changes in reserves were as follows: MMBOE 2019 Revisions of previous estimates (200 ) Improved recovery 293 Extensions and discoveries 63 Purchases 1,311 Sales (29 ) Production (363 ) Total 1,075 Occidental's ability to add reserves, other than through purchases, depends on the success of improved recovery, extension and discovery projects, each of which depends on reservoir characteristics, technology improvements and oil and natural gas prices, as well as capital and operating costs. Many of these factors are outside management's control and may negatively or positively affect Occidental's reserves. Purchases of Proved Reserves In 2019, Occidental purchased proved reserves of 1,311 MMBOE primarily as part of the Acquisition, including proved reserves in thePermian Delaware Basin , theDJ Basin andGulf of Mexico . As part of smaller asset purchases separate from the Acquisition, Occidental purchased proved reserves in Permian Resources New Mexico. Revisions of Previous Estimates Revisions can include upward or downward changes to previous proved reserve estimates for existing fields due to the evaluation or interpretation of geologic, production decline or operating performance data. In addition, product price changes affect proved reserves recorded by Occidental. For example, lower prices may decrease the economically recoverable reserves, particularly for domestic properties, because the reduced margin limits the expected life of the operations. Offsetting this effect, lower prices increase Occidental's share of proved reserves under PSCs because more oil is required to recover costs. Conversely, when prices rise, Occidental's share of proved reserves decreases for PSCs and economically recoverable reserves may increase for other operations. Reserve estimation rules require that estimated ultimate recoveries be much more likely to increase or remain constant than to decrease, as changes are made due to increased availability of technical data. In 2019, Occidental had negative revisions of 200 MMBOE, primarily related to negative price revisions, changes to development plans and reservoir performance in thePermian Basin . Improved Recovery In 2019, Occidental added proved reserves of 293 MMBOE mainly associated with thePermian Basin . These properties comprise both conventional projects, which are characterized by the deployment of EOR development methods, largely employing application of CO2 flood, waterflood or steam flood, and unconventional projects. These types of conventional EOR development methods can be applied through existing wells, though additional drilling is frequently required to fully optimize the development configuration. Waterflooding is the technique of injecting water into the formation to displace the oil to the offsetting oil production wells. The use of either CO2 or steam flooding depends on the geology of the formation, the evaluation of engineering data, availability and cost of either CO2 or steam and other economic factors. Both techniques work similarly to lower viscosity causing the oil to move more easily to the producing wells. Many of Occidental's projects, including unconventional projects, rely on improving permeability to increase flow in the wells. In addition, some improved recovery comes from drilling infill wells that allow recovery of reserves that would not be recoverable from existing wells. Extensions and Discoveries Occidental also added proved reserves from extensions and discoveries, which are dependent on successful exploration and exploitation programs. In 2019, extensions and discoveries added 63 MMBOE primarily related to the recognition of proved undeveloped reserves due to post-Acquisition activities for acquired properties in thePermian Basin andGulf of Mexico . Sales of Proved Reserves In 2019, Occidental sold 29 MMBOE in proved reserves mainly related to non-corePermian Basin acreage. OXY 2019 FORM 10-K 27
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
Proved Undeveloped Reserves Occidental had proved undeveloped reserves at year-end 2019 of 904 MMBOE, compared to the year-end 2018 amount of 750 MMBOE. Changes in proved undeveloped reserves were as follows: MMBOE 2019 Revisions of previous estimates (166 ) Improved recovery 192 Extensions and discoveries 36 Purchases 317 Sales (29 ) Transfer to proved developed reserves (196 ) Total 154 Occidental incurred approximately$1.8 billion in 2019 to convert proved undeveloped reserves to proved developed reserves.Permian Basin added approximately 500 MMBOE through improved recovery and purchases. The 2019 additions to proved undeveloped reserves were partially offset by 196 MMBOE transfers to proved developed reserves, primarily in thePermian Basin , 166 MMBOE of negative revisions of previous estimates primarily related to negative price revisions, changes to development plans and reservoir performance in thePermian Basin . Occidental's highest-return projects and most active development areas are located in thePermian Basin , which represented 44% of the proved undeveloped reserves as ofDecember 31, 2019 . Nearly half of Occidental's 2020 capital program of$5.3 billion is allocated to the development program in thePermian Basin . Overall, Occidental plans to spend approximately$3.6 billion over the next five years to develop its proved undeveloped reserves in thePermian Basin . Occidental's proved undeveloped reserves in international locations are associated with approved long-term international development projects. RESERVES EVALUATION AND REVIEW PROCESS Occidental's estimates of proved reserves and associated future net cash flows as ofDecember 31, 2019 , were made by Occidental's technical personnel and are the responsibility of management. The estimation of proved reserves is based on the requirement of reasonable certainty of economic producibility and funding commitments by Occidental to develop the reserves. This process involves reservoir engineers, geoscientists, planning engineers and financial analysts. As part of the proved reserves estimation process, all reserve volumes are estimated by a forecast of production rates, operating costs and capital expenditures. Price differentials between benchmark prices (the unweighted arithmetic average of the first-day-of-the-month price for each month within the year) and realized prices and specifics of each operating agreement are then used to estimate the net reserves. Production rate forecasts are derived by a number of methods, including estimates from decline curve analysis, type curve analysis, material balance calculations that take into account the volumes of substances replacing the volumes produced, and associated reservoir pressure changes, seismic analysis and computer simulation of the reservoir performance. These reliable field-tested technologies have demonstrated reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation. Operating and capital costs are forecast using the current cost environment applied to expectations of future operating and development activities. Net proved developed reserves are those volumes that are expected to be recovered through existing wells with existing equipment and operating methods for which the incremental cost of any additional required investment is relatively minor. Net proved undeveloped reserves are those volumes that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Proved undeveloped reserves are supported by a five-year, detailed, field-level development plan, which includes the timing, location and capital commitment of the wells to be drilled. The development plan is reviewed and approved annually by senior management and technical personnel. Annually a detailed review is performed by Occidental'sWorldwide Reserves Group and its technical personnel on a lease-by-lease basis to assess whether proved undeveloped reserves are being converted on a timely basis within five years from the initial disclosure date. Any leases not showing timely transfers from proved undeveloped reserves to proved developed reserves are reviewed by senior management to determine if the remaining reserves will be developed in a timely manner and have sufficient capital committed in the development plan. Only proved undeveloped reserves that are reasonably certain to be drilled within five years of booking and are supported by a final investment decision to drill them are included in the development plan. A portion of the proved undeveloped reserves associated with international operations are expected to be developed beyond the five years and are tied to approved long-term development plans. The current Senior Vice President, Reserves forOxy Oil and Gas is responsible for overseeing the preparation of reserve estimates, in compliance withU.S. SEC rules and regulations, including the internal audit and review of Occidental's oil and gas reserves data. He has over 35 years of experience in the upstream sector of the exploration and production business, and has held various assignments inNorth America ,Asia andEurope . He is a three-time past Chair of theSociety of Petroleum Engineers Oil andGas Reserves Committee . He is anAmerican Association of Petroleum Geologists (AAPG) Certified Petroleum Geologist and currently serves on theAAPG Committee on Resource Evaluation . He is a member of the Society 28 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
of Petroleum Evaluation Engineers, theColorado School of Mines Potential Gas Committee and theUNECE Expert Group on Resource Management . He has Bachelor of Science and Master of Science degrees in geology fromEmory University inAtlanta . Occidental has a Corporate Reserves Review Committee (Reserves Committee), consisting of senior corporate officers, to review and approve Occidental's oil and gas reserves. The Reserves Committee reports to the Audit Committee of Occidental's Board of Directors during the year. Since 2003, Occidental has retainedRyder Scott Company, L.P. (Ryder Scott), independent petroleum engineering consultants, to review its annual oil and gas reserve estimation processes. In addition, Occidental utilizedMiller and Lents, Ltd. (M&L), independent petroleum engineering consultants who were previously retained by Anadarko, to review the annual oil and gas reserve estimation processes associated with the Anadarko reserves. For additional reserves information, see Supplemental Oil and Gas Information under Item 8 of this Form 10-K. In 2019, both Ryder Scott and M&L conducted a process review of the methods and analytical procedures utilized by Occidental's engineering and geological staff for estimating the proved reserves volumes, preparing the economic evaluations and determining the reserves classifications as ofDecember 31, 2019 , in accordance withSEC regulatory standards. Ryder Scott and M&L reviewed the specific application of such methods and procedures for selected oil and gas properties considered to be a valid representation of Occidental's 2019 year-end total proved reserves portfolio. In 2019, Ryder Scott reviewed approximately 20% of legacy 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 80% of legacy Occidental's existing proved oil and gas reserves. M&L reviewed approximately 90% of the Anadarko proved oil and gas reserves. Management retained Ryder Scott and M&L to provide objective third-party input on its methods and procedures and to gather industry information applicable to Occidental's reserve estimation and reporting process. Neither Ryder Scott nor M&L has been engaged to render an opinion as to the reasonableness of reserves quantities reported by Occidental. Occidental has filed Ryder Scott's and M&L's independent reports as exhibits to this Form 10-K. Based on its reviews, including the data, technical processes and interpretations presented by Occidental, Ryder Scott and M&L have concluded that the overall procedures and methodologies Occidental utilized in estimating the proved reserves volumes, documenting the changes in reserves from prior estimates, preparing the economic evaluations and determining the reserves classifications for the reviewed properties are appropriate for the purpose thereof and comply with currentSEC regulations. INDUSTRY OUTLOOK The petroleum industry is highly competitive and subject to significant volatility due to various market conditions. WTI and Brent oil price indexes increased throughout 2019 closing at$61.06 per barrel and$66.00 per barrel, respectively, as ofDecember 31, 2019 . Oil prices will continue to be affected by: (i) global supply and demand, which are generally a function of global economic conditions, inventory levels, production disruptions, technological advances, regional market conditions and the actions ofOPEC , other significant producers and governments; (ii) transportation capacity, infrastructure constraints, and costs in producing areas; (iii) currency exchange rates; and (iv) the effect of changes in these variables on market perceptions. NGL prices are related to the supply and demand for the components of products making up these liquids. Some of them more typically correlate to the price of oil while others are affected by natural gas prices as well as the demand for certain chemical products for which they are used as feedstock. In addition, infrastructure constraints magnify the pricing volatility from region to region. Domestic natural gas prices and local differentials are strongly affected by local supply and demand fundamentals, as well as government regulations and availability of transportation capacity from producing areas. These and other factors make it difficult to predict the future direction of oil, NGL and domestic gas prices reliably. For purposes of the current capital plan, Occidental will continue to focus on allocating capital to its highest-return assets with the flexibility to adjust based on fluctuations in commodity prices. International gas prices are generally fixed under long-term contracts. Occidental continues to adjust capital expenditures in line with current economic conditions with the goal of keeping returns well above its cost of capital. OXY 2019 FORM 10-K 29
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
CHEMICAL SEGMENT BUSINESS STRATEGY OxyChem seeks to generate cash flow in excess of its normal capital expenditure requirements and achieve above-cost-of-capital returns. The chemical segment focuses on being a low-cost producer in order to maximize cash flow generation. OxyChem concentrates on the chlorovinyls chain, beginning with the co-production of caustic soda and chlorine. Caustic soda and chlorine are marketed to external customers. In addition, chlorine, together with ethylene, is converted through a series of intermediate products into polyvinyl chloride (PVC). OxyChem's focus on chlorovinyls allows it to maximize the benefits of integration and take advantage of economies of scale. Capital is employed to sustain production capacity and to focus on projects and developments designed to improve the competitiveness of segment assets. Acquisitions and plant development opportunities may be pursued when they are expected to enhance the existing core chlor-alkali and PVC businesses or take advantage of other specific opportunities. In 2019, capital expenditures for OxyChem totaled$267 million . BUSINESS ENVIRONMENT In 2019,the United States economic growth rate, estimated to be 2.3%, was lower than the 2.9% experienced in 2018, which resulted in lower demand for caustic soda and PVC. Ethylene prices trended downward in the first half of 2019 before increasing in the second half of the year with the total year average ethylene price being less than that of 2018. Pricing for caustic soda and PVC was lower in 2019, partially offset by lower energy and feedstock costs. Domestic demand for caustic soda and PVC was negatively impacted by slower or no growth in manufacturing, automotive and construction markets as well as a weaker pulp and paper market. BUSINESS REVIEW BASIC CHEMICALS The lowerU.S. growth rate resulted in lower domestic demand as the industry chlor-alkali operating rates decreased by 3% compared to 2018. Liquid caustic soda prices were lower both domestically and globally in 2019 due to weaker demand in the alumina and pulp and paper market segments, which was partially offset by lower energy prices than in 2018. Exports of downstream chlorine derivatives into the vinyls chain decreased in 2019 as demand for PVC lagged year-over-year.
VINYLS
Demand for PVC in 2019 decreased year-over-year in total as domestic demand was down 3% from 2018 while export demand increased by less than 1%. Domestic demand was weaker in the first half of 2019 due to lower construction demand caused by weather conditions and demand did not fully recover in the second half of 2019. Export demand growth was driven by emerging economy growth and competitive North American feedstock costs. Export volume remains a significant portion of PVC sales representing over 34% of total North American producer's production. PVC industry operating rates decreased by 1% compared to 2018. Industry PVC margins decreased in 2019 due to lower PVC prices partially offset by lower ethylene prices in the first half of 2019 and lower energy prices than in 2018. INDUSTRY OUTLOOK Industry performance will depend on the health of the global economy, specifically in the housing, construction, automotive and durable goods markets. The housing and construction markets are expected to strengthen over the next year while the automotive and durable goods markets look to remain flat or decrease slightly. Margins also depend on market supply and demand balances and feedstock and energy prices. Weakening in the petroleum industry may negatively affect the demand and pricing of a number of Occidental's products that are consumed by industry participants.U.S. commodity export markets will continue to be impacted by the relative strength of theU.S. dollar. BASIC CHEMICALS Continued improvement inthe United States housing market, offset by flat to weakening automotive and durable goods markets, are expected to result in a flattening to a moderate increase in demand for basic chemical products in 2020. Export demand for caustic soda is expected to be similar to 2019 levels driven by limited demand improvement into the alumina market. Chlor-alkali operating rates should improve moderately with higher demand and continued competitive energy and raw material pricing as compared to global feedstock costs. Businesses such as calcium chloride and muriatic acid may be affected by flatterU.S. oil growth trends, as well as shifts in drilling technology.
VINYLS
North American demand for PVC is expected to improve in 2020 over 2019 levels, as growth in residential construction spending is expected to rebound along with upside potential driven by new infrastructure projects. Although overall demand is expected to increase inNorth America , operating rates are anticipated to remain relatively flat in 2020 as new PVC capacity is expected to enter the market. Growth in the export market is likely along with favorable ethylene costs continuing in 2020. 30 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKETING AND MIDSTREAM SEGMENT
BUSINESS STRATEGY The marketing and midstream segment strives to maximize realized value by optimizing the use of its gathering, processing, transportation, storage and terminal commitments and by providing access to domestic and international markets. To generate returns, the segment evaluates opportunities across the value chain and uses its assets to provide services to Occidental's subsidiaries, as well as third parties. The marketing and midstream segment operates gathering systems, gas plants, co-generation facilities and storage facilities and invests in entities that conduct similar activities. FromAugust 8, 2019 , toDecember 31, 2019 , WES's operating results were consolidated in the marketing and midstream segment. As ofDecember 31, 2019 , Occidental will account for its ownership investment in WES under the equity method of accounting. See Note 16 - Investments and Related-Party Transactions in the Notes to Consolidated Financial Statements. Also within the marketing and midstream segment is OLCV. OLCV seeks to capitalize on Occidental's EOR leadership by developing carbon capture, utilization and storage projects that source anthropogenic CO2 and promote innovative technologies that drive cost efficiencies and economically grow Occidental's business while reducing emissions. This segment also seeks to minimize the costs of gas, power and other commodities used in Occidental's various businesses. Capital is employed to sustain or expand assets to improve the competitiveness of Occidental's businesses. In 2019, capital expenditures related to the marketing and midstream segment totaled$461 million (including$365 million related to WES). BUSINESS ENVIRONMENT Marketing and midstream segment earnings are affected by the performance of its various businesses, including its marketing, gathering and transportation, gas processing and power-generation assets. The marketing business aggregates, markets and stores Occidental and third-party volumes. Marketing performance is affected primarily by commodity price changes and margins in oil and gas transportation and storage programs. The marketing business results can experience significant volatility depending on commodity price changes and the Midland toGulf Coast spreads. In 2019, the Permian takeaway capacity increased as several new third-party pipelines were completed, which in turn reduced the Midland toGulf Coast spreads. Gas gathering, processing and transportation results are affected by fluctuations in commodity prices and the volumes that are processed and transported through the segment's plants, as well as the margins obtained on related services from investments in which Occidental has an equity interest. The 2019 declines in NGL prices and sulfur prices negatively impacted the gas processing business. BUSINESS REVIEW MARKETING The marketing group markets substantially all of Occidental's oil, NGL and natural gas production, as well as trades around its assets, including contracted transportation and storage capacity. Occidental's third-party marketing activities focus on purchasing oil, NGL and gas for resale from parties whose oil and gas supply is located near its transportation and storage assets. These purchases allow Occidental to aggregate volumes to better utilize and optimize its assets. In 2019, compared to the prior year, marketing results were negatively impacted by the decline in theMidland-to-Gulf Coast spreads, as well as non-cash mark-to-market losses. OXY 2019 FORM 10-K 31
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
PIPELINE
Occidental's pipeline business mainly consists of its 24.5% ownership interest inDolphin Energy .Dolphin Energy owns and operates a 230-mile-long, 48-inch-diameter natural gas pipeline (Dolphin Pipeline), which transports dry natural gas fromQatar to theUAE andOman . The Dolphin Pipeline has capacity to transport up to 3.2 Bcf of natural gas per day and currently transports approximately 2.2 Bcf per day, and up to 2.5 Bcf per day in the summer months. In 2019, compared to the prior year, pipeline income declined due to the 2018 sale of the Centurion Pipeline common carrier oil pipeline and storage system and theIngleside Crude Terminal . GAS PROCESSING, GATHERING AND CO2 Occidental processes its and third-party domestic wet gas to extract NGL and other gas byproducts, including CO2, and delivers dry gas to pipelines. Margins primarily result from the difference between inlet costs of wet gas and market prices for NGL. As ofDecember 31, 2019 , Occidental has 54.5% of limited partner unit interest and a 2% non-voting general partner unit interest in WES. In addition, Occidental has a 2% non-voting limited partner interest inWestern Midstream Operating, LP , a consolidated subsidiary of WES. Prior toDecember 31, 2019 Occidental consolidated WES. As ofDecember 31, 2019 , Occidental recognizes WES as an equity method investment. See Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. WES owns gathering systems, plants and pipelines and earns revenue from fee-based and service-based contracts with Occidental and third parties. Occidental also has a 40% participating interest inAl Hosn Gas which is designed to process 1.3 Bcf per day of natural gas and separate it into salable gas, condensate, NGL and sulfur. In 2019, the facilities produced approximately 11,500 metric tons per day of sulfur, of which approximately 4,600 metric tons was Occidental's share.Al Hosn Gas facilities generate revenues from gas processing fees and the sale of sulfur. In 2019, compared to the prior year, gas processing, gathering and CO2 results increased primarily due to income from WES partially offset by lower NGL prices and sulfur prices which negatively impacted the gas processing business. POWER GENERATION FACILITIES Earnings from power and steam generation facilities are derived from sales to affiliates and third parties.LOW CARBON VENTURES OLCV was formed to execute on Occidental's vision to reduce global emissions and provide a more sustainable future through low carbon energy and products. OLCV capitalizes on Occidental's extensive experience in utilizing CO2 for EOR by investing in technologies, developing projects and providing services to facilitate and accelerate the implementation of carbon capture, utilization and storage projects and opportunities for zero-carbon power. Moreover, OLCV is fostering new technologies and business models with the potential to position Occidental as a leader in the production of low-carbon oil and products. INDUSTRY OUTLOOK Marketing and midstream segment results can experience volatility depending on the Midland toGulf Coast spreads and commodity price changes. The decline in the Midland toGulf Coast spreads in the second half of 2019 has continued into the early part of 2020. If the spread remains at current levels or are lower for the rest of 2020, this could significantly reduce margins in the marketing business. To a lesser extent, declines in commodity prices, including NGL and sulfur prices, would reduce the results for the gas processing business. 32 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
SEGMENT RESULTS OF OPERATIONS AND ITEMS AFFECTING COMPARABILITY
SEGMENT RESULTS OF OPERATIONS Segment earnings exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from the segments' equity investments. Seasonality is not a primary driver of changes in Occidental's consolidated quarterly earnings during the year. The following table sets forth the sales and earnings of each operating segment and corporate items for the years endedDecember 31 : millions, except per share amounts 2019 2018 2017NET SALES (a) Oil and Gas$ 13,423 $ 10,441 $ 7,870 Chemical 4,102 4,657 4,355 Marketing and Midstream 4,132 3,656 1,157 Eliminations (1,264 ) (930 ) (874 ) Total$ 20,393 $ 17,824 $ 12,508 SEGMENT RESULTS AND EARNINGS Domestic$ 838 $ 621 $ (589 ) International 1,683 1,896 1,767 Exploration (169 ) (75 ) (67 ) Oil and Gas 2,352 2,442 1,111 Chemical 799 1,159 822 Marketing and Midstream 241 2,802 85 Total$ 3,392 $ 6,403 $ 2,018 Unallocated corporate items Interest expense, net (1,002 ) (356 ) (324 ) Income taxes (693 ) (1,477 ) (17 ) Other (2,204 ) (439 ) (366 ) Income (loss) from continuing operations$ (507 ) $ 4,131 $ 1,311 Discontinued operations, net (15 ) - - Net income (loss) (522 ) 4,131 1,311 Less: Net income attributable to noncontrolling interests (145 ) - - Less: Preferred stock dividends (318 ) - - Net income (loss) attributable to common stockholders$ (985 ) $ 4,131 $ 1,311 Net income (loss) attributable to common stockholders-basic$ (1.22 ) $ 5.40 $ 1.71 Net income (loss) attributable to common stockholders-diluted$ (1.22 ) $
5.39
(a) Intersegment sales eliminate upon consolidation and are generally made at
prices approximating those that the selling entity would be able to obtain
in third-party transactions.
OXY 2019 FORM 10-K 33
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEMS AFFECTING COMPARABILITY
OIL AND GAS SEGMENT Results of Operations millions 2019 2018 2017 Segment Sales$ 13,423 $ 10,441 $ 7,870 Segment Results (a) Domestic$ 838 $ 621 $ (589 ) International 1,683 1,896 1,767 Exploration (169 ) (75 ) (67 ) Total$ 2,352 $ 2,442 $ 1,111 Items affecting comparability Asset sale gains, net (b)$ 475 $ -$ 655 Asset impairments and related items domestic (c)$ (288 ) $ -$ (397 ) Asset impairments and related items international (d)$ (39 ) $ (416 ) $ (4 ) Oil collars mark-to-market gains$ (107 ) $
- $ -
(a) Results include significant items affecting comparability discussed in the
footnotes below.
(b) The 2019 amount included gain on sale of a portion of Occidental's joint
venture with Ecopetrol and a loss on sale of real estate assets. The 2017
gain on sale of assets included the sale of
in the
(c) The 2019 amount included
associated with domestic undeveloped leases that were set to expire in the
near term, where Occidental had no plans to pursue exploration activities.
The 2017 amount included
associated with non-core proved and unproved Permian acreage.
(d) The 2019 amount related to Occidental's mutually agreed early termination of
its Qatar ISSD contract. The 2018 amount consisted of impairment and related
charges associated with ISND and ISSD.
The following table sets forth the average realized prices for oil, NGL and
natural gas from ongoing operations for each of the three years in the period
ended
Year Year
over over
Year Year
millions (except percentages) 2019 Change 2018 Change 2017
Average Realized Prices
Oil Prices ($ per bbl)
United States $ 54.31 (4 )% $ 56.30 18 % $ 47.91
Latin America $ 57.26 (11 )% $ 64.32 33 % $ 48.50
Middle East $ 61.96 (8 )% $ 67.69 34 % $ 50.38
Total worldwide $ 56.09 (8 )% $ 60.64 24 % $ 48.93
NGL Prices ($ per bbl)
United States $ 16.03 (42 )% $ 27.64 17 % $ 23.67
Middle East $ 21.31 (8 )% $ 23.20 29 % $ 18.05
Total worldwide $ 17.06 (35 )% $ 26.25 21 % $ 21.63
Gas Prices ($ per Mcf)
United States $ 1.31 (18 )% $ 1.59 (31 )% $ 2.31
Latin America $ 7.01 9 % $ 6.43 27 % $ 5.08
Total worldwide $ 1.45 (10 )% $ 1.62 (12 )% $ 1.84
Domestic oil and gas results, excluding items affecting comparability, increased
in 2019 compared to 2018 primarily due to higher oil, NGL and natural gas sales
volumes mostly due to added production from the Acquisition and increased
production in the legacy Occidental Permian Resources operations, partially
offset by lower realized oil, NGL and natural gas prices. Domestic oil and gas
results, excluding significant items affecting comparability, increased in 2018
compared to 2017 primarily due to an increase in average domestic realized oil
prices, higher volumes and lower DD&A rates.
34 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
International oil and gas results, excluding significant items affecting comparability, decreased in 2019 compared to 2018 primarily due to lower volumes from the expiration of the ISND contract and early termination of the ISSD contract as well as a decrease in realized oil prices inLatin America and theMiddle East . International oil and gas results, excluding significant items affecting comparability, increased in 2018 compared to 2017 primarily due to an increase in realized oil prices inLatin America and theMiddle East , respectively.
Production
The following table sets forth the production volumes of oil, NGL and natural gas per day from ongoing operations for each of the three years in the period endedDecember 31, 2019 and includes a year-over-year change calculation: Year
Year
over over
Production per Day from Ongoing Year Year Operations (MBOE/d) 2019 Change 2018 Change 2017United States Permian Resources 355 66 % 214 52 % 141 Permian EOR 154 - % 154 3 % 150 DJ Basin 120 N/A - N/A - Gulf of Mexico 58 N/A - N/A - Other Domestic 27 N/A 4 N/A 5 Total 714 92 % 372 26 % 296 Latin America 34 6 % 32 - % 32 Middle East Al Hosn Gas 82 12 % 73 3 % 71 Dolphin 42 5 % 40 (5 )% 42 Oman 89 3 % 86 (9 )% 95 Qatar 35 (36 )% 55 (5 )% 58 Total 248 (2 )% 254 (5 )% 266 Total Production from Ongoing Operations 996 51 % 658 11 % 594 Sold domestic operations - N/A - N/A 8 Discontinued operations -Africa Assets 33 N/A - N/A - Total Production (MBOE/d) (a) 1,029 56 % 658 9 % 602 (a) Natural gas volumes have been converted to BOE based on energy content of six Mcf of gas to one barrel of oil. Barrels of oil equivalence does not necessarily result in price equivalence. Please refer to "Supplemental Oil and Gas Information (unaudited)" for additional information on oil and gas production and sales. Average daily production volumes from ongoing operations increased in 2019 compared to 2018 primarily due to 264 MBOE/d in acquired production from the Acquisition, including 120 MBOE/d inDJ Basin , 58 MBOE/d in theGulf of Mexico and 63 MBOE/d in theDelaware Basin , as well as an increase of 78 MBOE/d in the legacy Occidental Permian Resources operations as a result of increased drilling and well productivity. Average daily production volumes from ongoing operations increased in 2018 compared to 2017 primarily due to higher Permian Resources production which increased by 52% from the prior year, due to developmental drilling activity and improved well performance. Lease operating expense The following table sets forth the average lease operating expense per BOE from ongoing operations for each of the three years in the period endedDecember 31, 2019 : 2019 2018 2017
Average lease operating expense per BOE
Average lease operating expense per BOE, decreased in 2019 compared to 2018 primarily due to operational efficiencies related to maintenance and support cost. Combined 2019 Permian Resources lease operating expense per BOE, was$6.80 which represented a decrease of 6% from the prior year. Average lease operating costs per BOE, excluding taxes other than on income, increased in 2018 compared to 2017 primarily due to increased surface operations and maintenance costs. Permian Resources lease operating costs per BOE for 2018 decreased by 10% from the prior year, and the fourth quarter of 2018 costs were below$7.00 per BOE, due to continued improved operational efficiencies.
OXY 2019 FORM 10-K 35
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
CHEMICAL SEGMENT millions 2019 2018 2017 Segment Sales$ 4,102 $ 4,657 $ 4,355 Segment Results$ 799 $ 1,159 $ 822 Chemical segment results decreased in 2019 compared to 2018 due to lower realized caustic soda prices and lower domestic demand across many product lines partially offset by favorable feedstock costs. The 2019 earnings also reflected fees received under a pipeline easement agreement that was executed during the first quarter of 2019. Chemical segment results increased in 2018 compared to 2017 due to significant improvements in realized caustic soda pricing, strong margins and demand across many product lines and lower ethylene costs, slightly offset by decreased caustic soda export volumes. The 2018 earnings also benefited from the full-year equity contributions from the joint venture ethylene cracker inIngleside, Texas , and additional earning contributions from theGeismar, Louisiana plant expansion to produce 4CPe. MARKETING AND MIDSTREAM SEGMENT millions 2019 2018 2017 Segment Sales$ 4,132 $ 3,656 $ 1,157 Segment Results (a)$ 241 $ 2,802 $ 85 Items affecting comparability Asset and equity investment sale gains (b)$ 114 $ 907 $ 94 Asset impairments and other charges(c)$ (1,002 ) $ -$ (120 ) Interest rate swaps MTM, net(d)$ 30 $ - $ - (a) Results include items affecting comparability listed below, as well as WES
segment results from
(b) The 2019 amount represented a
investment in Plains All American Pipeline, L.P. and Plains GP Holdings,
L.P. (together, Plains). The 2018 amount represented a gain on sale of
non-core domestic midstream assets. The 2017 amount represented a non-cash
fair value gain related to Plains.
(c) The 2019 amount included a
Occidental's investment in WES at fair value as of
the loss of control. The 2017 amount represented impairments and related
charges related to idled midstream facilities.
(d) The 2019 amount represented a
rate swap for WES.
Marketing and midstream segment results, excluding items affecting
comparability, decreased in 2019 compared to 2018, primarily due to lower
marketing margins from the decrease in the Midland-to-Gulf Coast spreads by
approximately $4.00 per barrel and lower pipeline income due to the 2018 sales
of the Centurion pipeline and the Ingleside Crude Oil Terminal .
Marketing and midstream segment results, excluding items affecting
comparability, increased in 2018 compared to 2017 primarily due to higher
marketing margins from improved Midland-to-Gulf Coast spreads and higher gas
plant income due to higher domestic NGL prices and higher sulfur prices in
connection with Al Hosn Gas sulfur sales.
CORPORATE
Significant corporate items during 2019 include the following: millions
2019 2018 2017
Items Affecting Comparability
Anadarko acquisition-related costs $ (1,647 ) $ - $ -
Bridge loan financing fees $ (122 ) $ - $ - Other acquisition-related pension and other termination benefits
$ 37 $ - $ - Asset impairments and other charges$ (22 ) $ - $ - Gains on warrants and interest rate swaps, net$ 203 $ - $ - 36 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAXES Deferred tax liabilities, net of deferred tax assets of$3.7 billion , were$9.7 billion atDecember 31, 2019 . The deferred tax assets, net of allowances, are expected to be realized through future operating income and reversal of temporary differences. WORLDWIDE EFFECTIVE TAX RATE The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations: millions 2019 2018 2017 SEGMENT RESULTS Oil and Gas$ 2,352 $ 2,442 $ 1,111 Chemical 799 1,159 822 Marketing and Midstream 241 2,802 85 Unallocated corporate items (3,206 ) (795 ) (690 ) Income from continuing operations before taxes$ 186 $ 5,608 $ 1,328 Income tax expense (benefit) Federal and state (34 ) 463 (903 ) Foreign 727 1,014 920 Total income tax expense$ 693 $ 1,477 $ 17
Income (loss) from continuing operations
373 % 26 % 1 %
In 2019, Occidental's worldwide effective tax rate was 373%, which was largely a result of Acquisition-related costs and charges associated with the loss of control of WES for which Occidental received no tax benefit. Excluding the impact of items affecting comparability, Occidental's worldwide effective tax rate for 2019 would be 36%. The increase in worldwide effective tax rate from 2017 to 2018 was primarily due to the 2017 remeasurement of net deferred tax liabilities to the new federal corporate income tax rate.
CONSOLIDATED RESULTS OF OPERATIONS
REVENUE AND OTHER INCOME ITEMS millions 2019 2018 2017 Net sales$ 20,393 $ 17,824 $ 12,508 Interest, dividends and other income$ 217 $ 136 $ 99 Gain on sale of equity investments and other assets, net$ 622 $
974
Price and volume changes generally represent the majority of the change in the oil and gas and chemical segments sales. Marketing and midstream sales are mainly impacted by the change in theMidland-to-Gulf Coast spread for the marketing business and, to a lesser extent, the change in NGL and sulfur prices for the gas processing business. The increase in net sales in 2019 compared to 2018 was primarily due to higher domestic volumes related to the Acquisition, which added approximately$3.5 billion in net sales as well as increased production activity in Occidental's Permian Resources operations, partially offset by oil, NGL and natural gas prices in the oil and gas segment and lower realized caustic soda prices in the chemical segment. The increase in net sales in 2018 compared to 2017 was mainly due to higher oil prices and higher domestic oil volumes, as well as higher marketing margins in the marketing and midstream segment due to improvedMidland-to-Gulf Coast spreads and higher realized caustic soda prices in the chemical segment. Average worldwide realized oil prices rose approximately 24% from 2017 to 2018. The 2019 gain on sale included a net gain of$475 million related toOccidental's Midland Basin joint venture with Ecopetrol and sale of real estate assets and$114 million from the sale of Occidental's remaining equity investment in Plains. The 2018 gain on sale included the sale of non-core domestic midstream assets including the Centurion common carrier pipeline and storage system,Southeast New Mexico oil gathering system, andIngleside Crude Terminal of$907 million . The 2017 gain on sale included the sale ofSouth Texas and non-core proved and unproved Permian acreage. OXY 2019 FORM 10-K 37
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EXPENSE ITEMS millions 2019 2018 2017 Oil and gas operating expense$ 3,246 $ 2,761 $ 2,427 Transportation expense$ 621 $ 152 $ 175
Chemical and midstream cost of sales
$ 1,679 $ 822 $ 54
Selling, general and administrative
$ 707 $ 439 $ 311
Anadarko acquisition-related costs
$ 246 $ 110 $ 82 Interest and debt expense, net$ 1,066 $ 389 $ 345 OIL AND GAS OPERATING EXPENSE Oil and gas operating expense increased in 2019 from the prior year, primarily due to higher oil and gas production costs for surface operations and maintenance due to increased activity mainly related to acquired operations as part of the Acquisition. Oil and gas operating expense increased in 2018 from the prior year, primarily due to higher oil and gas production costs for surface operations and downhole maintenance due to increased activity in thePermian Basin as well as an increase in purchased CO2 injectant. TRANSPORTATION EXPENSE Transportation expense increased in 2019 from the prior year, primarily due to increased oil sales volumes, mainly driven by added production and the fulfillment of additional capacity commitments related to the Acquisition. Transportation expense decreased in 2018 from the prior year due to the 2018 sale of the Centurion Pipeline common carrier oil pipeline and storage system and theIngleside Crude Terminal . CHEMICAL AND MIDSTREAM COST OF SALES Chemical and midstream cost of sales decreased slightly in 2019 from the prior year, primarily due to favorable raw material costs in the chemical segment, partially offset by an increase in midstream operation costs due to WES. Chemical and midstream cost of sales decreased slightly in 2018 from the prior year, primarily due to lower gas plant and maintenance expenses in the midstream segment. PURCHASED COMMODITIES Purchased commodities included purchased oil volumes for which Occidental does not act as agent. Several of these oil purchase agreements commenced in mid-year 2018. The increase in 2019 from the prior year is due to a full year of purchases under these contracts, which are used to ensure the full utilization of committed transportation capacity in the marketing business. Similarly, the purchased oil volumes for contracts effective in late 2017 but in effect for the full year of 2018 caused the increase between those years. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expense increased in 2019 from the prior year, primarily due to higher employee costs related to the Acquisition. Selling, general and administrative expense increased in 2018 from the prior year due to higher compensation costs. OTHER OPERATING AND NON-OPERATING EXPENSE Other operating and non-operating expense increased in 2019 from the prior year, primarily due to higher overhead oil and gas engineering costs related to the Acquisition. Other operating and non-operating expense increased in 2018 from the prior year, primarily due to higher environmental costs. TAXES OTHER THAN ON INCOME Taxes other than on income in 2019 increased from the prior year, primarily due to production taxes on higher oil, NGL and natural gas volumes as well as additional ad valorem tax related to the Acquisition. Taxes other than on income increased in 2018 from the prior year, primarily due to higher production taxes, which are directly tied to higher commodity prices. 38 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
DEPRECIATION, DEPLETION AND AMORTIZATION DD&A expense increased in 2019 from prior year, primarily due to increased production related to the Acquisition. DD&A expense decreased slightly in 2018 from the prior year due to lower domestic DD&A rates due to higher reserves partially offset by higher production volumes and higher DD&A rates in theMiddle East . ASSET IMPAIRMENTS AND OTHER CHARGES Asset impairments and other charges are primarily related to a$1 billion loss on theDecember 31, 2019 loss of control of WES. In addition, Occidental incurred impairment charges of approximately$285 million related to domestic undeveloped mineral leases that were set to expire in the near term, where Occidental had no plans to pursue exploration activities, and$39 million related to early termination of its Qatar ISSD contract. In 2018, Occidental incurred impairment and other charges of approximately$416 million on proved oil and gas properties and inventory inQatar due to the decline in oil prices. Also in 2018, the marketing and midstream segment incurred approximately$100 million of charges primarily for lower of cost or market adjustments on its crude inventory and line fill. In 2017, Occidental incurred impairment and other charges of$545 million , of which$397 million related to proved and unproved non-core Permian acreage and$120 million for idled marketing and midstream assets. ANADARKO ACQUISITION-RELATED COSTS In 2019, Occidental had the following charges related to the Acquisition: employee severance and related cost of$1 billion ; licensing fees for critical seismic data of$401 million ; and$213 million for bank, legal and consulting fees. Estimated acquisition-related charges of approximately$1.3 billion that were mostly accrued in 2019 are expected to be mostly paid in 2020. INTEREST AND DEBT EXPENSE, NET Interest and debt expense, net, increased in 2019 from the prior year due to an increase in debt issued to partially fund the Acquisition, as well as the debt assumed through the Acquisition. Interest and debt expense, net, remained relatively consistent between 2018 and 2017 experiencing a small increase in interest paid on debt due to the addition of$1 billion in senior notes.
OTHER ITEMS Income/(expense) millions 2019 2018 2017 Income tax expense
$ (693 ) $ (1,477 ) $ (17 )
Income from equity investments
INCOME TAX EXPENSE Income tax expense decreased in 2019 from the prior year, primarily due to lower pre-tax income, partially offset by charges related to the loss of control of WES and acquisition-related costs for which Occidental did not receive a tax benefit. Income tax expense increased in 2018 from the prior year, primarily due to Tax Reform in 2017 and higher pre-tax income in 2018. Occidental recorded an income tax benefit in 2017 due to the revaluation of deferred taxes as a result of the corporate tax rate reduction enacted as part of Tax Reform, partially offset by higher pre-tax operating income as a result of a recovery in commodity prices. OXY 2019 FORM 10-K 39
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
AtDecember 31, 2019 , Occidental had approximately$3.0 billion in cash and cash equivalents. A substantial majority of this cash is held and available for use inthe United States . AtDecember 31, 2019 , Occidental had$0.5 billion in restricted cash and restricted cash equivalents, which was primarily associated with a benefits trust for former Anadarko employees that was funded as part of the Acquisition. Restricted cash within the benefits trust will be made available to Occidental as benefits are paid to former Anadarko employees. DEBT ACTIVITY InAugust 2019 , Occidental issued$13.0 billion of new senior unsecured notes, consisting of both floating and fixed rate debt. Occidental also borrowed under the Term Loans, which consisted of: (1) a 364-day senior unsecured variable-rate term loan tranche of$4.4 billion and (2) a two-year senior unsecured variable-rate term loan tranche of$4.4 billion . In total, the$21.8 billion in debt issued was used to finance part of the cash portion of the purchase price for the Acquisition. Through the Acquisition, Occidental assumed Anadarko debt with an outstanding principal balance of$11.9 billion . In 2019, Occidental paid approximately$7.0 billion of long-term debt including a majority of the Term Loans using proceeds from assets sales and available cash. OnJune 3, 2019 , Occidental entered into an amendment to its existing$3.0 billion revolving credit facility (Occidental RCF) pursuant to which, among other things, the commitments under the Occidental RCF were increased to$5.0 billion at the closing of the Acquisition. Borrowings under the Occidental RCF bear interest at various benchmark rates, including London Inter-Bank Offered Rate (LIBOR), plus a margin based on Occidental's senior debt-ratings. The facility has similar terms to other debt agreements and does not contain material adverse change clauses or debt ratings triggers that could restrict Occidental's ability to borrow, or that would permit lenders to terminate their commitments or accelerate debt repayment. The facility provides for the termination of loan commitments and requires immediate repayment of any outstanding amounts if certain events of default occur. Occidental has not drawn down any amounts under the Occidental RCF. As ofDecember 31, 2019 , under the most restrictive covenants of its financing agreements, Occidental had substantial capacity for additional unsecured borrowings, the payment of cash dividends and other distributions on, or acquisitions of, Occidental stock. With a continued focus on capital and operational efficiencies, Occidental expects to fund its liquidity needs, including future dividend payments, through cash on hand, cash generated from operations, monetization of non-core assets or investments and, if necessary, proceeds from other forms of capital issuance. CASH FLOW ANALYSIS CASH PROVIDED BY OPERATING ACTIVITIES millions 2019 2018 2017 Operating cash flow from continuing operations$ 7,203 $ 7,669 $ 4,861 Operating cash flow from discontinued operations, net of taxes 172 - - Net cash provided by operating activities$ 7,375 $
7,669
Cash provided by operating activities decreased$294 million in 2019 compared to 2018, reflecting Acquisition related costs, higher interest expense, and slightly lower oil prices, which were partially offset by a 92% increase in domestic production volumes. Cash provided by operating activities increased$2.8 billion in 2018 compared to 2017, reflecting higher realized worldwide oil and NGL prices, which increased by 24% and 21%, respectively, as well as a 25% increase in domestic oil volumes. Operating cash flows in 2018 also benefited from higher marketing margins in the marketing and midstream segment due to improvedMidland-to-Gulf Coast spreads and higher chemical margins from significant improvements in caustic soda prices. 40 OXY 2019 FORM 10-K
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CASH USED BY INVESTING ACTIVITIES millions 2019 2018 2017 Capital expenditures Oil and Gas$ (5,500 ) $ (4,413 ) $ (2,945 ) Chemical (267 ) (271 ) (308 ) Marketing and Midstream(a) (461 ) (216 ) (284 ) Corporate (127 ) (75 ) (62 ) Total$ (6,355 ) $ (4,975 ) $ (3,599 ) Purchase of businesses and assets, net (28,088 ) (928 ) (1,064 ) Proceeds from sale of assets and equity investments, net 6,143 2,824 1,403 Other investing activities, net (573 ) (127 ) 181 Investing cash flows from continuing operations$ (28,873 ) $ (3,206 ) $ (3,079 ) Investing cash flows from discontinued operations (154 ) - - Net cash used by investing activities$ (29,027 ) $
(3,206 )
(a) Included
The increase in cash flows used by investing activities in 2019 compared to 2018 primarily reflected the cash portion of the Acquisition consideration, partially offset by the cash acquired. In 2019, proceeds from the sale of assets and equity investments, net, included the sale of Mozambique LNG assets, the Ecopetrol joint venture, the equity investment in Plains and real estate assets. Occidental's capital expenditures increased by$1.4 billion in 2019, compared to 2018. The increase was primarily related to thePermian Basin due to its high returns of legacy operations coupled with the addition of assets through the Acquisition in thePermian Basin ,DJ Basin andGulf of Mexico . Occidental's 2020 capital spending is expected to be$5.3 billion . The increase in cash flows used by investing activities in 2018 compared to 2017 was a result of additional capital spending, primarily in thePermian Basin due to its high returns. In 2018, proceeds from sale of assets and equity investments, net related to the sale of non-core domestic midstream assets, partially offset by purchases of businesses and assets, net related to the acquisition of a previously leased power and steam cogeneration plant. CASH PROVIDED (USED) BY FINANCING ACTIVITIES millions 2019 2018
2017
Net cash provided (used) by financing activities
Cash provided by financing activities in 2019 increased$25.3 billion , compared to 2018, primarily due to net proceeds from long-term debt of$21.6 billion and the issuance of$10.0 billion of preferred shares with a warrant used to fund the Acquisition. These proceeds were partially offset by debt payments of$7.0 billion and dividends on common stock of$2.6 billion . OXY 2019 FORM 10-K 41
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
OFF-BALANCE SHEET ARRANGEMENTS
GUARANTEES
Occidental has guaranteed its portion of the debt ofDolphin Energy , an equity method investment, and has entered into various other guarantees, including performance bonds, letters of credit, indemnities and commitments provided by Occidental to third parties, mainly to provide assurance that OPC or its subsidiaries and affiliates will meet their various obligations. See "Oil and Gas Segment - Business Review -Qatar " and "Segment Results of Operations" for further information about Dolphin. As ofDecember 31, 2019 , and 2018, Occidental had provided limited recourse guarantees on approximately$242 million and$244 million , respectively, ofDolphin Energy's debt, which are limited to certain political and other events. COMMITMENTS AND OBLIGATIONS DELIVERY COMMITMENTS Occidental has made commitments to certain refineries and other buyers to deliver oil, natural gas and NGL. The total amount contracted to be delivered inthe United States is approximately 158 million barrels of oil through 2025, 1,346 Bcf of gas through 2035 and 660 million barrels of NGL through 2035. The price for these deliveries is set at the time of delivery of the product. Occidental has significantly more production capacity than the amounts committed and has the ability to secure additional volumes in case of a shortfall. CONTRACTUAL OBLIGATIONS The following table summarizes and cross-references Occidental's contractual obligations, and indicates on- and off-balance sheet obligations as ofDecember 31, 2019 :
Payments Due by Year
2021 and 2023 and 2025 and
millions Total 2020 2022 2024 thereafter
On-Balance Sheet
Long-term debt (Note 7) (a) $ 37,401 $ - $ 11,096 $ 5,111 $ 21,194
Leases (Note 8) (b) 2,018 608 630 251 529
Asset retirement obligations (Note 1) 4,633 247 271 799 3,316
Other long-term liabilities (c) 3,765 1,054 513 490 1,708
Off-Balance Sheet
Purchase obligations (d) 20,712 3,252 5,704 4,660 7,096
Total $ 68,529 $ 5,161 $ 18,214 $ 11,311 $ 33,843 (a) Excluded unamortized debt discount and interest on the debt. As of
payable in the following years: 2020 -
billion, 2023 and 2024 -
(b) Occidental is the lessee under various agreements for real estate,
equipment, plants and facilities. See Note 2 - Accounting and Disclosure
Changes in the Notes to Consolidated Financial Statements regarding the
impact of rules effective
recognize most leases, including operating leases, on the balance sheet.
(c) Included obligations under postretirement benefit and deferred compensation
plans, accrued transportation commitments, severance and change of control
obligations related to the Acquisition and other accrued liabilities.
(d) Amounts included payments which will become due under long-term agreements
to purchase goods and services used in the normal course of business to
secure terminal, pipeline and processing capacity, CO2, electrical power,
steam and certain chemical raw materials. In 2019, Occidental added
billion of additional long-term commitments as a result of the loss of
control of WES. Amounts exclude certain product purchase obligations related
to marketing activities for which there are no minimum purchase requirements
or the amounts are not fixed or determinable. Long-term purchase contracts
are discounted at a 3.89% discount rate.
42 OXY 2019 FORM 10-K
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LAWSUITS, CLAIMS, COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS Occidental or certain of its subsidiaries are involved, in the normal course of business, in lawsuits, claims and other legal proceedings that seek, among other things, compensation for alleged personal injury, breach of contract, property damage or other losses, punitive damages, civil penalties, or injunctive or declaratory relief. Occidental or certain of its subsidiaries also are involved in proceedings under Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and similar federal, state, local and foreign environmental laws. These environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties and injunctive relief. Usually Occidental or such subsidiaries are among many companies in these environmental proceedings and have to date been successful in sharing response costs with other financially sound companies. Further, some lawsuits, claims and legal proceedings involve acquired or disposed assets with respect to which a third party or Occidental retains liability or indemnifies the other party for conditions that existed prior to the transaction. In accordance with applicable accounting guidance, Occidental accrues reserves for outstanding lawsuits, claims and proceedings when it is probable that a liability has been incurred and the liability can be reasonably estimated. Reserves for matters, other than for environmental remediation, that satisfy this criteria as ofDecember 31, 2019 , andDecember 31, 2018 , were not material to Occidental's Consolidated Balance Sheets. OnMay 30, 2019 , a complaint was filed in theCourt of Chancery of the State of Delaware by purported Occidental stockholdersHigh River Limited Partnership ,Icahn Partners Master Fund LP andIcahn Partners LP (the "Icahn Complainants"), captionedHigh River Ltd. P'ship v.Occidental Petroleum Corp. , C.A. No. 2019-0403-JRS, seeking inspection of Occidental's books and records pursuant to Section 220 of the Delaware General Corporation Law. In the complaint, the Icahn Complainants noted that they had accumulated over$1.6 billion of Occidental Common Stock. OnJune 14, 2019 , Occidental filed an answer to the complaint in theCourt of Chancery of the State of Delaware . A trial was held onSeptember 20, 2019 , and the court dismissed the Icahn Complaint. The Icahn Complainants appealed and oral arguments occurred inFebruary 2020 . In 2016, Occidental received payments from theRepublic of Ecuador of approximately$1.0 billion pursuant to aNovember 2015 arbitration award forEcuador's 2006 expropriation of Occidental's Participation Contract for Block 15. The awarded amount represented a recovery of 60% of the value of Block 15. In 2017,Andes Petroleum Ecuador Ltd. (Andes) filed a demand for arbitration, claiming it is entitled to a 40% share of the judgment amount obtained by Occidental. Occidental contends that Andes is not entitled to any of the amounts paid under the 2015 arbitration award because Occidental's recovery was limited to Occidental's own 60% economic interest in the block. The merits hearing is scheduled forMay 2020 . Occidental intends to vigorously defend against this claim in arbitration. The ultimate outcome and impact of outstanding lawsuits, claims and proceedings on Occidental cannot be predicted. Management believes that the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on Occidental's Consolidated Balance Sheets. If unfavorable outcomes of these matters were to occur, future results of operations or cash flows for any particular quarterly or annual period could be materially adversely affected. Occidental's estimates are based on information known about the legal matters and its experience in contesting, litigating and settling similar matters. Occidental reassesses the probability and estimability of contingent losses as new information becomes available. TAX MATTERS During the course of its operations, Occidental is subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions. Taxable years through 2016 forU.S. federal income tax purposes have been audited by theU.S. Internal Revenue Service (IRS) pursuant to its Compliance Assurance Program and subsequent taxable years are currently under review. Taxable years through 2009 have been audited for state income tax purposes. While a single foreign tax jurisdiction is open for 2002, all other significant audit matters in foreign jurisdictions have been resolved through 2010. During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law. Occidental believes that the resolution of outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations. For Anadarko, its taxable years through 2016 forU.S. federal and state income tax purposes have been audited by theIRS and respective state taxing authorities. There are outstanding significant audit matters in one foreign jurisdiction. During the course of the tax audit, disputes have arisen and other disputes may arise as to facts and matters of law. Other than the matter discussed below, Occidental believes that the resolution of these outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations. Anadarko received an$881 million tentative refund in 2016 related to its$5.2 billion Tronox settlement payment in 2015. InSeptember 2018 , Anadarko received a statutory notice of deficiency from theIRS disallowing the net operating loss carryback and rejectingAnadarko's refund claim. As a result, Anadarko filed a petition with theU.S. Tax Court to dispute the disallowances inNovember 2018 . The case is currently in theIRS appeals process. If the matter is not resolved in theIRS appeals process, Occidental expects to continue pursuing resolution in theU.S. Tax Court. While Occidental believes it is entitled to this refund, in accordance with ASC 740's guidance on the accounting for uncertain tax positions, as ofDecember 31, 2019 , Occidental has recorded no tax benefit on the tentative cash tax refund of OXY 2019 FORM 10-K 43
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
$881 million . As a result, should Occidental not ultimately prevail on the issue, there would be no additional tax expense recorded for financial statement purposes other than future interest. However, in that event Occidental would be required to repay approximately$925 million ($898 million federal and$27 million in state taxes) plus accrued interest of approximately$189 million . As a result, a liability for this amount has been recorded in deferred credits and other liabilities - other atDecember 31, 2019 . INDEMNITIES TO THIRD PARTIES Occidental, its subsidiaries, or both, have indemnified various parties against specified liabilities those parties might incur in the future in connection with purchases and other transactions that they have entered into with Occidental. These indemnities usually are contingent upon the other party incurring liabilities that reach specified thresholds. As ofDecember 31, 2019 , Occidental is not aware of circumstances that it believes would reasonably be expected to lead to indemnity claims that would result in payments materially in excess of reserves.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Occidental's operations are subject to stringent federal, state, local and international laws and regulations related to improving or maintaining environmental quality. The laws that require or address environmental remediation, including Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar federal, state, local and international laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites. OPC or certain of its subsidiaries participate in or actively monitor a range of remedial activities and government or private proceedings under these laws with respect to alleged past practices at operating, closed and third-party sites. Remedial activities may include one or more of the following: investigation involving sampling, modeling, risk assessment or monitoring; cleanup measures including removal, treatment or disposal; or operation and maintenance of remedial systems. The environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs. ENVIRONMENTAL REMEDIATION As ofDecember 31, 2019 , Occidental participated in or monitored remedial activities or proceedings at 177 sites, which included 36 sites assumed through the Acquisition. The following table presents Occidental's current and non-current environmental remediation liabilities as ofDecember 31, 2019 and 2018, the current portion of which is included in accrued liabilities ($162 million in 2019 and$120 million in 2018) and the remainder in deferred credits and other liabilities - environmental remediation liabilities ($1.04 billion in 2019 and$762 million in 2018). Occidental continues to evaluate the remediation obligations assumed through the Acquisition. Occidental's environmental remediation sites are grouped into four categories: National Priorities List (NPL) sites listed or proposed for listing by theEPA on the CERCLA NPL and three categories of non-NPL sites - third-party sites, Occidental-operated sites and closed or non-operated Occidental sites. 2019 2018 Number of Remediation Number of Remediation millions, except number of sites Sites Balance Sites Balance NPL sites 36 $ 463 34 $ 458 Third-party sites 74 311 68 168 Occidental-operated sites 17 154 14 115 Closed or non-operated Occidental sites 50 269 29 141 Total 177 $ 1,197 145 $ 882 As ofDecember 31, 2019 , Occidental's environmental remediation liabilities exceeded$10 million each at 20 of the 177 sites described above, and 101 of the sites had liabilities from$0 to$1 million each. As ofDecember 31, 2019 , three sites - the Diamond Alkali Superfund Site and a former chemical plant inOhio (both of which are indemnified byMaxus Energy Corporation , as discussed further below) and a landfill inWestern New York - accounted for 94 percent of its liabilities associated with NPL sites. Seventeen of the 36 NPL sites are indemnified byMaxus . Six of the 74 third-party sites - aMaxus -indemnified chrome site inNew Jersey , a former copper mining and smelting operation inTennessee , a former oil field, a landfill and a chemical plant inCalifornia , and an active refinery inLouisiana where Occidental reimburses the current owner for certain remediation activities - accounted for 75 percent of Occidental's liabilities associated with these sites. Nine of the 74 third-party sites are indemnified byMaxus . Five sites - oil and gas operations inColorado and chemical plants inKansas ,Louisiana ,New York andTexas - accounted for 67 percent of the liabilities associated with the Occidental-operated sites.
44 OXY 2019 FORM 10-K
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
Six other sites - a landfill inWestern New York , a former refinery inOklahoma , former chemical plants inCalifornia ,Tennessee andWashington , and a closed coal mine inPennsylvania - accounted for 64 percent of the liabilities associated with closed or non-operated Occidental sites. Environmental remediation liabilities vary over time depending on factors such as acquisitions or dispositions, identification of additional sites and remedy selection and implementation. Based on current estimates, Occidental expects to expend funds corresponding to approximately 40 percent of the year end remediation balance over the next three to four years with the remainder over the subsequent 10 or more years. Occidental believes its range of reasonably possible additional losses beyond those amounts currently recorded for environmental remediation for all of its environmental sites could be up to$1.1 billion . MAXUS ENVIRONMENTAL SITES When Occidental acquiredDiamond Shamrock Chemicals Company (DSCC) in 1986,Maxus , a subsidiary of YPF S.A. (YPF), agreed to indemnify Occidental for a number of environmental sites, including the Diamond Alkali Superfund Site (Site) along a portion of thePassaic River . OnJune 17, 2016 ,Maxus and several affiliated companies filed for Chapter 11 bankruptcy inFederal District Court in theState of Delaware . Prior to filing for bankruptcy,Maxus defended and indemnified Occidental in connection with clean-up and other costs associated with the sites subject to the indemnity, including the Site. InMarch 2016 , theEPA issued a Record of Decision (ROD) specifying remedial actions required for the lower 8.3 miles of theLower Passaic River . The ROD does not address any potential remedial action for the upper nine miles of theLower Passaic River orNewark Bay . During the third quarter of 2016, and followingMaxus's bankruptcy filing, Occidental and theEPA entered into an Administrative Order on Consent (AOC) to complete the design of the proposed clean-up plan outlined in the ROD at an estimated cost of$165 million . TheEPA announced that it will pursue similar agreements with other potentially responsible parties. Occidental has accrued a remediation liability relating to its estimated allocable share of the costs to perform the design and the remediation called for in the AOC and the ROD, as well as for certain otherMaxus -indemnified sites. Occidental's accrued estimated environmental remediation liability does not consider any recoveries for indemnified costs. Occidental's ultimate share of the estimated costs may be higher or lower than its accrued remediation liability, and is subject to final design plans and the resolution with other potentially responsible parties. Occidental continues to evaluate the costs to be incurred to comply with the AOC, the ROD and to perform remediation at otherMaxus -indemnified sites in light of theMaxus bankruptcy and the share of ultimate liability of other potentially responsible parties. InJune 2018 , Occidental filed a complaint under CERCLA inFederal District Court in theState of New Jersey against numerous potentially responsible parties for reimbursement of amounts incurred or to be incurred to comply with the AOC, the ROD or to perform other remediation activities at the Site. InJune 2017 , the court overseeing theMaxus bankruptcy approved a Plan of Liquidation (Plan) to liquidateMaxus and create a trust to pursue claims against YPF, Repsol and others to satisfy claims by Occidental and other creditors for past and future cleanup and other costs. InJuly 2017 , the court-approved Plan became final and the trust became effective. Among other responsibilities, the trust will pursue claims against YPF, Repsol and others and distribute assets toMaxus' creditors in accordance with the trust agreement and Plan. InJune 2018 , the trust filed its complaint against YPF and Repsol inDelaware bankruptcy court asserting claims based upon, among other things, fraudulent transfer and alter ego. OnFebruary 15, 2019 , the bankruptcy court denied Repsol's and YPF's motions to dismiss the complaint. ENVIRONMENTAL COSTS Occidental's environmental costs, some of which include estimates, are presented below for each segment for each of the years endedDecember 31 : millions 2019 2018 2017 Operating Expenses Oil and Gas$ 178 $ 91 $ 62 Chemical 80 80 78 Marketing and Midstream 12 10 7 Total$ 270 $ 181 $ 147 Capital Expenditures Oil and Gas$ 111 $ 71 $ 71 Chemical 34 23 18 Marketing and Midstream 4 2 3 Total$ 149 $ 96 $ 92 Remediation Expenses Corporate$ 112 $ 47 $ 39
Operating expenses are incurred on a continual basis. Capital expenditures relate to longer-lived improvements in properties currently operated by Occidental. Remediation expenses relate to existing conditions from past operations.
OXY 2019 FORM 10-K 45
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[[Image Removed: untitleda05.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS
GLOBAL INVESTMENTS
A portion of Occidental's assets are located outside
Marketing and Corporate and
millions Oil and Gas Chemical Midstream Other Total Consolidated
North America
United States $ 72,833 $ 4,173 $ 13,324 $ 3,952 $ 94,282
Canada - 126 27 - 153
Middle East 3,748 - 3,634 - 7,382
Latin America 1,355 57 - - 1,412
Africa and Other - 5 70 6,026 6,101
Consolidated $ 77,936 $ 4,361 $ 17,055 $ 9,978 $ 109,330
For the year ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The process of preparing financial statements in accordance with generally accepted accounting principles requires Occidental's management to make informed estimates and judgments regarding certain items and transactions. Changes in facts and circumstances or discovery of new information may result in revised estimates and judgments, and actual results may differ from these estimates upon settlement but generally not by material amounts. The selection and development of these policies and estimates have been discussed with the Audit Committee of the Board of Directors. Occidental considers the following to be its most critical accounting policies and estimates that involve management's judgment. OIL AND GAS PROPERTIES The carrying value of Occidental's property, plant, and equipment (PP&E) represents the cost incurred to acquire or develop the asset, including any asset retirement obligations (AROs) and capitalized interest, net of DD&A and any impairment charges. For assets acquired in a business combination, PP&E cost is based on fair values at the acquisition date. Asset retirement obligations and interest costs incurred in connection with qualifying capital expenditures are capitalized and amortized over the useful lives of the related assets. Occidental uses the successful efforts method to account for its oil and gas properties. Under this method, Occidental capitalizes costs of acquiring properties, costs of drilling successful exploration wells and development costs. The costs of exploratory wells are initially capitalized pending a determination of whether proved reserves have been found. If proved reserves have been found, the costs of exploratory wells remain capitalized. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory drilling costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the economic and operating viability of the project. At the end of each quarter, management reviews the status of all suspended exploratory drilling costs in light of ongoing exploration activities, in particular, whether Occidental is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, analyzing whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. Occidental expenses annual lease rentals, the costs of injectants used in production, and geological, geophysical and seismic costs as incurred. Occidental determines depreciation and depletion of oil and gas producing properties by the unit-of-production method. It amortizes acquisition costs over total proved reserves and capitalized development and successful exploration costs over proved developed reserves. Proved oil and gas reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible-from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations-prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether 46 OXY 2019 FORM 10-K
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deterministic or probabilistic methods are used for the estimation. Occidental has no proved oil and gas reserves for which the determination of economic producibility is subject to the completion of major additional capital expenditures. Several factors could change Occidental's proved oil and gas reserves. For example, Occidental receives a share of production from PSCs to recover its costs and generally an additional share for profit. Occidental's share of production and reserves from these contracts decreases when product prices rise and increases when prices decline. Overall, Occidental's net economic benefit from these contracts is greater at higher product prices. In other cases, particularly with long-lived properties, lower product prices may lead to a situation where production of a portion of proved reserves becomes uneconomical. For such properties, higher product prices typically result in additional reserves becoming economical. Estimation of future production and development costs is also subject to change partially due to factors beyond Occidental's control, such as energy costs and inflation or deflation of oil field service costs. These factors, in turn, could lead to changes in the quantity of proved reserves. Additional factors that could result in a change of proved reserves include production decline rates and operating performance differing from those estimated when the proved reserves were initially recorded. Additionally, Occidental performs impairment tests with respect to its proved properties whenever events or circumstances indicate that the carrying value of property may not be recoverable. If there is an indication the carrying amount of the asset may not be recovered due to significant and prolonged declines in current and forward prices, significant changes in reserve estimates, changes in management's plans, or other significant events, management will evaluate the property for impairment. Under the successful efforts method, if the sum of the undiscounted cash flows is less than the carrying value of the proved property, the carrying value is reduced to estimated fair value and reported as an impairment charge in the period. Individual proved properties are grouped for impairment purposes at the lowest level for which there are identifiable cash flows. The fair value of impaired assets is typically determined based on the present value of expected future cash flows using discount rates believed to be consistent with those used by market participants. The impairment test incorporates a number of assumptions involving expectations of future cash flows which can change significantly over time. These assumptions include estimates of future production, product prices, contractual prices, estimates of risk-adjusted oil and gas reserves and estimates of future operating and development costs. It is reasonably possible that prolonged declines in commodity prices, reduced capital spending in response to lower prices or increases in operating costs could result in additional impairments. For impairment testing, unless prices are contractually fixed, Occidental uses observable forward strip prices for oil and natural gas prices when projecting future cash flows. Future operating and development costs are estimated using the current cost environment applied to expectations of future operating and development activities to develop and produce oil and gas reserves. Market prices for oil, natural gas and NGL have been volatile and may continue to be volatile in the future. Changes in global supply and demand, transportation capacity, currency exchange rates, and applicable laws and regulations, and the effect of changes in these variables on market perceptions could impact current forecasts. Future fluctuations in commodity prices could result in estimates of future cash flows to vary significantly. The most significant ongoing financial statement effect from a change in Occidental's oil and gas reserves or impairment of its proved properties would be to the DD&A rate. For example, a 5% increase or decrease in the amount of oil and gas reserves would change the DD&A rate by approximately$1.15 per barrel, which would increase or decrease pre-tax income by approximately$415 million annually at current production rates. A portion of the carrying value of Occidental's oil and gas properties is attributable to unproved properties. Net capitalized costs attributable to unproved properties were$29.5 billion atDecember 31, 2019 , and$1.0 billion atDecember 31, 2018 . The 2019 amount is primarily related to the Acquisition. The unproved amounts are not subject to DD&A until they are classified as proved properties. Individually insignificant unproved properties are combined and amortized on a group basis based on factors such as lease terms, success rates, and other factors. If the exploration efforts are unsuccessful, or management decides not to pursue development of these properties as a result of lower commodity prices, higher development and operating costs, contractual conditions or other factors, the capitalized costs of the related properties would be expensed. The timing of any writedowns of these unproved properties, if warranted, depends upon management's plans, the nature, timing and extent of future exploration and development activities and their results. Occidental periodically reviews unproved properties for impairments; numerous factors are considered, including but not limited to, current exploration plans, favorable or unfavorable exploration activity on the property or the adjacent property, geologists' evaluation of the property and the remaining lease term for the property. Management's assessment of the availability of funds for future activities and the current and projected political and regulatory climate in areas in which Occidental operates also impacts the timing of any impairment. PROVED RESERVES Occidental estimates its proved oil and gas reserves according to the definition of proved reserves provided by theSEC and FASB. This definition includes oil, natural gas, and NGLs that geological and engineering data demonstrate with reasonable certainty to be economically producible in future periods from known reservoirs under existing economic conditions, operating methods, government regulations, etc. (at prices and costs as of the date the estimates are made). Prices include consideration of price changes provided only by contractual arrangements, and do not include adjustments based on expected future conditions. For reserves information, see the Supplemental Information on Oil and Gas Exploration and Production Activities under Item 8 of this Form 10-K. Engineering estimates of the quantities of proved reserves are inherently imprecise and represent only approximate amounts because of the judgments involved in developing such information. Occidental's estimates of proved reserves are made using available geological and reservoir data as well as production performance data. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data and the efficiency of extracting
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and processing the hydrocarbons. These estimates are reviewed annually by internal reservoir engineers and revised, either upward or downward, as warranted by additional data. Revisions are necessary due to changes in, among other things, development plans, reservoir performance, prices, economic conditions, and governmental restrictions as well as changes in the expected recovery associated with infill drilling. Decreases in prices, for example, may cause a reduction in some proved reserves due to reaching economic limits at an earlier projected date. A material adverse change in the estimated volume of proved reserves could have a negative impact on DD&A and could result in property impairments. FAIR VALUES Occidental estimates fair-value of long-lived assets for impairment testing, assets and liabilities acquired in a business combination or exchanged in non-monetary transactions, pension plan assets and initial measurements of AROs. Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities of the acquired business and recording deferred taxes for any differences between the allocated values and tax basis of assets and liabilities. Any excess of the purchase price over the amounts assigned to assets and liabilities is recorded as goodwill. The purchase price allocation is accomplished by recording each asset and liability at its estimated fair value. Occidental primarily applies the market approach for recurring fair value measurements, maximizes its use of observable inputs and minimizes its use of unobservable inputs. When estimating the fair values of assets acquired and liabilities assumed, Occidental must apply various assumptions. FINANCIAL ASSETS AND LIABILITIES Occidental utilizes the mid-point between bid and ask prices for valuing the majority of its financial assets and liabilities measured and reported at fair value. In addition to using market data, Occidental makes assumptions in valuing its assets and liabilities, including assumptions about the risks inherent in the inputs to the valuation technique. For financial assets and liabilities carried at fair value, Occidental measures fair value using the following methods: Ø Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date. These derivatives are classified as Level 1. Ø Over-the-Counter (OTC) bilateral financial commodity contracts,
international exchange contracts, options and physical commodity forward
purchase and sale contracts are generally classified as Level 2 and are
generally valued using quotations provided by brokers or industry-standard
models that consider various inputs, including quoted forward prices for
commodities, time value, volatility factors, credit risk and current
market and contractual prices for the underlying instruments, as well as
other relevant economic measures. Substantially all of these inputs are
observable in the marketplace throughout the full term of the instrument,
and can be derived from observable data or are supported by observable
prices at which transactions are executed in the marketplace.
Ø Occidental values commodity derivatives based on a market approach thatconsiders various assumptions, including quoted forward commodity prices
and market yield curves. The assumptions used include inputs that are
generally unobservable in the marketplace or are observable but have beenadjusted based upon various assumptions and the fair value is designated
as Level 3 within the valuation hierarchy.
Ø Occidental values debt using market-observable information for debtinstruments that are traded on secondary markets. For debt instruments
that are not traded, the fair value is determined by interpolating the
value based on debt with similar terms and credit risk.
NON-FINANCIAL ASSETS
Occidental uses market-observable prices for assets when comparable transactions
can be identified that are similar to the asset being valued. When Occidental is
required to measure fair value and there is not a market-observable price for
the asset or for a similar asset then the cost or income approach is used
depending on the quality of information available to support management's
assumptions. The cost approach is based on management's best estimate of the
current asset replacement cost. The income approach is based on management's
best assumptions regarding expectations of future net cash flows, and the
expected cash flows are discounted using a commensurate risk-adjusted discount
rate. Such evaluations involve significant judgment, and the results are based
on expected future events or conditions such as sales prices, estimates of
future oil and gas production or throughput, development and operating costs and
the timing thereof, economic and regulatory climates, and other factors, most of
which are often outside of management's control. However, assumptions used
reflect a market participant's view of long-term prices, costs, and other
factors and are consistent with assumptions used in the Company's business plans
and investment decisions.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Occidental records environmental liabilities and
related charges and expenses for estimated remediation costs that relate to
existing conditions from past operations when environmental remediation efforts
are probable and the costs can be reasonably estimated. In determining the
environmental remediation liability and the range of reasonably possible
additional losses, Occidental refers to currently available information,
including relevant past experience, remedial objectives, available technologies,
applicable laws and regulations and cost-sharing arrangements. Occidental bases
its environmental remediation liabilities on management's estimate of the most
likely cost to be incurred, using the most cost-effective technology reasonably
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expected to achieve the remedial objective. Occidental periodically reviews its environmental remediation liabilities and adjusts them as new information becomes available. Occidental records environmental remediation liabilities on a discounted basis when it deems the aggregate amount and timing of cash payments to be reliably determinable at the time the reserves are established. The reserve methodology with respect to discounting for a specific site is not modified once it is established. Presently none of its environmental remediation liabilities are recorded on a discounted basis. Occidental generally records reimbursements or recoveries of environmental remediation costs in income when received, or when receipt of recovery is highly probable. Many factors could affect Occidental's future remediation costs and result in adjustments to its environmental remediation liabilities and the range of reasonably possible additional losses. The most significant are: (1) cost estimates for remedial activities may vary from the initial estimate; (2) the length of time, type or amount of remediation necessary to achieve the remedial objective may change due to factors such as site conditions, the ability to identify and control contaminant sources or the discovery of additional contamination; (3) a regulatory agency may ultimately reject or modify Occidental's proposed remedial plan; (4) improved or alternative remediation technologies may change remediation costs; (5) laws and regulations may change remediation requirements or affect cost sharing or allocation of liability; and (6) changes in allocation or cost-sharing arrangements may occur. Certain sites involve multiple parties with various cost-sharing arrangements, which fall into the following three categories: (1) environmental proceedings that result in a negotiated or prescribed allocation of remediation costs among Occidental and other alleged potentially responsible parties; (2) oil and gas ventures in which each participant pays its proportionate share of remediation costs reflecting its working interest; or (3) contractual arrangements, typically relating to purchases and sales of properties, in which the parties to the transaction agree to methods of allocating remediation costs. In these circumstances, Occidental evaluates the financial viability of other parties with whom it is alleged to be jointly liable, the degree of their commitment to participate and the consequences to Occidental of their failure to participate when estimating Occidental's ultimate share of liability. Occidental records its environmental remediation liabilities at its expected net cost of remedial activities and, based on these factors, believes that it will not be required to assume a share of liability of such other potentially responsible parties in an amount materially above amounts reserved. In addition to the costs of investigations and cleanup measures, which often take in excess of 10 years at CERCLA NPL sites, Occidental's environmental remediation liabilities include management's estimates of the costs to operate and maintain remedial systems. If remedial systems are modified over time in response to significant changes in site-specific data, laws, regulations, technologies or engineering estimates, Occidental reviews and adjusts its liabilities accordingly. If Occidental were to adjust the balance of its environmental remediation liabilities based on the factors described above, the amount of the increase or decrease would be recognized in earnings. For example, if the balance were reduced by 10%, Occidental would record a pre-tax gain of$120 million . If the balance were increased by 10%, Occidental would record an additional remediation expense of$120 million . INCOME TAXES Occidental files variousU.S. federal, state and foreign income tax returns. The impact of changes in tax regulations are reflected when enacted. In general, deferred federal, state and foreign income taxes are provided on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Occidental routinely assesses the realizability of its deferred tax assets. If Occidental concludes that it is more likely than not that some of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Occidental recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The tax benefit recorded is equal to the largest amount that is greater than 50% likely to be realized through final settlement with a taxing authority. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense (benefit). Occidental uses the flow-through method to account for its investment tax credits. See Note 12 - Income Taxes in the Notes to Consolidated Financial Statements. LOSS CONTINGENCIES Occidental is involved, in the normal course of business, in lawsuits, claims and other legal proceedings and audits. Occidental accrues reserves for these matters when it is probable that a liability has been incurred and the liability can be reasonably estimated. In addition, Occidental discloses, in aggregate, its exposure to loss in excess of the amount recorded on the balance sheet for these matters if it is reasonably possible that an additional material loss may be incurred. Occidental reviews its loss contingencies on an ongoing basis. Loss contingencies are based on judgments made by management with respect to the likely outcome of these matters and are adjusted as appropriate. Management's judgments could change based on new information, changes in, or interpretations of, laws or regulations, changes in management's plans or intentions, opinions regarding the outcome of legal proceedings, or other factors. See "Lawsuits, Claims and Contingencies" for additional information.
SIGNIFICANT ACCOUNTING AND DISCLOSURE CHANGES
See Note 2 - Accounting and Disclosure Changes in the Notes to Consolidated Financial Statements.
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SAFE HARBOR DISCUSSION REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA
Portions of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and involve risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows and business prospects. Words such as "estimate," "project," "predict," "will," "would," "should," "could," "may," "might," "anticipate," "plan," "intend," "believe," "expect," "aim," "goal," "target," "objective," "likely" or similar expressions that convey the prospective nature of events or outcomes generally indicate forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Occidental does not undertake any obligation to update any forward-looking statements as a result of new information, future events, except as required by law. Factors that may cause Occidental's results of operations and financial position to differ from expectations include the factors discussed in Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
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