10. Derivatives

Occidental uses a variety of derivative financial instruments and physical contracts, including those designated as cash-flow hedges, to manage its exposure to commodity price fluctuations, transportation commitments and to fix margins on the future sale of stored volumes of oil and natural gas. Where Occidental buys product for its own consumption or sells its production to a defined customer, Occidental may elect normal purchases and normal sales exclusions. Occidental usually applies cash-flow hedge accounting treatment to derivative financial instruments to lock in margins on the forecasted sales of its natural gas storage volumes, and at times for other strategies to lock in margins. Occidental also enters into derivative financial instruments for speculative or trading purposes; however, the results of any transactions are immaterial to the marketing portfolio.

The financial instruments not designated as hedges will impact Occidental’s earnings through mark-to-market until the offsetting future physical commodity is delivered. For GAAP purposes, any physical inventory is carried at the lower of cost or market on the balance sheet. A substantial majority of Occidental’s physical derivative contracts are index-based and carry no mark-to-market value in earnings. Net gains and losses associated with derivative instruments not designated as hedging instruments are recognized currently in net sales. Net gains and losses attributable to derivative instruments subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings.

Credit Risk

The majority of Occidental’s counterparty credit risk is related to the physical delivery of energy commodities to its customers and their inability to meet their settlement commitments. Occidental manages credit risk by selecting counterparties that it believes to be financially strong, by entering into master netting arrangements with counterparties and by requiring collateral or other credit risk-mitigants, as appropriate. Occidental actively evaluates the creditworthiness of its counterparties, assigns appropriate credit limits and monitors credit exposures against those assigned limits. Occidental also enters into future contracts through regulated exchanges with select clearinghouses and brokers, which are subject to minimal credit risk as a significant portion of these transactions settle on a daily margin basis.

Certain of Occidental’s over-the-counter 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. 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, 2017, and December 31, 2016.

Cash-Flow Hedges

Occidental’s marketing operations store natural gas purchased from third parties at Occidental’s leased storage facilities. Derivative instruments are used to fix margins on the future sales of the stored volumes. These agreements continue through 2018. As of September 30, 2017, Occidental had approximately 7 billion cubic feet (Bcf) of natural gas held in storage, and had cash-flow hedges for the forecasted sales to be settled by physical delivery of approximately 6 Bcf of stored natural gas. As of December 31, 2016, Occidental had approximately 7 Bcf of natural gas held in storage, and had cash-flow hedges for the forecasted sales, to be settled by physical delivery, of approximately 7 Bcf of stored natural gas. The amount of cash-flow hedges, including the ineffective portion, was immaterial for the nine months ended September 30, 2017, and the year ended December 31, 2016.

Derivatives Not Designated as Hedging Instruments

The following table summarizes the amounts reported in net sales related to the outstanding commodity derivative instruments not designated as hedging instruments as of September 30, 2017, and December 31, 2016:

(in millions, except Long/(Short) volumes)	2017			2016
Unrealized gain (loss) on derivatives not designated as hedges
Oil commodity contracts	$	(30	)	$	(5	)
Natural gas commodity contracts	$	1		$	1

Outstanding net volumes on derivatives not designated as hedges
Oil Commodity Contracts
Volume (MMBL)	65			67
Price Per Bbl	$	50.11		$	53.86

Natural gas commodity contracts
Volume (Bcf)	(43		)	(12		)
Price Per MMBTU	$	2.65		$	3.19

Fair Value of Derivatives

The following tables presents the gross and net fair values of Occidental’s outstanding derivatives as of September 30, 2017, and December 31, 2016 (in millions):

As of September 30, 2017		Fair Value Measurements Using						Netting (b)			Total Fair Value
(in millions)	(Commodity Contracts)	Level 1		Level 2		Level 3		Netting (b)			Total Fair Value
Assets:
Cash-flow hedges: (a)
Other current assets		$	—	$	1	$	—	$	—		$	1
Long-term receivables and other assets, net		$	—	$	—	$	—	$	—		$	—
Derivatives not designated as hedging instruments: (a)
Other current assets		$	345	$	61	$	—	$	(387	)	$	19
Long-term receivables and other assets, net		$	29	$	2	$	—	$	(29	)	$	2
Liabilities:
Cash-flow hedges: (a)
Accrued liabilities		$	—	$	—	$	—	$	—		$	—
Deferred credits and liabilities		$	—	$	—	$	—	$	—		$	—
Derivatives not designated as hedging instruments: (a)
Accrued liabilities		$	371	$	63	$	—	$	(387	)	$	47
Deferred credits and liabilities		$	27	$	5	$	—	$	(29	)	$	3

As of December 31, 2016		Fair Value Measurements Using						Netting (b)			Total Fair Value
(in millions)	(Commodity Contracts)	Level 1		Level 2		Level 3		Netting (b)			Total Fair Value
Assets:
Cash-flow hedges: (a)
Other current assets		$	—	$	1	$	—	$	—		$	1
Long-term receivables and other assets, net		$	—	$	—	$	—	$	—		$	—
Derivatives not designated as hedging instruments: (a)
Other current assets		$	166	$	57	$	—	$	(196	)	$	27
Long-term receivables and other assets, net		$	2	$	3	$	—	$	(2	)	$	3
Liabilities:
Cash-flow hedges (a)
Accrued liabilities		$	—	$	6	$	—	$	—		$	6
Deferred credits and liabilities		$	—	$	—	$	—	$	—		$	—
Derivatives not designated as hedging instruments: (a)
Accrued liabilities		$	172	$	51	$	—	$	(196	)	$	27
Deferred credits and liabilities		$	1	$	6	$	—	$	(2	)	$	5

(a)

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

(b)

These amounts do not include collateral. As of September 30, 2017, collateral received of $2 million has been netted against derivative assets and collateral paid of $31 million has been netted against derivative liabilities. As of December 31, 2016, collateral received of $4 million has been netted against derivative assets and collateral paid of $13 million has been netted against derivative liabilities. Collateral deposited by Occidental, mainly for initial margin, of $33 million and $25 million as of September 30, 2017, and December 31, 2016, respectively, has not been reflected in these derivative fair value tables. This collateral is included in other current assets in the consolidated condensed balance sheets.