Derivatives

9 Months Ended

Sep. 30, 2011

Derivatives

Derivatives

11.Derivatives

Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.  Occidental applies hedge accounting when transactions meet specified criteria for such treatment and management elects to do so. If a derivative does not qualify or is not designated and documented as a cash-flow hedge, any fair value gains or losses are recognized in earnings in the current period.

Through its marketing and trading activities and within its established policy controls and procedures, Occidental uses derivative instruments, including a combination of short-term futures, forwards, options and swaps, to improve realized prices for its crude oil, gas and natural gas liquids (NGL).  Additionally, Occidental, through its Phibro trading unit, engages in trading activities using derivatives for the purpose of generating profits mainly from market price changes of commodities.  Occidental has also used derivatives to reduce its exposure to price volatility on a small portion of its crude oil and gas production.

Cash-Flow Hedges

As of September 30, 2011 and December 31, 2010, Occidental held a series of collar agreements that qualify as cash-flow hedges for the sale of approximately 3 percent of its crude oil production.  These agreements continue to the end of 2011.  The following table presents the daily quantities and weighted-average strike prices of Occidental’s collar positions as of September 30, 2011 and December 31, 2010:

Crude Oil — Collars	Daily Volume (barrels)	Average Floor		Average Cap
October 2011 — December 2011 (a)	12,000	$	32.92	$	46.27

(a)At December 31, 2010, these contracts were outstanding with the same daily volumes and terms indicated and also covered the period from January 1, 2011 to September 30, 2011.

In 2009, Occidental entered into financial swap agreements related to the sale of a portion of its natural gas production from the Rocky Mountain region of the United States that qualify as cash-flow hedges. The following table presents the daily quantities and weighted-average prices that will be received by Occidental as of September 30, 2011 and December 31, 2010:

Natural Gas — Swaps	Daily Volume (cubic feet)	Average Price
October 2011 — March 2012 (a)	50 million	$	6.07

(a)At December 31, 2010, these contracts were outstanding with the same daily volumes and terms indicated and also covered the period from January 1, 2011 to September 30, 2011.

Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s North American leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These agreements continue through January 2013.  As of September 30, 2011 and December 31, 2010, Occidental had approximately 22 billion cubic feet and 28 billion cubic feet of natural gas held in storage, respectively. As of September 30, 2011 and December 31, 2010, Occidental had cash-flow hedges for the forecasted sale, to be settled by physical delivery, of approximately 22 billion cubic feet and 24 billion cubic feet of this natural gas held in storage, respectively.

The following table presents the pre-tax gains and losses recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the three and nine months ended September 30, 2011 and 2010 (in millions):

	Periods ended September 30
	Three Months						Nine Months
Commodity Contracts — cash-flow hedges	2011			2010			2011			2010
Unrealized gains recognized in AOCI	$	37		$	10		$	31		$	105
Losses reclassified into income	$	39		$	28		$	115		$	91
(Losses) recognized in income — ineffective portion	$	(1	)	$	(1	)	$	(1	)	$	—

The following table summarizes net after-tax derivative activity recorded in AOCI for the three and nine months ended September 30, 2011 and 2010 (in millions):

	Periods ended September 30
	Three Months						Nine Months
	2011			2010			2011			2010
Beginning balance — AOCI	$	(66	)	$	(127	)	$	(111	)	$	(227	)
Unrealized gains recognized in AOCI	24			7			20			67
Losses reclassified into income	25			18			74			58
Ending balance — AOCI	$	(17	)	$	(102	)	$	(17	)	$	(102	)

During the next twelve months, Occidental expects that approximately $4 million of net after-tax derivative losses included in AOCI, based on their valuation as of September 30, 2011, will be reclassified into income.

Derivatives Not Designated as Hedging Instruments

Occidental’s third-party marketing and trading activities focus on purchasing crude oil, natural gas and NGL for resale from partners, producers and third parties whose supply is located near midstream and marketing assets, such as pipelines, processing plants and storage facilities, that are owned or leased by Occidental.  These purchases allow Occidental to aggregate volumes to maximize prices received for Occidental’s production.  The third-party marketing and trading purchase and sales contracts generally approximate each other with respect to aggregate volumes and terms.  In addition, Occidental’s Phibro trading unit uses derivative instruments, including forwards, futures, swaps and options, some of which may be for physical delivery, in its strategy to profit from market price changes.

The following table presents gross volumes of Occidental’s commodity derivatives contracts not designated as hedging instruments as of September 30, 2011 and December 31, 2010:

	Volumes
Commodity	2011	2010
Sales contracts related to Occidental’s production
Crude oil (million barrels)	9	8
Third-party marketing and trading activities
Purchase contracts
Crude oil (million barrels)	173	136
Natural gas (billion cubic feet)	682	833
Precious metals (million troy ounces)	3	13
Sales contracts
Crude oil (million barrels)	170	144
Natural gas (billion cubic feet)	801	1,156
Precious metals (million troy ounces)	1	1

In addition, Occidental has certain other commodity trading contracts, including agricultural products, metals, and electricity, as well as foreign exchange contracts, which were not material to Occidental as of September 30, 2011 and December 31, 2010.

Occidental has crude oil sales contracts representing a small portion of Occidental’s domestic crude oil production.  Additionally, for third-party marketing and trading activities, typically a substantial portion of the sales contracts that exist at the end of a reporting period are fulfilled by existing purchase contracts with substantially identical terms. For a substantial portion of the natural gas sales commitments not satisfied by such contracts as of September 30, 2011, Occidental has entered into offsetting contracts after September 30, 2011. The remaining portion is not material to Occidental.

Approximately $237 million of net losses and $15 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended September 30, 2011 and 2010, respectively.  Approximately $47 million of net losses and $59 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the nine months ended September 30, 2011 and 2010, respectively.

Fair Value of Derivatives

The following table presents the gross fair value of Occidental’s outstanding derivatives as of September 30, 2011 and December 31, 2010 (in millions):

	Asset Derivatives				Liability Derivatives
September 30, 2011	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Cash-flow hedges (a)
	Marketing and trading assets and other	$	32		Accrued liabilities	$	38
Commodity contracts		32				38
Derivatives not designated as hedging instruments (a)
	Marketing and trading assets and other	1,528			Accrued liabilities	1,617
Commodity contracts	Long-term receivables and other assets, net	78			Deferred credits and other liabilities	69
		1,606				1,686
Total gross fair value		1,638				1,724
Less: counterparty netting and cash collateral (b)		(1,390		)		(1,431		)
Total net fair value of derivatives		$	248			$	293

	Asset Derivatives				Liability Derivatives
December 31, 2010	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Cash-flow hedges (a)
	Marketing and trading assets and other	$	51		Accrued liabilities	$	209
Commodity contracts	Long-term receivables and other assets, net	9			Deferred credits and other liabilities	—
		60				209
Derivatives not designated as hedging instruments (a)
	Marketing and trading assets and other	829			Accrued liabilities	823
Commodity contracts	Long-term receivables and other assets, net	86			Deferred credits and other liabilities	85
		915				908
Total gross fair value		975				1,117
Less: counterparty netting and cash collateral (c)		(680		)		(736		)
Total net fair value of derivatives		$	295			$	381

(a)The above fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheet.

(b)As of September 30, 2011, collateral received of $116 million has been netted against derivative assets and collateral paid of $157 million has been netted against derivative liabilities.

(c)As of December 31, 2010, collateral received of $39 million has been netted against derivative assets and collateral paid of $95 million has been netted against derivative liabilities.

See Note 10 for fair value measurement disclosures on derivatives.

Credit Risk

A majority of Occidental’s derivative transaction volume is executed through exchange-traded contracts, which are subject to nominal credit risk as a significant portion of these transactions are executed on a daily margin basis.  Collateral of $129 million and $154 million deposited by Occidental for such contracts with clearing houses and brokers, which has not been reflected in the derivative fair value tables, is included in the marketing and trading assets and other balance as of September 30, 2011 and December 31, 2010, respectively.

In addition, Occidental executes a portion of its derivative transactions in the over-the-counter (OTC) market.  Occidental is subject to counterparty credit risk to the extent the counterparty to the derivatives is unable to meet its settlement commitments.  Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by spreading the credit risk among many such counterparties, by entering into master netting arrangements with the counterparties and by requiring collateral, as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments to reflect counterparty risk, if necessary.  Certain of Occidental’s OTC derivative instruments contain credit risk contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each would need to post.  As of September 30, 2011 and December 31, 2010, Occidental had a net liability of $75 million and $234 million, respectively, for which the amount of collateral posted was $70 million and $10 million, respectively.  Occidental believes that if it had received a one-notch reduction in its credit rating, it would not have resulted in a material change in its collateral-posting requirements as of September 30, 2011 and December 31, 2010.