10. 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 cash-flow hedge treatment and management elects and documents such treatment. Otherwise, any fair value gains or losses are recognized in earnings in the current period.

Occidental uses a variety of derivative instruments, including cash-flow hedges and derivative instruments not designated as hedging instruments, to obtain average prices for the relevant production month and to improve realized prices for oil and gas. Occidental only occasionally hedges its oil and gas production, and, when it does, the volumes are usually insignificant.

Cash-Flow Hedges

Occidental’s marketing and trading operations, from time to time, 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 through March 2016. As of September 30, 2015, Occidental had approximately 13 billion cubic feet of natural gas held in storage, and had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 6 billion cubic feet of stored natural gas. As of December 31, 2014, Occidental did not have any cash-flow hedges.

Occidental’s after-tax gains and losses recognized in, and reclassified to income from, Accumulated Other Comprehensive Income (AOCI) for derivative instruments classified as cash-flow hedges for the three and nine months ended September 30, 2015 and 2014, and the ending AOCI balances for each period, were not material. The gains and losses reclassified to income were recognized in net sales, and the amount of the ineffective portion of cash-flow hedges was immaterial for the three and nine months ended September 30, 2015 and 2014.

Derivatives Not Designated as Hedging Instruments

The following table summarizes Occidental’s net volumes of outstanding commodity derivatives contracts not designated as hedging instruments, including both financial and physical derivative contracts as of September 30, 2015 and December 31, 2014:

	Net Outstanding Position Long / (Short)
Commodity	2015		2014
Oil (million barrels)	81		(9	)
Natural gas (billion cubic feet)	(54	)	(32	)
Carbon dioxide (billion cubic feet)	607		621

The volumes in the table above exclude contracts tied to index prices, for which the fair value, if any, is minimal at any point in time. These excluded contracts do not expose Occidental to price risk because the contract prices fluctuate with index prices.

Occidental fulfills short positions through its own production or by third-party purchase contracts. Subsequent to September 30, 2015, Occidental entered into purchase contracts for a substantial portion of the short positions outstanding at quarter end and has sufficient production capacity and the ability to enter into additional purchase contracts to satisfy the remaining positions.

Approximately $119 million of net losses from derivatives not designated as hedging instruments and $72 million of net losses were recognized in net sales for the three months ended September 30, 2015 and 2014, respectively. Approximately $163 million of net losses from derivatives not designated as hedging instruments and $12 million of net gains were recognized in net sales for the nine months ended September 30, 2015 and 2014, respectively.

Fair Value of Derivatives

The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of September 30, 2015 and December 31, 2014 (in millions):

	Asset Derivatives				Liability Derivatives
September 30, 2015	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Cash-flow hedges(a)
Commodity contracts	Other current assets	3			Accrued liabilities	—

		3				—

Derivatives not designated as hedging instruments (a)

	Other current assets	274			Accrued liabilities	309
Commodity contracts	Long-term receivables and other assets, net	9			Deferred credits and other liabilities	235

		283				544

Total gross fair value		286				544
Less: counterparty netting and cash collateral (b,d)		(223		)		(240		)
Total net fair value of derivatives		$	63			$	304

	Asset Derivatives				Liability Derivatives
December 31, 2014	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments (a)

	Other current assets	828			Accrued liabilities	886
Commodity contracts	Long-term receivables and other assets, net	11			Deferred credits and other liabilities	110

		839				996

Total gross fair value		839				996
Less: counterparty netting and cash collateral (c,d)		(742		)		(756		)

Total net fair value of derivatives		$	97			$	240

(a)

Fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and presented on a net basis in the consolidated balance sheets.

(b)

As of September 30, 2015, collateral received of $1 million has been netted against the derivative assets and collateral paid of $17 million has been netted against derivative liabilities.

(c)

As of December 31, 2014, no collateral was received against the derivative assets and collateral paid of $8 million has been netted against derivative liabilities.

(d)

Select clearinghouses and brokers require Occidental to post an initial margin deposit. Collateral, mainly for initial margin, of $35 million and $44 million deposited by Occidental has not been reflected in these derivative fair value tables as of September 30, 2015 and December 31, 2014, respectively. This collateral is included in other current assets in the consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.

See Note 9, Fair Value Measurements, for fair value measurement disclosures on derivatives.

Credit Risk

A large portion of Occidental’s derivative transaction volume is executed through 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. Occidental executes the rest of its derivative transactions in the exchange-traded market, which are subject to minimal credit risk as a significant portion of these transactions is settled on a daily margin basis with select clearinghouses and brokers.

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, 2015 and December 31, 2014, Occidental had a net liability of zero and $4 million, respectively, which is net of collateral posted of zero and $3 million, respectively. Occidental believes that if it had received a one-notch reduction in its credit ratings, it would not have resulted in a material change in its collateral-posting requirements as of September 30, 2015 and December 31, 2014.