(c) Property, Plant, and Equipment The principal classes of property, including construction in progress, are summarized as follows: Property, plant, and equipment is depreciated or amortized generally on the straight-line method over the estimated useful lives (3 to 27 years) of the various classes of property. The cost of property, plant, and equipment retired or replaced, less salvage, is charged to accumulated depreciation and amortization with no effect on net income. Gains or losses arising from abnormal retirements or sales are credited or charged to income currently. Expenditures for maintenance and repairs are charged to income as incurred. Betterments or major renewals are capitalized and the assets replaced, if any, are retired. (d) Exploration and development costs Exploration costs are charged to income as incurred. See Note (e) below for information with respect to deferred Saudi Arab income taxes relating to certain exploration expenses. Development costs are capitalized and are subsequently amortized over a tenyear period on the straight-line method. Costs relating to dry holes and abandoned wells, less the related accumulated amortization, are charged to income at the time such holes are determined to be dry or otherwise unproductive. (e) Deferred Saudi Arab income taxes Aramco's policy is to defer the effect of Saudi Arab income taxes paid or payable with respect to the difference between exploration expenses incurred subsequent to December 31, 1967 and the portion of such costs allowed for Saudi Arab income tax purposes. This policy has no effect on income taxes payable to the Saudi Arab Government. (f) Translation of foreign currencies All transactions consummated in currencies other than U.S. dollars are reported in U.S. dollars in the financial statements. Transactions in such currencies were translated to equivalent U.S. dollars at the average daily exchange rates for the preceding month and cash balances and asset and liability accounts requiring settlement in such currencies were translated at the market rates of exchange prevailing at the year-end. 2. EMPLOYEE PENSION PLANS The companies have no-contributory retirement, severance and death benefit plans for employees on the Saudi royal and Lebanese payrolls and, in general, contributory plans covering substantially all of its employees on other payrolls. The actuarially computed liabilities with respect to these plans are covered either through funds deposited with trustees or by reserves provided therefore. The total expense, as actuarially determined, for 1972 under these plans amounted to approximately $7,090,000 which includes, as to certain of the plans, amortization of prior service costs over periods ranging from 10 to 31 years. During 1972, the Company's contributory pension plan was amended to provide for reduced employee contributions and increased retirement benefits. In addition, certain of the actuarial assumptions used in the computation of pension cost for this plan were changed to give effect to recent experience of the plan. The net effect of these changes on 1972 net income was not significant. The Saudi Arab Government promulgated, effective November 28, 1969, a labor law that provided, among other things, that employers make service award payments to qualified employees upon termination of their employment. The noncontributory plans for employees on the Saudi riyal payrolls have been modified to include the increased benefit provisions of the labor law. 3. UNITED STATES INCOME TAXES During 1972 Aramco and Tapline reached agreement, in principle, with the Internal Revenue Service relative to the tax issues pending for the years 1957 through 1964. The estimate of the liability, with respect to those years, which is to be assumed by Aramco on behalf of Tapline, aggregates $4,163,000 including interest of $1,814,000 and has been provided for by Aramco in 1972. Pending tax issues with respect to the years 1965 and 1966 have not been resolved, but in the opinion of Aramco's management and tax counsel, should any tax deficiency be assessed, the tax liability would not have a material adverse effect upon the company's consolidated financial position or results of operations. 4. STOCKHOLDERS, DIVIDENDS DECLARATIONS, AND EARNINGS PER SHARE (a) Stockholders The stockholders of Aramco at December 31, 1972 and their relative interests in the outstanding capital stock were as follows: Chevron Oceanic, Inc.--. Exxon Corporation-formerly Standard Oil Co. (New Jersey). Texaco Export Inc---. (b) General dividends Cash dividends declared by Aramco, other than the special dividends which are explained below, are declared payable at an equal rate per share. Dividends are also declared payable in oil on a pro rata basis (representing approximately 12% of 1972 crude oil production). (c) Special dividends Aramco's Certificate of Incorporation, as amended, provides that, unless the Board of Directors by unanimous vote of all its members shall determine otherwise, no dividends payable at an equal rate per share shall be paid until special dividends have been paid (which computed amount per share is not the same for every stockholder) in accordance with the procedure described in the amended Certificate of Incorporation. A resolution of the Board of Directors sets forth the considerations, principles, and definitions which apply in the computation of such special dividends. (d) Earnings per share Since Aramco's earnings are not distributed to stockholders at an equal rate per share, the amounts of earnings and dividends per share of capital stock are not presented in the accompanying Statement of Consolidated Income and Earnings Retained in the Business. COMMITMENTS AND CONTINGENT LIABILITIES During 1972, the Saudi Arab Government reasserted a retroactive claim with respect to the 2% road stamp tax which it claimed should have been withheld from employees' salaries for periods prior to September 18, 1963. Since September 1963, Aramco has been deducting the road stamp tax from the salaries of all employees for payment to the Government. It had been Aramco's understanding prior to that time that the road stamp tax was not intended to apply to any of its employees, and therefore, no deductions from salaries or other provisions therefor were made prior to 1963. It is the opinion of Aramco's general counsel that the Company has an adequate defense against such claim. In addition to the above claim and other contingent liabilities and commitments which Aramco and its subsidiaries have with respect to loan agreements, guaranteed bank loans and construction and other commitments, there are various lawsuits, claims and other litigation matters pending against the com panies. In the opinion of management, the final disposition of these matters will not have a material adverse effect upon the companies' financial position. (a) Participation 6. SUBSEQUENT EVENTS Aramco, its stockholders and the Saudi Arab Government were parties to an agreement ("General Agreement") dated December 20, 1972 which provided, among other things, that effective January 1, 1973, the Saudi Arab Government, in return for a consideration yet to be finally determined, would have the right to purchase an initial twenty-five percent participation in Aramco's crude oil concession and have the right to purchase additional five percent increments of participation in each of the years 1978 through 1981 and six percent in 1982. As provided in the General Agreement, Aramco and the Saudi Arab Government are currently negotiating a separate agreement ("Implementing Agreement") to implement the provisions of the General Agreement and other matters relating to participation. The nature and form of such participation and the future financial effects thereof are to be determined in these negotiations. (b) Devaluation On February 13, 1973, the United States announced its intention to devalue the U.S. dollar by approximately ten percent. This is not expected to have a materially adverse effect on 1973 costs, as it relates to non-U.S. dollar assets and liabilities. SCHEDULE 12 ARABIAN AMERICAN OIL CO. AND SUBSIDIARIES GOVERNMENT RELATIONS EXPENSES FOR THE YEARS ENDED DEC. 31, 1972 AND 1971 Note: The company has limited its deduction for 1972 for Saudi Arab income tax purposes to 90 percent of the total expenses above (before redistributions), as allowed in prior years under the terms of the Mar. 24, 1963, agreement between the Saudi Arab Government and Aramco. SCHEDULE 15 ARABIAN AMERICAN OIL CO. AND SUBSIDIARIES PUBLIC RELATIONS EXPENSES FOR THE YEARS ENDED DEC. 31, 1972 AND 1971 Note. Most expenses in Saudi Arabia-less 1⁄2 million in United States-(World debt in United States). 1 Basic royalties on crude oil production were computed at 4 shillings, gold, per ton of crude oil plus an additional 5 cents per barrel for offshore crude oil, as provided in agreements with the Saudi Arab Government. Such basic royalties accrued on crude oil production through Mar. 31, 1972 and paid prior to May 8, 1972, were translated to U.S. dollars at the rate of $8.2397 per gold pound (approximately $1.65 per ton of oil). All basic royalties accrued on crude oil production subsequent to Mar. 31, 1972 and paid subsequent to May 8, 1972 were translated to U.S. dollars at the rate of $8.94596 per gold pound (approximately $1.79 per ton of oil). In computing royalty expense, the quantities of crude oil produced were reduced by the quantities of oil used in company operations, by the quantities of injected products, and by the quantities of free products to which the Saudi Arab Government is entitled under its agreements with Aramco. Accordingly, during 1972, royalty expense was computed after deduction of 3,786,462 barrels from onshore crude oil production of 1,534,365,984 barrels and 2,757,434 barrels from offshore production of 564,056,619 barrels. 2 Under the terms of the letter agreement dated June 23, 1971 between Aramco and the Saudi Arab Government (Tehran implementing agreement), Aramco agreed to pay additional royalties on export sales of hydrocarbons (as defined) subsequent to Feb. 14, 1971 equal to the amount, if any, by which 122 percent of the aggregate value of such sales, as described in note 3, exceeds the basic royalties on the production of such crude oil, as computed in note 1. 3 Under the terms of the Jan. 25, 1965 agreement between the Saudi Arab Government and Aramco, royalties paid or payable with respect to (a) crude oil produced and delivered by Aramco, in lieu of royalties, to the Saudi Arab Government for export, (b) crude oil produced and sold by Aranico for export, and (c) the crude equivalent of refined products sold by Aramco for export and manufactured from crude oil produced by Aramco are to be treated as expenses for income tax purposes to the extent that they do not exceed 122 percent of the aggregate value determined on the basis of the following prices: (a) In the case of crude oil taken by the Saudi Arab Government for export in lieu of royalties, the simple arithmetical average of the published prices of Aramco's buyers applicable at the marine terminal of delivery to the grade, quality and gravity of crude oil so taken; (b) in the case of all other crude oil exported, the published price of such crude oil (or in the case of unstabilized crude oil the published price of the stabilized component thereof) at the appropriate marine terminal of Aramco in Saudi Arabia; and (c) in the case of all refined products, the published price applicable to the crude equivalent thereof at Ras Tanura, after deduction of the terminaling charges (deemed to be $0.02 per barrel as set forth in the Tehran implementing agreement referred to above). The total of basic and additional royalties paid or payable in excess of 121⁄2 percent of the aggregate value of export sales of hydrocarbons computed above and those relating to natural gas derivatives and to crude oil used in the manufacture of liquefied petroleum gas are treated as credits against income taxes. Application of the terms described above resulted in $630,940,7 12 of the royalties being treated as expenses in the computation of Saudi Arab income taxes for 1972. 4 Further information with respect to the application of royalties in the computation of Saudi Arab income taxes is set forth in schedule 20. SCHEDULE 20 ARABIAN AMERICAN OIL CO. AND SUBSIDIARIES BASIS OF COMPUTING SAUDI ARAB INCOME TAXES FOR THE YEAR ENDED DEC. 31, 1972 Exploration expense in excess of amount allowable. Trans-Arabian pipeline expense representing lump sum consideration payment to Saudi Arab Donations not allowable. Net income subject to tax under royal decree no. 17/2/28/3321.. Add amounts not deductible for determination of income subject to tax under royal decree 3,733, 430, 732 9, 298, 935 2, 170, 614 21, 800 549,578 630 2,500 12, 044, 057 3,745, 474, 789 106,404, 514 1,290, 369 248,463 26,841 107, 970, 187 3,637, 504, 602 Adjustment of deduction for royalities (note). Exactions-- Subtotal_ Net income subject to tax under royal decree no. 17/2/28/7634 (forward).. Less amounts not subject to tax under royal decree No. M/28: Income not resulting from the sales of hydrocarbons for export... 5,093, 040 446, 400 5,539, 440 3, 643, 044, 042 23, 316, 027 Net income subject to tax under royal decree No. M/28. Computation of taxes: Tax under royal decree No. 17/2/28/3321: Tax at 20 percent of net income subject to tax ($3,637,504,602). Tax under royal decree No. 17/2/28/7634: Provisional tax at 50 percent of net income subject to tax ($3,643,044,042) Subtractions: 3,619, 728, 015 727, 500, 920 1,821, 522, 021 Tax under royal decree No. 17/2/28/3321, as shown above. Royalties allowable as a tax credit (Note). Exactions... Total subtractions.. Additional tax under royal decree No. 17/2/28/7634------ Tax under royal decree No. M/28: Tax at 5 percent of net income subject to tax resulting from the sales of hydrocarbons for export Total Saudi Arab income taxes.. NOTES 727, 500, 920 4,737, 366 446,000 732,684,686 1,088, 837, 335 180, 986, 401 1, 997, 324, 656 Aramco is subject to the income tax on companies, royal decree No. 17/2/28/3321 of Nov. 2, 1950, and to the additional tax on companies engaged in the production of petroleum or other hydrocarbons, royal decree No. 17/2/28/7634 of Dec. 26, 1950, as amended. Under royal decree No. M/28 of Dec. 28, 1970, effective Nov. 14, 1970, Aramco became subject to an additional income tax of 5 percent on its net income subject to tax resulting from its sales of hydrocarbons for export. In computing tax under royal decree No. 17/2/28/7634, the total royalties to be treated either as deductions from income or as subtractions from the provisional tax are those which become payable during the year. Although royalties on net crude oil do not become payable until the oil is run from field storage, Aramco, for accounting purposes, accrues royalties as the oil is produced. This practice of accruing royalties as oil is produced rather than when it is run from field storage, however, has no effect on net income because the amount of such accrual applicable to oil in field storage at any date is included in equal amounts in other accrued liabilities and in the inventory of oil in field storage. A summary of royalties included in inventories at Dec. 31, 1972 and 1971 follows: |