Occidental Petroleum Corporation Form 10-K

10-K 1 form10k-2005.htm FORM 10-K Occidental Petroleum Corporation Form 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005

o Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number 1-9210

Occidental Petroleum Corporation

(Exact name of registrant as specified in its charter)

State or other jurisdiction of incorporation or organization		Delaware
I.R.S. Employer Identification No.		95-4035997
Address of principal executive offices		10889 Wilshire Blvd., Los Angeles, CA
Zip Code		90024
Registrant’s telephone number, including area codee		(310) 208-8800

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
10 1/8% Senior Debentures due 2009		New York Stock Exchange
9 1/4% Senior Debentures due 2019		New York Stock Exchange
Common Stock		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ YES o NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (Note: Checking the box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections). o YES þ NO

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ YES o NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). þ Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). o YES þ NO

The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $30.9 billion, computed by reference to the closing price on the New York Stock Exchange composite tape of $76.93 per share of Common Stock on June 30, 2005. Shares of Common Stock held by each executive officer and director have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes.

At January 31, 2006, there were approximately 402,283,188 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement, filed in connection with its May 5, 2006, Annual Meeting of Stockholders, are incorporated by reference into Part III.

TABLE OF CONTENTS

		Page
Part I
Items 1 and 2	Business and Properties	4
	General	4
	Oil and Gas Operations	4
	Chemical Operations	5
	Capital Expenditures	6
	Employees	6
	Environmental Regulation	6
	Available Information	6
Item 1A	Risk Factors	6
Item 3	Legal Proceedings	8
Item 4	Submission of Matters to a Vote of Security Holders	9
	Executive Officers	9
Part II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters	10
Item 6	Selected Financial Data	11
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Incorporating Item 7A)	11
	Strategy	11
	Oil and Gas Segment	13
	Chemical Segment	18
	Corporate and Other	19
	Segment Results of Operations	20
	Significant Items Affecting Earnings	22
	Taxes	22
	Consolidated Results of Operations	23
	Consolidated Analysis of Financial Position	24
	Liquidity and Capital Resources	25
	Off-Balance-Sheet Arrangements	27
	Lawsuits, Claims, Commitments, Contingencies and Related Matters	28
	Environmental Liabilities and Expenditures	29
	Foreign Investments	30
	Critical Accounting Policies and Estimates	31
	Significant Accounting Changes	33
	Derivative Activities and Market Risk	35
	Safe Harbor Discussion Regarding Outlook and Other Forward-Looking Data	37
Item 8	Financial Statements and Supplementary Data	38
	Management's Annual Assessment of and Report on Internal Control Over Financial Reporting	38
	Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements	39
	Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	40
	Consolidated Statements of Income	41
	Consolidated Balance Sheets	42
	Consolidated Statements of Stockholders’ Equity	44
	Consolidated Statements of Comprehensive Income	44
	Consolidated Statements of Cash Flows	45
	Notes to Consolidated Financial Statements	46
	Quarterly Financial Data (Unaudited)	78
	Supplemental Oil and Gas Information (Unaudited)	80
	Financial Statement Schedule:
	Schedule II – Valuation and Qualifying Accounts	88
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	89
Item 9A	Controls and Procedures	89
	Disclosure Controls and Procedures	89
Part III
Item 10	Directors and Executive Officers of the Registrant	89
Item 11	Executive Compensation	89
Item 12	Security Ownership of Certain Beneficial Owners and Management	89
Item 13	Certain Relationships and Related Transactions	89
Item 14	Principal Accountant Fees and Services	89
Part IV
Item 15	Exhibits and Financial Statement Schedules	89

Part I

ITEMS 1 AND 2 BUSINESS AND PROPERTIES

In this report, "Occidental" refers to Occidental Petroleum Corporation, a Delaware corporation, and/or one or more entities in which it owns a majority voting interest (subsidiaries). Occidental’s executive offices are located at 10889 Wilshire Boulevard, Los Angeles, California 90024; telephone (310) 208-8800.

GENERAL

Occidental’s principal businesses consist of two industry segments. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas. The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals. For financial information by segment and by geographic area, see Note 15 to the Consolidated Financial Statements of Occidental (Consolidated Financial Statements).

For information regarding Occidental's current developments, see the information in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) section of this report.

OIL AND GAS OPERATIONS

General

Occidental’s domestic oil and gas operations are located in Elk Hills and other smaller locations in California, the Hugoton field in Kansas and Oklahoma, the Permian Basin in west Texas and New Mexico, the Gulf of Mexico and western Colorado. International operations are located in Colombia, Ecuador, Libya, Oman, Pakistan, Qatar, Russia, the United Arab Emirates (UAE) and Yemen. Occidental also has exploration interests in several other countries. For additional information regarding Occidental's oil and gas segment, see the information under the caption "Oil and Gas Segment" in the MD&A section of this report.

Proved Reserves, Production and Properties

The table below shows Occidental’s total oil and natural gas proved reserves and production in 2005, 2004 and 2003. See the MD&A section of this report, Note 16 to the Consolidated Financial Statements and the information under the caption "Supplemental Oil and Gas Information" in Item 8 of this report for certain details regarding Occidental’s oil and gas proved reserves, the estimation process and production by country. On May 13, 2005, Occidental reported to the United States Department of Energy on Form EIA-28 proved oil and gas reserves at December 31, 2004. The amounts reported were the same as the amounts reported in Occidental’s 2004 Annual Report.

Comparative Oil and Gas Proved Reserves and Production

Oil in millions of barrels; natural gas in billions of cubic feet; BOE in millions of barrels of oil equivalent


	2005					2004					2003
RESERVES	Oil	^(a)	Gas	BOE	^(b)	Oil	^(a)	Gas	BOE	^(b)	Oil	^(a)	Gas	BOE	^(b)
United States	1,636		2,338	2,026		1,494		2,101	1,844		1,500		1,826	1,804
International	446		1,140	636		499		874	645		490		759	617
Consolidated Subsidiaries	2,082		3,478	2,662	^(c)	1,993		2,975	2,489	^(c)	1,990		2,585	2,421	^(c)
Other Interests ^(d)	45		—	45		43		—	43		48		9	50
PRODUCTION
United States	92		202	126		93		186	124		93		194	125
International	66		44	73		66		47	74		60		27	65
Consolidated Subsidiaries	158		246	199		159		233	198		153		221	190
Other Interests ^(d)	7		6	8		9		—	9		10		—	10

(a)	Includes natural gas liquids and condensate.
(b)	Natural gas volumes have been converted to BOE based on energy content of 6,000 cubic feet (one thousand cubic feet is referred to as an "Mcf") of gas to one barrel of oil.
(c)	Stated on a net basis and after applicable royalties. Includes reserves related to production-sharing contracts and other economic arrangements. Proved reserves from production-sharing contracts in the Middle East and from other economic arrangements in the United States were 472 million barrels of oil equivalent (MMBOE) and 104 MMBOE in 2005, 450 MMBOE and 90 MMBOE in 2004 and 435 MMBOE and 90 MMBOE in 2003, respectively.
(d)	Includes Occidental's share of reserves and production from equity investees in Russia and Yemen, partially offset by minority interests for a Colombian affiliate.

Competition and Sales and Marketing

As a producer of crude oil and natural gas, Occidental competes with numerous other domestic and foreign private and government producers. Crude oil and natural gas are commodities that are sensitive to prevailing global and, in certain cases, local conditions of supply and demand and are sold at "spot" or contract prices or on futures markets to refiners and other market participants. Occidental competes by developing and producing its worldwide oil and gas reserves cost-effectively and acquiring rights to explore in areas with known oil and gas deposits. Occidental also competes by increasing production through enhanced oil recovery projects in mature and underdeveloped fields and making strategic acquisitions. Occidental focuses on operations in its core areas of the United States, the Middle East and Latin America.

CHEMICAL OPERATIONS

General

Occidental manufactures and markets basic chemicals, vinyls, chlorinated organics and performance chemicals through various affiliates (collectively, OxyChem). For additional information regarding Occidental’s chemical segment, see the information under the caption "Chemical Segment" in the MD&A section of this report.

Products and Properties

OxyChem owns and operates chemical manufacturing plants at 24 sites in the United States. OxyChem has a 50-percent equity investment in a Brazilian corporation that owns a chlor-alkali plant, a 50-percent equity investment in a corporation that produces antimony oxide in Mexico and a 50-percent interest in a general partnership that produces liquid and anhydrous potassium carbonate products in Alabama. OxyChem’s chlorine facilities in Delaware City, Delaware and Deer Park, Texas and its ethylene dichloride (EDC) facility in Ingleside, Texas were permanently shut down in the third quarter of 2005. In December 2005, OxyChem announced that it would permanently close its Alberta, Canada PVC manufacturing facility in the first quarter of 2006.

In 2005, OxyChem acquired two operating chemical assets in Louisiana and Kansas from Vulcan Materials Company (Vulcan).

The following information regarding production capacity reflects estimated annual capacity at December 31, 2005.

Basic Chemicals

OxyChem’s basic chemicals consist of chlorine and caustic soda, chlorinated organics, potassium chemicals and their derivatives.

Chlorine is used for chemical manufacturing in the chlorovinyl chain and for water treatment. OxyChem produces chlorine in Alabama, Kansas, Louisiana, New York, Texas, Brazil and Chile. Annual capacity was 3.6 million tons in the United States (including the gross 0.6-million-ton total annual capacity of the OxyVinyls partnership, owned 76 percent by Occidental and 24 percent by PolyOne Corporation) and 0.3 million tons in Brazil and Chile. The United States amount includes 0.8 million tons of capacity from the Vulcan chemical assets.

Caustic soda is used for pulp and paper production, alumina production and other chemical manufacturing. OxyChem produces caustic soda in Kansas, Louisiana, New York, Texas, Brazil and Chile. Annual capacity was 3.9 million tons in the United States (including the gross 0.7-million-ton total annual capacity of the OxyVinyls partnership) and 0.4 million tons in Brazil and Chile. The United States amount includes 0.8 million tons of capacity from the Vulcan chemical assets.

Potassium chemicals are used in glass, fertilizers, cleaning products and rubber. OxyChem produces potassium chemicals in Alabama where annual capacity was 328,000 tons.

EDC, a chlorine derivative, is a raw material for vinyl chloride monomer (VCM). OxyChem produces EDC in Louisiana and Brazil. Annual capacity was 2.1 billion pounds in the United States and 0.3 billion pounds in Brazil. The United States amount includes 0.6 billion pounds of capacity from the Vulcan chemical assets.

OxyChem’s acquisition of Vulcan’s chemical assets included certain chlorinated organic products that are used in silicones, paint stripping, pharmaceuticals and refrigerants.

Vinyls

OxyChem produces vinyls through its 76-percent interest in the OxyVinyls partnership. OxyChem’s vinyls products include polyvinyl chloride (PVC) and its precursors, VCM and EDC.

OxyChem produces VCM in Texas. Annual capacity was 6.2 billion pounds (consisting of the 2.4 billion-pound total annual capacity of OxyMar, which is 88-percent owned by OxyChem, and the 3.8 billion-pound total annual gross capacity of the OxyVinyls partnership).

PVC resins are used in piping, electrical insulation, external construction materials, flooring, medical and automotive products and packaging. OxyChem produces PVC resins in Kentucky, New Jersey, Texas and Canada. Gross annual PVC capacity of the OxyVinyls partnership was 4.3 billion pounds.

Performance Chemicals

OxyChem’s performance chemicals include chlorinated isocyanurates (estimated capacity of 131 million pounds produced in Illinois and Louisiana), resorcinol (estimated capacity of 50 million pounds produced in Pennsylvania), mercaptans (estimated capacity of 18 million pounds produced in Texas) and sodium silicates (estimated capacity of 722,000 tons produced in Georgia, Ohio, Illinois, New Jersey, Texas and Alabama).

Raw Materials, Intellectual Property, Marketing and Competition

Nearly all raw materials used in OxyChem’s operations are readily available from a variety of sources. Operations have not been curtailed due to any supply interruptions, except for limited supply interruptions along the Gulf Coast, which occurred in September and October 2005, caused by Hurricanes Katrina and Rita.

OxyChem does not regard its business as being materially dependent on any single patent, trademark or process.

OxyChem sells its products to industrial users or distributors located in the United States and in certain export markets where third party agents are utilized.

Occidental’s chemical business competes with numerous producers. Since most of OxyChem’s products are commodities, it competes primarily on the basis of price.

CAPITAL EXPENDITURES

For information on capital expenditures, see the information under the heading "Capital Expenditures" in the MD&A section of this report.

EMPLOYEES

Occidental employed 8,017 people at December 31, 2005, 6,335 of whom were located in the United States. Occidental employed 3,499 people in oil and gas operations and 3,341 people in chemical operations. An additional 1,177 people were employed in administrative and headquarters functions. Approximately 858 United States-based employees are represented by labor unions.

Occidental has a long-standing policy to provide fair and equal employment opportunities to all people without regard to race, color, religion, ethnicity, gender, national origin, disability, age, sexual orientation, veteran status or any other legally impermissible factor. Occidental maintains diversity and outreach programs.

ENVIRONMENTAL REGULATION

For environmental regulation information, including associated costs, see the information under the heading "Environmental Liabilities and Expenditures" in the MD&A section of this report.

AVAILABLE INFORMATION

Occidental makes the following information available free of charge through its web site at www.oxy.com:

Ø	Forms 10-K, 10-Q, 8-K and amendments to these forms as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission (SEC);
Ø	Other SEC filings, including Forms 3, 4 and 5; and
Ø	Corporate governance information, including its corporate governance guidelines, board-committee charters and Code of Business Conduct. (See Part III Item 10 of this report for further information.)

ITEM 1A RISK FACTORS

EXTERNAL RISKS

Volatile global commodity pricing fluctuations beyond Occidental’s control strongly affect its revenues, profitability, operating cash flow and future growth rate.

As discussed in the section entitled "Derivative Activities and Market Risk — Commodity Price Risk — Production Hedges," Occidental’s financial results typically correlate closely to the price it obtains for its products in the global markets in which they compete. Oil and gas price changes also impact production and reserves because production-sharing contracts (PSCs) typically include terms that adjust Occidental’s share of production when prices change, and price changes also affect the profitability of production and the economic recoverability of reserves. Historically, prices for Occidental’s products have been volatile. A significant portion of the oil Occidental produces is sour crude, and the prices for sour crude tend to be lower. In addition, the price differential between sweet and sour crude varies based on their respective supply and demand dynamics.

Drilling and exploration activity levels, inventory levels, production disruptions, the actions of OPEC (increasing prices or limiting Occidental's production), price speculation and geophysical and technical limitations affect the global and, in some cases, local short-term and long-term supply of oil and gas and interact to contribute to price volatility. Because of the long lead times associated with drilling and exploration projects, Occidental may commit significant amounts of capital to oil and gas projects and cannot be certain of the level of demand that will exist when it finishes a project. The health of the global economy, alternative sources of energy, such as coal, and efforts at improving or implementing efficient consumption can also affect the demand for oil and gas.

Demand for Occidental’s chemical products correlates most strongly with the health of the global economy. Occidental also depends on feedstocks and energy to produce chemicals, both of which are commodities subject to significant price fluctuations.

Occidental’s businesses operate in a highly competitive environment, which affects its profitability and its ability to grow production and replace oil and gas reserves.

Occidental’s future oil and gas production and its profitability depend, in part, on its ability to acquire or find additional reserves at costs below the price at which it can sell the oil and gas it produces from them, after operating costs. Occidental can acquire reserves by purchasing existing production assets or by acquiring exploration rights and successfully drilling wells that produce hydrocarbons in commercial quantities. Industry competition for reserves may influence Occidental to:

Ø	shift toward higher risk exploration activity;

Ø	pay more for reinvestment opportunities;
Ø	purchase lesser quality properties; or
Ø	delay expected production activities.

Rising exploration and development activity in the industry generally increases the demand and, therefore, the costs of oil and gas services.

Participants in the chemical industry compete primarily based on price and the industry consists of many domestic and foreign competitors. In addition, the industry has historically experienced over-expansion when prices rise.

In both industries, Occidental uses nonproprietary technology and business management techniques, which limits its ability to achieve significant comparative production efficiencies.

Occidental’s businesses may experience catastrophic occurrences.

Natural disasters, such as hurricanes, occur regularly and may occasionally affect Occidental’s businesses. In addition, well blowouts and oilfield fires, armed conflicts, civil unrest and industrial accidents may occur and may affect Occidental’s businesses. Occidental maintains insurance against a number of these risks; however, it partially self-insures and insurance may not always provide the coverage expected or desired due to contractual limitations, unavailability, cost of insurance and the insurers' financial health.

Varied governmental and political actions affect Occidental’s results of operations.

The transnational character of Occidental’s oil and gas business subjects it to the decisions of many governments and political interests. As a result, Occidental faces increased risks of:

Ø	changes in laws and regulations, including those related to taxes, royalty rates, permitted production rates, import, export and use of products, and environmental protection;
Ø	expropriation or reduction of entitlements to produce hydrocarbons; and
Ø	refusal to extend exploration, production or development contracts.

For example, the Government of Ecuador has threatened to terminate Occidental’s Participation Contract for Block 15. See ”MD&A — Oil and Gas Segment — Business Review — Latin America — Ecuador.” When Occidental acquired Vintage Petroleum, Inc. (Vintage) at the end of January 2006, it gained operations in Argentina and Bolivia. Beginning in 2001, Argentina increased export taxes on oil and implemented stricter foreign exchange controls, mandatory export proceeds repatriation laws, export limitations and domestic sales price caps, some of which have since expired. In 2005, Bolivia approved a hydrocarbons bill that introduced a significant new production tax. Actions such as these may affect Occidental’s results of operations, financial position or the quantity of its oil and gas reserves.

Occidental operates some of its oil and gas business in countries that occasionally have experienced political instability, which increases Occidental’s risk of loss or delayed production associated with armed conflict, civil unrest, security problems, restrictions on production equipment imports and sanctions that prevent continued operations. Occidental may face the risk of increased costs if it is perceived not to be respecting or advancing the economic and social progress of the communities in which it operates. Since Occidental’s assets are long-lived, the magnitude of these risks can vary over the time it operates in a country.

Occidental faces risks associated with its mergers, acquisitions and divestitures.

Occidental periodically acquires and divests oil and gas reserves and chemical facilities. These activities carry risks that Occidental may:

Ø	not fully realize the anticipated benefits due to delay, miscalculation or changed circumstances;
Ø	bear greater-than-expected integration costs or difficulties;
Ø	be unable to successfully manage regulatory, tax or legal issues it assumes or retains;
Ø	experience lower stock values based on the market’s evaluation of the activity;
Ø	assume or retain liabilities that are greater than anticipated; or
Ø	be unable to resell acquired assets as planned or at prices planned.

Additionally, the assets Occidental acquires may not be as profitable as its current asset base.

Certain of Occidental’s major chemical products are coproduced in a fixed ratio, which limits its ability to exploit pricing opportunities.

Because chlorine and caustic soda must be produced together in a fixed ratio, an imbalance in demand between the products ultimately requires Occidental to reduce output or cut prices to restore demand balance. Either action limits Occidental’s profits on these commodities.

Technological developments may reduce the demand for oil and gas.

Rising oil and gas prices create incentives to find alternative energy sources and energy conservation measures that could replace or reduce oil and gas consumption over the long term.

INTERNAL RISKS

Occidental may incur significant costs in exploration or development efforts, which may prove unsuccessful or unprofitable.

Occidental may misinterpret geologic or engineering data, which may result in significant losses on unsuccessful exploration or development drilling efforts.

Occidental bears the risks of project delays and cost overruns due to unexpected geologic conditions, equipment failures, equipment delivery delays, accidents, adverse weather, government and joint venture partner approval delays, construction or start-up delays and other associated risks. Such risks may delay expected production and/or increase the costs of production.

Inadequate cost containment could reduce Occidental’s competitiveness.

Occidental works to minimize the costs associated with its businesses but the impact of its efforts may not be sufficient to offset any negative effects related to the main elements of cost, which consist of reserve acquisition costs for oil and gas and feedstock and energy costs for chemicals.

CROSS-REFERENCES TO OTHER RISK DISCUSSIONS

Additional risks related to competition, foreign operations, litigation, environmental matters, derivatives and market risks, and oil and gas reserve estimation fluctuations are discussed elsewhere in this report under the headings: BUSINESS AND PROPERTIES — “Oil & Gas Operations – Competition and Sales and Marketing,” “Chemical Operations – Competition;" MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS — “Oil & Gas Segment – Business Review – Proved Reserves Additions,” “Oil & Gas Segment – Industry Outlook,” “Chemical Segment – Business Environment,” “Chemical Segment – Industry Outlook,” “Lawsuits, Claims, Commitments, Contingencies and Related Matters,” “Environmental Liabilities and Expenditures,” “Foreign Investments,” “Critical Accounting Policies and Estimates,” and “Derivative Activities and Market Risk.”

ITEM 3 LEGAL PROCEEDINGS

For information regarding legal proceedings, see the information in Note 9 to the Consolidated Financial Statements, which is incorporated herein by reference.

The OxyVinyls partnership is engaged in voluntary discussions with federal, state and local environmental agencies with jurisdiction over four of its manufacturing facilities in an effort to reach an agreement to reduce VCM emissions and to resolve disputed administrative claims and allegations of past or ongoing environmental violations at those facilities, some of which claims allege penalties in excess of $100,000. OxyVinyls initiated discussions with the agencies following the successful conclusion of a similar agreement relating to an affiliate's former PVC manufacturing facility in Pottstown, Pennsylvania. If any agreement to reduce emissions and resolve the claims and allegations were reached, Occidental believes it would require the payment of penalties, or the performance of supplemental environmental projects, exceeding a total cost of $100,000. Occidental does not expect the resolution of this matter to have a material effect on its financial condition or results of operations.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of Occidental’s security holders during the fourth quarter of 2005.

EXECUTIVE OFFICERS

The current term of employment of each executive officer of the Registrant will expire at the May 5, 2006 organizational meeting of the Occidental Board of Directors or when a successor is selected. The following table sets forth the executive officers and significant employees of the Registrant:

Name	Age at February 28, 2006	Positions with Occidental and Subsidiaries and Five-Year Employment History
Dr. Ray R. Irani	71	Chairman and Chief Executive Officer since 1990; President since 2005; Director since 1984; Member of Executive Committee and Dividend Committee.
Stephen I. Chazen	59	Senior Executive Vice President since 2004; Chief Financial Officer since 1999; 1994-2004, Executive Vice President — Corporate Development.
Donald P. de Brier	65	Executive Vice President, General Counsel and Secretary since 1993.
Richard W. Hallock	61	Executive Vice President — Human Resources since 1994.
James M. Lienert	53	Executive Vice President — Finance and Planning since 2006; 2004-2006, Vice President; Occidental Chemical Corporation: 2004-2006, President; 2000-2002, Senior Vice President — Basic Chemicals; OxyVinyls: 2002-2004, Senior Vice President; Oxy Services, Inc.: 1998-2000, Vice President — Finance.
John W. Morgan	52	Executive Vice President since 2001; 1998-2001, Executive Vice President — Operations; Occidental Oil and Gas Corporation (OOGC): President — Western Hemisphere since 2005; 2004, President; 2001-2004, Executive Vice President — Worldwide Production.
R. Casey Olson	52	Executive Vice President since 2005; 2001-2005, Vice President; OOGC: President - Eastern Hemisphere since 2005; Occidental Development Company: 2004, President; Occidental Middle East Development Company: 2001-2003, President.
James R. Havert	64	Vice President and Treasurer since 1998; 1992-1998, Senior Assistant Treasurer.
Jim A. Leonard	56	Vice President and Controller since 2005; 2000-2005, Senior Assistant Controller; OOGC: 2000-2005, Senior Vice President — Finance.
B. Chuck Anderson	46	Occidental Chemical Corporation: President since 2006; 2004-2006, Executive Vice President — Chlorovinyls; 2002-2004, Senior Vice President — Basic Chemicals; 2000-2002, President — OxyVinyls; 1999-2000, Senior Vice President and General Manager — OxyVinyls.

Part II

ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

TRADING PRICE RANGE AND DIVIDENDS

This section incorporates by reference the quarterly financial data appearing under the caption "Quarterly Financial Data (Unaudited)" in Item 8 and the information appearing under the caption "Liquidity and Capital Resources" in the MD&A section of this report. Occidental’s common stock was held by approximately 44,305 stockholders of record at December 31, 2005, with an estimated 331,476 additional stockholders whose shares were held for them in street name or nominee accounts. The common stock is listed and traded principally on the New York Stock Exchange. The quarterly financial data, which are included in this report after the "Notes to the Consolidated Financial Statements," set forth the range of trading prices for the common stock as reported on the composite tape of the New York Stock Exchange and quarterly dividend information.

In 2005, the quarterly declared dividend rate for the common stock was $0.31 per share for the first three quarters of 2005 and $0.36 for the fourth quarter of 2005 ($1.29 for the year). On February 16, 2006, a quarterly dividend of $0.36 per share ($1.44 per year) was declared on the common stock, payable on April 15, 2006 to stockholders of record on March 10, 2006. The declaration of future cash dividends is a business decision made by the Board of Directors from time to time, and will depend on Occidental’s financial condition and other factors deemed relevant by the Board.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

All of Occidental's equity compensation plans for its employees and non-employee directors, pursuant to which options, rights or warrants may be granted, have been approved by the stockholders. See Note 12 to the Consolidated Financial Statements for further information on the material terms of these plans.

The following is a summary of the shares reserved for issuance as of December 31, 2005, pursuant to outstanding options, rights or warrants granted under Occidental’s equity compensation plans:

(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted- average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a))
11,490,439		$38.87		19,798,405 *


* Includes, with respect to:
(a)	the 1995 Incentive Stock Plan, 1,593,844 shares reserved for issuance pursuant to deferred performance and restricted stock awards;
(b)	the 2001 Incentive Compensation Plan, 936,687 shares at maximum target level (919,041 at target level) reserved for issuance pursuant to outstanding performance stock awards, 775,906 shares reserved for issuance pursuant to restricted stock awards, 1,413,721 shares reserved for issuance pursuant to deferred restricted stock awards and 9,747 shares reserved for issuance as dividend equivalents; and
(c)	the 2005 Long-Term Incentive Plan, 1,200 shares at target and maximum level reserved for issuance pursuant to outstanding performance stock awards, 1,115,400 shares reserved for issuance pursuant to restricted stock awards.
Of the 13,951,900 shares that are not reserved for issuance, all are available under the 2005 Long-Term Incentive Plan and all may be issued or reserved for issuance for options, rights and warrants as well as performance stock awards, restricted stock awards, stock bonuses and dividend equivalents.

SHARE REPURCHASE ACTIVITIES

Occidental’s share repurchase activities for the three months ended December 31, 2005, were as follows:

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
October 1 - 31, 2005	—	—	—	—
November 1 - 30, 2005	—	—	—	—
December 1 - 31, 2005	96,781 ^(a)	$82.60	—	—
Total	96,781	$82.60	—	10,000,000 ^(b)

(a)	Amount represents shares purchased by Occidental from the trustee of its defined contribution savings plan.
(b)	In 2005, Occidental announced a common stock repurchase program. Occidental plans to purchase at least ten million shares, from time to time, at prevailing prices as permitted by securities laws and other requirements. At December 31, 2005, no shares had been repurchased under this program.

ITEM 6 SELECTED FINANCIAL DATA

Five-Year Summary of Selected Financial Data

Dollar amounts in millions, except per-share amounts


For the years ended December 31,	2005			2004			2003			2002			2001
RESULTS OF OPERATIONS ^(a)
Net sales	$	15,208		$	11,368		$	9,240		$	7,247		$	8,012
Income from continuing operations	$	5,272		$	2,606		$	1,601		$	1,181		$	1,182
Net income	$	5,281		$	2,568		$	1,527		$	989		$	1,154
Basic earnings per common share from
continuing operations	$	13.07		$	6.59		$	4.17		$	3.14		$	3.17
Basic earnings per common share	$	13.09		$	6.49		$	3.98		$	2.63		$	3.10
Diluted earnings per common share	$	12.91		$	6.40		$	3.93		$	2.61		$	3.09
Core earnings ^(b)	$	3,964		$	2,499		$	1,641		$	1,017		$	1,249
FINANCIAL POSITION ^(a)
Total assets	$	26,108		$	21,391		$	18,168		$	16,548		$	17,850
Long-term debt, net and trust preferred securities ^(c)	$	2,873		$	3,345		$	4,446		$	4,452		$	4,528
Common stockholders’ equity	$	15,032		$	10,550		$	7,929		$	6,318		$	5,634
MARKET CAPITALIZATION	$	32,129		$	23,153		$	16,349		$	10,750		$	9,926
CASH FLOW
Cash provided by operating activities	$	5,337		$	3,878		$	3,074		$	2,100		$	2,566
Capital expenditures	$	(2,423	)	$	(1,843	)	$	(1,600	)	$	(1,234	)	$	(1,305	)
Cash (used) provided by all other investing activities, net	$	(738	)	$	(585	)	$	(531	)	$	(462	)	$	654
DIVIDENDS PER COMMON SHARE	$	1.29		$	1.10		$	1.04		$	1.00		$	1.00
BASIC SHARES OUTSTANDING (thousands)	403,300			395,580			383,943			376,190			372,119

(a)	See the MD&A section of this report and the "Notes to Consolidated Financial Statements" for information regarding accounting changes, asset acquisitions and dispositions, discontinued operations, environmental remediation, other costs and other items affecting comparability.
(b)	For an explanation of core earnings, see "Significant Items Affecting Earnings" in the MD&A section of this report.
(c)	On January 20, 2004, Occidental redeemed the trust preferred securities.

ITEM 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Incorporating Item 7A)

In this report, the term "Occidental" refers to Occidental Petroleum Corporation (OPC) and/or one or more entities in which it owns a majority voting interest (subsidiaries). Occidental is divided into two segments: oil and gas and chemical.

STRATEGY

General

Occidental aims to generate competitive total returns to stockholders using the following strategy:

Ø	Focus on large, long-lived oil and gas assets with long-term growth potential;
Ø	Maintain financial discipline and a strong balance sheet; and
Ø	Manage the chemical segment to provide cash in excess of normal capital expenditures.

Occidental prefers to own large, long-lived "legacy" oil and gas assets, like those in California and the Permian Basin, that tend to have moderate decline rates, enhanced secondary and tertiary recovery opportunities and economies of scale that lead to cost-effective production. Management expects such assets to contribute substantial earnings and cash flow after invested capital.

At Occidental, maintaining financial discipline means investing capital in projects that management expects will generate above-cost-of-capital returns throughout the business cycle. During periods of high commodity prices, Occidental expects to use most of its cash flow after capital expenditures and dividends to improve future earnings by making such investments.

The chemical business is not managed with a growth strategy. Capital is expended to operate the chemical business in a safe and environmentally sound way, to sustain production capacity and to focus on projects designed to lower manufacturing costs. Asset acquisitions may be pursued when they are expected to enhance the existing core chlor-alkali and PVC businesses. Historically, the chemical segment has generated cash flow exceeding its normal capital expenditure requirements. Occidental intends to invest this cash mainly in strategically attractive assets. As part of Occidental's strategy to grow its oil and gas business, any excess cash generated by the chemical segment may be used as part of the overall funding for oil and gas growth.

Oil and Gas

Segment Income

($ millions)

The oil and gas business seeks to add new oil and natural gas reserves at a pace ahead of production while keeping costs incurred for finding and development among the lowest in the industry. The oil and gas business implements this strategy within the limits of the overall corporate strategy primarily by:

Ø	Continuing to add commercial reserves through a combination of focused exploration and development programs conducted in and around Occidental’s core areas, which are the United States, the Middle East/North Africa and Latin America;
Ø	Pursuing commercial opportunities in core areas to enhance the development of mature fields with large volumes of remaining oil by applying appropriate technology and advanced reservoir-management practices; and
Ø	Maintaining a disciplined approach in buying and selling assets at attractive prices.

Over the past several years, Occidental has strengthened its asset base within each of the core areas. Occidental has invested in, and disposed of, assets with the goal of raising the average performance and potential of its assets. See "Oil and Gas Segment — Business Review" for a discussion of these changes.

In addition, Occidental has made acquisitions and investments in the Dolphin Project in Qatar and the UAE, re-entered Libya and assumed operations in the Mukhaizna field in Oman for future growth opportunities, not for current production.

Occidental’s overall performance during the past several years reflects the successful implementation of its strategy to enhance the development of mature fields, beginning with the acquisition of the Elk Hills oil and gas field in California followed by a series of purchases in the Permian Basin in west Texas and New Mexico.

At the end of 2005, the Elk Hills and Permian Basin assets made up 70 percent of Occidental’s consolidated proven oil reserves and 45 percent of its consolidated proven gas reserves. On a barrels of oil equivalent (BOE) basis, they accounted for 64 percent of Occidental’s consolidated reserves. In 2005, the combined production from these assets averaged approximately 279,000 BOE per day, which represents approximately 49 percent of Occidental’s total worldwide production. These assets also contributed approximately 48 percent of oil and gas segment earnings.

Chemical

Segment Income

($ millions)

OxyChem's strategy is to be a low-cost producer so that it can maximize its cash flow generation. OxyChem concentrates on the chlorovinyls chain where it begins with chlorine, which is coproduced with caustic soda, and then converts chlorine and ethylene, through a series of intermediate products, into PVC. OxyChem's focus on chlorovinyls permits it to take advantage of economies of scale.

Key Performance Indicators

General

Occidental seeks to ensure that it meets its strategic goals by continuously measuring its success in maintaining below average debt levels and top quartile performance compared to its peers in:

Ø	Total return to stockholders;
Ø	Return on equity;
Ø	Return on capital employed; and

Ø	Other segment-specific measurements such as profit per unit produced, cost to produce each unit, cash flow per unit, cost to find and develop new reserves, reserve replacement percentage and other similar measures.

Debt Structure

Occidental's total debt and total debt-to-capitalization ratios are shown in the table below:


Date ($ amounts in millions)	Total Debt		^(a)	Total Debt-to- Capitalization Ratio
12/31/01	$	4,890		46%
12/31/02	$	4,759		43%
12/31/03	$	4,570		37%
12/31/04	$	3,905		27%
12/31/05	$	3,019		17%

(a)	Includes trust preferred securities (redeemed January 20, 2004), natural gas delivery commitment (terminated in 2002), subsidiary preferred stock and capital lease obligations.

As shown, Occidental’s year-end 2005 total debt-to-capitalization ratio declined to 17 percent from the 46-percent level that existed at the end of 2001. The decrease in the total debt-to-capitalization ratio in 2005 compared with 2001 resulted from total debt reductions of 38 percent combined with an increase in stockholders' equity of 167 percent over the same period.

Return on Equity

Annual 2005 ^(a)		Three-Year Average 2003 - 2005 ^(b)
41%		31%

(a)	The Return on Equity for 2005 was calculated by dividing Occidental's 2005 earnings applicable to common stock by the average equity balance in 2005.
(b)	The three-year average Return on Equity was calculated by dividing the average earnings applicable to common stock over the three-year period 2003-2005 by the average equity balance over the same period.

Occidental has focused on improving its return on equity. In 2005, Occidental's return on equity was 41 percent and the three-year average return on equity was 31 percent. During the same three-year period, Occidental increased its stockholders’ equity by 138 percent and its quarterly dividend by 38 percent and its stock price increased by 181 percent.

OIL AND GAS SEGMENT

Business Environment

Oil and gas prices are the major variables that drive the industry’s financial performance. Oil prices strengthened in 2005 over 2004 levels. During the year, Occidental experienced an increase in its price differential between the average West Texas Intermediate (WTI) price and Occidental's realized prices. However, Occidental’s realized price as a percentage of WTI was 85 percent for both years. Prices and differentials can vary significantly, even on a short-term basis, making forecasting realized prices difficult. The average WTI market price for 2005 was $56.56 per barrel compared with $41.40 per barrel in 2004. Occidental's average realized price for oil in 2005 was $48.20, compared with $35.09 in 2004.

Average NYMEX domestic natural gas prices increased approximately 37 percent from 2004. For 2005, NYMEX gas prices averaged $8.11/Mcf compared with $5.92/Mcf for 2004.

Business Review

All production and reserve figures are net to Occidental unless otherwise specified.

Worldwide Production

(thousands BOE/day)

Elk Hills

Occidental operates the Elk Hills oil and gas field in the southern portion of California’s San Joaquin Valley with an approximate 78-percent interest. The field was acquired in 1998 for $3.5 billion and is the largest producer of gas in California. Oil and gas production in 2005 was approximately 90,000 BOE per day. During 2005, Occidental performed infill drilling, field extensions and recompletions identified by advanced reservoir characterization techniques. A record 291 new wells were drilled and 548 wells were worked over. In addition, a successful CO₂ pilot was completed during the year. As a result of these activities, Occidental was able to maintain production at 2004 levels. Since its acquisition, total Elk Hills oil and gas production has been approximately 268 million BOE. At the end of 2005, the property had an estimated 505 million BOE of proved reserves, compared to the 425 million BOE that were recorded at the time of the acquisition.

Permian Basin

The Permian Basin extends throughout southwest Texas and southeast New Mexico and is one of the largest and most active oil basins in the United States, with the entire basin accounting for approximately 18 percent of total United States oil production. Occidental is the largest producer in the Permian Basin with an approximately 16 percent net share of the total Permian Basin oil production. Occidental also produces and processes natural gas and natural gas liquids (NGL) in the Permian Basin.

Most of Occidental's Permian Basin interests were obtained through the acquisition of Altura in 2000 for approximately $3.6 billion.

In 2005, Occidental made several additional acquisitions of oil and gas producing property interests for approximately $1.7 billion. This was partially offset by cash proceeds totaling $171 million from dispositions of a portion of the acquired properties.

Occidental's total share of Permian Basin oil, gas and NGL production averaged 189,000 BOE per day in 2005 compared to 175,000 BOE per day in 2004. At the end of 2005, Occidental's Permian Basin properties had 1.2 billion BOE in proved reserves. Occidental's Permian Basin production is diversified across a large number of producing areas. The largest producing areas in 2005 included Wasson San Andres, Slaughter, Levelland, North Cowden and Wasson Clearfork, which contributed 20 percent, 10 percent, 5 percent, 5 percent and 4 percent, respectively, to Occidental’s 2005 Permian BOE production.

Occidental’s interests in the Permian Basin offer additional development and exploitation potential. During 2005, Occidental drilled approximately 250 wells on its operated properties and participated in wells drilled on outside operated interests. Occidental conducted significant development activity on five CO₂ projects during 2005, including implementation of new floods and expansion of existing CO₂ floods. Occidental also focused on improving performance of existing wells. Occidental had an average of 105 well service units working in the Permian area during 2005 performing well maintenance and workovers.

Approximately 60 percent of Occidental’s Permian Basin oil production is from fields that actively employ the application of carbon dioxide (CO₂) flood technology, an enhanced oil recovery technique. This involves injecting CO₂ into oil reservoirs where it acts as a solvent, causing the oil to flow more freely into producing wells. The size of these CO₂ flood operations makes Occidental a world leader in the application of this technology.

THUMS

Occidental purchased THUMS, the field contractor for an oil production unit offshore Long Beach, California, in 2000. Occidental's share of production from THUMS is subject to contractual arrangements similar to a PSC, whereby Occidental's share of production varies inversely with oil prices. For 2005, production from THUMS averaged 18,000 barrels per day.

Gulf of Mexico

Occidental has a one-third interest in the deep-water Horn Mountain oil field, which is Occidental's only asset in the Gulf of Mexico. BP p.l.c. (BP) is the operator. For 2005, Occidental's production at Horn Mountain averaged 14,000 BOE per day. In the second half of 2005, the Horn Mountain field was shut down for about 47 days due to the impact of the hurricanes in the Gulf of Mexico.

Hugoton and Other

Occidental owns other oil and gas interests including a large concentration of gas reserves, production interests and royalty interests in the Hugoton area of Kansas and Oklahoma. The Hugoton field is the largest natural gas field discovered in North America. Occidental’s Hugoton and other operations produced 133 MMcf of natural gas per day and 3,000 barrels of oil per day in 2005.

Occidental has over 28,000 net acres in the Piceance Basin in western Colorado. During 2004 and 2005, Occidental drilled 30 development wells, installed a 50 MMcf per day gas processing facility and the infrastructure required for future field development. Occidental has acquired seismic data covering 34 square miles of the Cascade Creek field.

Acquisition of Vintage Petroleum

In January 2006, Occidental completed the merger of Vintage Petroleum, Inc. (Vintage) into a wholly-owned Occidental subsidiary. Occidental acquired producing assets in Argentina, the United States, Yemen and Bolivia. The Argentine assets consist of 22 concessions, 19 of which Occidental will operate, located in the San Jorge Basin in Southern Argentina and the Cuyo Basin in western Argentina. Occidental paid $1.4 billion to former Vintage shareholders for the cash portion of the merger consideration and issued 28 million shares for the stock portion, which was valued at $2.1 billion. The value of Occidental’s shares was determined by the average share price for the five-day period beginning two days before the acquisition announcement. In addition, Occidental assumed Vintage’s debt, which had an estimated fair market value of $585 million at closing. Occidental intends to divest a portion of these assets.

Middle East / North Africa

Dolphin Project

Occidental's investment in the Dolphin Project, which was acquired in 2002, consists of two separate economic interests held through two separate legal entities. One entity, OXY Dolphin E&P, LLC, owns a 24.5-percent undivided interest in the assets and liabilities associated with a Development and Production Sharing Agreement (DPSA) with the Government of Qatar to develop and produce natural gas and condensate in Qatar’s North Field for 25 years from the start of production, with a provision to request a 5-year extension. The purchase price of the undivided working interest in the DPSA was approximately $60 million and was recorded in Property, Plant & Equipment. This undivided interest is proportionately consolidated in Occidental's financial statements.

A second entity, OXY Dolphin Pipeline, LLC, owns 24.5 percent of the stock of Dolphin Energy Limited (Dolphin Energy). The purchase price of Dolphin Energy stock totaled approximately $250 million and was recorded as an equity investment.

Dolphin Energy is the operator under the DPSA on behalf of the three DPSA contractors, including Occidental. Dolphin Energy also has the rights to build, own and operate a 260-mile-long, 48-inch natural gas pipeline, which will transport dry natural gas from Qatar to the UAE.

The Dolphin Project is expected to cost approximately $4.0 billion in total. Occidental expects to invest approximately $1 billion of this total. The project will be financed by a combination of participant investment and project financing. During 2006, Occidental expects to spend a combined total of approximately $430 million for the gas exploration and

development activity and the investment in Dolphin Energy, compared to $380 million in 2005.

In 2003, the Government of Qatar approved the final field development plan for the Dolphin Project. Construction of a gas processing and compression plant at Ras Laffan in Qatar, as well as two offshore gas production platforms, commenced in 2004 and is continuing. The projected start-up date for production is late 2006.

Based on existing supply contracts, the Dolphin Project is expected to export approximately 2 billion cubic feet (Bcf) of natural gas per day (plus associated liquids and byproducts). However, the pipeline is expected to have capacity to transport up to 3.2 Bcf of natural gas per day. Demand for natural gas in the UAE and Oman continues to grow and Dolphin Energy’s customers have requested additional gas supplies. To help fulfill this growing demand, Dolphin Energy will pursue an agreement to secure an additional supply of gas from Qatar.

To date, Occidental has recorded 250 million BOE of proved undeveloped oil and gas reserves for the Dolphin Project DPSA activity. No revenue or production costs were recorded in 2005 for the Dolphin Project gas exploration and development activity.

Qatar

In addition to the Dolphin Project, Occidental participates in two production projects in Qatar: Idd El Shargi North Dome (ISND) and Idd El Shargi South Dome (ISSD). Occidental is nearing completion of Phase II of full field development of ISND and is in the process of developing the ISSD field.

Occidental expects to continue increasing production and recoverable reserves under its existing agreement in the ISND field. Phase II is targeting the development and recovery of additional reserves by applying advanced drilling systems and improved reservoir characterization techniques. Capital expenditures in Qatar for the ISSD and ISND projects were $343 million in 2005 and are expected to be $268 million in 2006.

Occidental’s net share of combined production from the two fields averaged 42,000 barrels per day in 2005.

Yemen

In Yemen, Occidental owns a 38 percent direct-working interest in the Masila field in Block 14 and a 40.4-percent interest in the East Shabwa field, comprising a 28.6-percent direct-working interest and an 11.8-percent equity interest in an unconsolidated entity. Occidental’s production averaged 28,000 barrels of oil per day in 2005, with 24,000 coming from the Masila field and the remainder from East Shabwa. In addition, Occidental is the operator of Block 20, where it owns an 80-percent working interest.

In July 2005, Occidental was the successful bidder for Block 75 in Yemen’s exploration bid round and has been invited to finalize a PSC for the block.

Oman

Occidental's Oman business includes Block 9 and Block 27, where it holds a 65-percent working interest in each, and Block 53, where it holds a 45-percent working interest. Occidental is the operator of all three blocks where production averaged 24,000 BOE per day in 2005, with 23,000 BOE coming from Block 9 and the remainder from Block 53. The Block 9 agreement provides for two ten-year extensions and Occidental has agreed with the Government of Oman to the first ten-year extension through December 7, 2015.

In March 2004, Occidental began selling gas to the Government of Oman under a gas sales agreement, thereby allowing Occidental to produce previously stranded gas and condensates from Block 9. Under the agreement, Occidental (and its Block 9 partner) must supply approximately 114 MMcf per day of natural gas until December 31, 2007. Thereafter, Occidental will nominate quantities that it has available for delivery. In 2005, Occidental (and its partner) supplied an average of approximately 116 MMcf per day of natural gas to the Government under the gas sales agreement. The minimum gross quantities to be delivered under the gas sales agreement through December 31, 2007 represent approximately 93 percent of the expected average gross production of gas from Block 9 during that period. As of December 31, 2005, the gross proved gas reserves from Block 9 are approximately 373 percent of the total minimum of gas that remains to be delivered under the gas sales agreement.

In October 2005, Occidental received approval for development of the Khamilah field in Block 27. The exploitation term of the agreement is 30 years beginning in September 2005. Occidental plans to develop the reserves and commence production in Block 27 through capital-efficient investment and exploration.

Occidental (and its Block 53 partners) signed a new PSC for the Mukhaizna field with the Government of the Sultanate of Oman in July 2005. On September 1, 2005, Occidental assumed operations of the Mukhaizna field, where it holds a 45-percent working interest. The Mukhaizna field, located in Oman’s south central interior, was discovered in 1975 and was brought into production in 2000. Primary production peaked in the same year at 15,000 barrels of oil per day and by September 2005, had declined to 8,500 barrels of oil per day. Occidental plans to use horizontal well steamflood technology to steadily increase production.

Libya

Occidental suspended all activities in Libya in 1986 as a result of economic sanctions imposed by the United States government. During the imposition of sanctions, Occidental derived no economic benefit from its Libyan interests. In 2004, the United States government lifted all of the principal economic sanctions against Libya. However, Libya continues to be designated as a country supporting international terrorism under section 6(j) of the United States Export Administration Act and, as such, continues to be subject to certain limited sanctions.

On August 11, 2005, the Libyan authorities approved the terms of Occidental’s participation in the assets that it left in 1986, effective as of July 1, 2005. The agreement allows Occidental to return to its Libyan operations on generally the same terms in effect when activities were suspended. Those assets consist of three producing contracts in the Sirte Basin and four exploration blocks. Occidental paid approximately $133 million in re-entry bonuses, capital adjustment and work-in-progress payments and is required to pay $10 million per year while it continues to operate in Libya, as reimbursements for past development costs associated with the historical assets. In addition, Occidental committed to spend $90 million over the next five years in the four exploration blocks. Currently, Occidental’s rights in the producing fields extend through 2009 and early 2010. Occidental had its first lifting from its Libyan operations in late September and production during the fourth quarter of 2005 averaged 24,000 BOE per day.

Separately, in early 2005, Occidental participated in the EPSA IV exploration bid round in Libya. Occidental successfully bid on nine of the 15 areas available. Occidental is the operator for five onshore areas and has a 90-percent exploration working interest. In addition, Occidental holds a 35-percent exploration working interest in four offshore areas. Woodside Petroleum Ltd. is the operator for the offshore areas. Occidental paid approximately $90 million in exploration lease bonuses for these nine new areas and committed to spend an additional $125 million over the next five years.

Other Eastern Hemisphere

Pakistan

Occidental holds oil and gas working interests, that vary from 25 to 50 percent, in four Badin Blocks in Pakistan. BP is the operator. Occidental’s share of production was approximately 18,000 BOE per day in 2005.

Russia

In Russia, Occidental owns 50 percent of a joint venture company, Vanyoganneft, that operates in the western Siberian oil basin. Production for 2005 was approximately 28,000 BOE per day.

Latin America

Colombia

Occidental is the operator of the Caño Limón field with a 35-percent share of production, declining to 33.6 percent by mid-2006 and 31.5 percent by 2009. In mid-2006, if WTI exceeds $30 per barrel, Occidental’s share of production will decline an additional amount based on a sliding scale. Occidental's share of 2005 production averaged 32,000 barrels of oil per day. Colombia's national oil company, Ecopetrol, operates the Caño Limón-Coveñas oil pipeline and marine-export terminal. The pipeline transports oil produced from the Caño Limón field for export to international markets.

In September 2005, Occidental signed a new agreement with Ecopetrol for an enhanced oil recovery project in the La Cira-Infantas field, located in central Colombia. If conditions warrant, upon completion of the two pilot phases, Occidental will earn a 48 percent net share of production upon further development.

In November 2005, Ecopetrol approved development of the Caricare field, an exploration discovery under the Rondon Association Contract, adjacent to Caño Limón. Production from this field, where Occidental holds a 35-percent working interest, is expected to commence in May 2006.

Occidental holds various working interests in two additional exploration blocks.

Ecuador

Occidental operates Block 15 in Ecuador in which it holds a 60-percent economic interest. Although Occidental holds legal title to 100 percent of the Block 15 Participation Contract, it farmed out 40 percent of its economic interest related to Block 15 in 2000. Occidental's share of production averaged approximately 42,000 barrels of oil per day in 2005. In addition, Occidental has a 14-percent interest in the Oleoducto de Crudos Pesados Ltd. (OCP) oil export pipeline.

Development of existing fields, primarily Eden-Yuturi and the Indillana Complex, continued through 2005. Drilling and the installation of new wells nearly offset the natural decline of existing wells.

Foreign oil companies, including Occidental, have been paying a Value Added Tax (VAT), generally calculated on the basis of 10 to 12 percent of expenditures for goods and services used in the production of oil for export. Until 2001, oil companies, like other companies producing products for export, filed for and received reimbursement of VAT. In 2001, the Ecuador tax authority announced that the oil companies’ VAT payments did not qualify for reimbursement. In 2002, Occidental initiated an international arbitration proceeding against the Ecuadorian Government under the United States-Ecuador bilateral investment treaty based on Occidental’s belief that the Ecuadorian Government is arbitrarily and discriminatorily refusing to refund the VAT to Occidental. In July 2004, a tribunal of international arbitrators awarded Occidental compensation for VAT refunds from Occidental's Block 15 operations that were withheld by the Ecuadorian Government and indicated that similar VAT refunds should be paid going forward. The Ecuadorian Government has appealed the tribunal's decision and the appeals proceedings continue at present. In the event of an unfavorable outcome, the potential effect on Occidental's financial statements would not be material.

recommending that the Minister of Energy declare the termination of Occidental’s Participation Contract for Block 15. The principal allegation stated in the notice and the Petroecuador report is an assertion that Occidental should have obtained government approval for the farmout agreement entered into in 2000. In November 2005, the Minister of Energy, following the procedure set forth in the Ecuadorian Hydrocarbons Law, requested that Occidental respond to the allegations against it. In February 2006, Occidental submitted its response to the Minister of Energy, in which Occidental confirmed its belief that it has complied with all material obligations under the Participation Contract and Ecuadorian law, and that any termination of the contract based upon the stated allegations would be unfounded and would constitute an unlawful expropriation. Occidental has been cooperating with the Ecuadorian authorities in these proceedings, and will continue to strive for an amicable resolution. Occidental currently is unable to determine the outcome of these proceedings, but if there were to be a negotiated settlement, it is probable that the terms would effectively reduce the future profitability of Block 15 operations. See also "Off-Balance-Sheet Arrangements — Ecuador" for further information about the OCP pipeline.

Production-Sharing Contracts

Occidental conducts its operations in Qatar, Oman and Yemen under PSCs and, under such contracts, receives a share of production to recover its costs and an additional share for profit. In addition, Occidental's share of production from THUMS is subject to contractual arrangements similar to a PSC. Occidental’s share of production from these contracts decreases when oil prices rise and increases when oil prices decline. Overall, Occidental’s net economic benefit from these contracts is greater at higher oil prices.

Proved Reserves - Evaluation and Review Process

A senior corporate officer of Occidental is responsible for the internal audit and review of its oil and gas reserves data. In addition, a Corporate Reserves Review Committee (Reserves Committee) has been established, consisting of senior corporate officers, to monitor and review Occidental's oil and gas reserves. The Reserves Committee reports to the Audit Committee of Occidental's Board of Directors periodically throughout the year. Occidental retained Ryder Scott Company, L.P. (Ryder Scott), independent petroleum engineering consultants, to review its oil and gas reserve estimation processes in 2004 and 2005.

Ryder Scott compared Occidental’s methods and procedures for estimating oil and gas reserves to generally accepted industry standards and reviewed certain data, methods and procedures used in estimating reserve volumes, the economic evaluations and reserve classifications. Ryder Scott reviewed the specific application of such methods and procedures for a selection of oil and gas fields considered to be a valid representation of Occidental’s total reserves portfolio.

Based on this review, including the data, technical processes and interpretations presented by Occidental, Ryder Scott concluded that the methodologies used by Occidental in preparing the relevant estimates generally comply with current Securities and Exchange Commission (SEC) standards. Ryder Scott was not engaged to render an opinion as to the reserves volumes presented by Occidental.

Proved Reserve Additions

Occidental consolidated subsidiaries had proved reserves at year-end 2005 of 2,662 million BOE, as compared with the year-end 2004 amount of 2,489 million BOE. Additionally, Occidental’s investments in other interests had proved reserves of 45 million and 43 million BOE at year-end 2005 and 2004, respectively. The increase in the consolidated subsidiaries’ reserves from all sources was 380 million BOE, of which 232 million BOE were from proved developed reserves and 148 million BOE were from proved undeveloped reserves.

Proved developed reserves represent approximately 74 percent of Occidental’s total proved reserves.

Proved Reserve Additions - Consolidated Subsidiaries - 2005

In Millions of BOE	Proved Developed	Proved Undeveloped		Proved Total
Revisions due to change in price	1	(27	)	(26	)
Other revisions	62	(57	)	5
Improved Recovery	49	90		139
Extensions and Discoveries	21	102		123
Purchases	99	40		139
Total Additions	232	148		380

Proved reserves are 78 percent crude oil and condensate and 22 percent natural gas.

Revisions of Previous Estimates

In 2005, Occidental had net negative revisions of its proved reserves of 26 million BOE due to changes in price. The decrease was mainly due to negative revisions of 52 million BOE from the Dolphin Project, Qatar, Oman and Yemen where reserve amounts decrease when prices rise. These revisions were partially offset by positive revisions at domestic operations in Elk Hills and the Permian Basin. If oil prices increased by $5 per barrel, less oil volume is required to recover costs, and PSCs would reduce Occidental's share of proved reserves by approximately 7 million BOE. Conversely, if oil prices dropped by $5 per barrel, Occidental's share of proved reserves would increase by a similar amount. Oil price changes would also tend to affect the economic lives of proved reserves from other contracts, in a manner partially offsetting the PSC reserve volume changes. Apart from the effects of product prices, Occidental's approach to interpreting technical data regarding oil and gas reserves makes it more likely future reserve revisions will be positive rather than negative.

Improved Recovery

In 2005, Occidental added reserves of 139 million BOE through improved recovery, mainly in the Permian Basin, Elk Hills, and THUMS in the United States and also in Qatar. In an effort to partially mitigate the decline in oil and gas production from the Elk Hills field,

Occidental has successfully implemented an infill drilling program. The Elk Hills operations employ both gas flood and water flood techniques. In the Permian Basin, the increased reserves were primarily attributable to enhanced recovery techniques, such as drilling additional CO₂ flood and water flood wells.

Extensions and Discoveries

Occidental obtains reserve additions from extensions which are dependent on successful exploitation programs. In 2005, Occidental added reserves of 123 million BOE, with 23 million BOE in the United States and 91 million BOE in the Middle East. In western Colorado, Occidental added approximately 9 million BOE from the extension of gas reserves to proved locations, most of which will require additional development capital.

The success of improved recovery, extension and discovery projects depends on reservoir characteristics and technology improvements, as well as oil and gas prices, capital costs and operating costs. Many of these factors are outside of management's control, and will affect whether or not these historical sources of reserve additions continue at similar levels.

Purchases of Proved Reserves

In 2005, Occidental purchased reserves of 139 million BOE, of which 135 million BOE are in the United States. The reserve additions in the United States were from various acquisitions, primarily in the Permian Basin, of which 71 percent were proved developed reserves. Occidental continues to add reserves through acquisitions when properties are available at reasonable prices. Acquisitions are dependent on successful bidding and negotiating of oil and gas contracts at attractive terms. As market conditions change, the available supply of properties may increase or decrease accordingly.

Proved Undeveloped Reserves

In 2005, Occidental's proved undeveloped reserves increased by 148 million BOE. This net increase resulted from improved recovery, extensions, discoveries and purchases, primarily in the Elk Hills field, in the Permian Basin, in western Colorado and in the Dolphin Project. The Dolphin Project accounted for 63 percent of the 2005 increase, and the projected start-up for Dolphin production is late 2006. These proved undeveloped additions were partially offset by reserve transfers to the proved developed category as a result of 2005 development programs.

For details of proved reserve activity by geographic areas, see the "Supplemental Oil and Gas Information (Unaudited)" section in Item 8.

Industry Outlook

The petroleum industry is highly competitive and subject to significant volatility due to numerous market forces. Crude oil and natural gas prices are affected by market fundamentals such as weather, inventory levels, competing fuel prices, overall demand and the availability of supply.

Worldwide oil prices in 2005 remained at or near historical highs. Continued economic growth, resulting in increased demand and concerns about supply availability, could result in continued high prices. A lower demand growth rate could result in lower crude oil prices.

Historically, sustained high or low oil prices have significantly affected profitability and returns for Occidental and other upstream producers. Oil prices cannot be predicted with any certainty. The WTI price has averaged approximately $28.78 per barrel over the past ten years. However, the industry has historically experienced wide fluctuations in prices. During 2005, Occidental experienced an increase in its price differential of the average WTI price over Occidental's realized prices. See the "Oil and Gas Segment — Business Environment" section above for further information.

While local supply/demand fundamentals are a decisive factor affecting domestic natural gas prices over the long term, day-to-day prices may be more volatile in the futures markets, such as on the NYMEX and other exchanges, making it difficult to forecast prices with any degree of confidence. Over the last ten years, the NYMEX gas price has averaged $4.04 per Mcf.

CHEMICAL SEGMENT

Business Environment

The chemical segment experienced improved results in 2005 due to sustained demand coupled with improved margins despite sharply higher feedstock costs. The widespread impact of Hurricanes Katrina and Rita in the third quarter caused several disruptions among chlor-alkali producers and their customers. This resulted in a moderate softening of product demand.

Business Review

Chlor-alkali

Demand for chlor-alkali products began the year quite strong, which enabled OxyChem to realize robust margins despite escalating energy and raw material costs. While chlorine and caustic prices continued to rise throughout the year, the combination of softening demand, partly due to Hurricanes Katrina and Rita, and the rapid rise in energy and feedstock costs caused operating rates and profitability to fall in the latter part of the year. Key sectors, such as vinyls and pulp and paper, were operating at full capacity in the first half, resulting in a tight supply/demand balance for chlorine and caustic soda. Although demand remained relatively strong in the second half of the year, margins came under pressure as product became more available and industrial customers reduced purchases to control inventories and bolster cash flow.

Domestic chlorine demand fell 7 percent compared to 2004, as several sectors experienced slowdowns late in the year, which resulted in de-stocking of inventory amid the expectation of lower prices. Despite starting the year operating at near capacity, 2005 chlor-alkali industry operating rates fell to 90 percent for the year, down from 99 percent in 2004. OxyChem’s chlor-alkali operating rate for 2005 was 92 percent, slightly above the industry operating rate of 90 percent.

In September 2005, OxyChem decided to permanently close its Deer Park, Texas and Delaware City, Delaware chlor-alkali production facilities, and its

EDC facility in Ingleside, Texas. These sites were closed because they were not expected to regain an economically viable operating position in the future.

Vinyls

Increasing ethylene and natural gas prices led to a continuation of industry PVC price increases in 2005. Industry PVC prices increased 24 percent compared to 2004. These increases led to record high price levels in the fourth quarter of 2005.

Industry-wide total 2005 demand was 3 percent lower compared with 2004.

OxyChem operated its PVC facilities at an average operating rate of 88 percent for 2005, compared to the North American industry average of 89 percent.

In December 2005, OxyChem announced that it would permanently close its Alberta, Canada PVC manufacturing facility in the first quarter of 2006.

Acquisition of Vulcan Assets

In June 2005, Occidental completed the purchase of three chlor-alkali chemical manufacturing facilities from Vulcan for $214 million in cash, plus contingent payments based upon the future performance of these facilities and the assumption of certain liabilities. In order to facilitate receipt of regulatory approval for this acquisition, Occidental divested one of the facilities.

Exit of Vinyl Specialty Resins Business

At the end of 2004, Occidental decided to exit the vinyl specialty resins business for strategic and economic reasons. This resulted in the immediate closure of the Pottstown, Pennsylvania manufacturing facility. Occidental recorded an after-tax charge of $32 million in 2004 and classified this business as a discontinued operation.

Industry Outlook

Occidental's chemical business experienced improved profitability in 2005, 47 percent higher than 2004’s earnings. The major factors that contributed to this improved performance were the continued strong United States economy, higher margins and the acquisition of certain Vulcan chemical operating assets.

Continued strong performance will depend on global economic activity, the competitiveness of the United States in the world economy and the direction of the unprecedented high levels of feedstock and energy prices and their impact on margins. Reduced demand due to softening in the United States economy and continuation of the historically high levels of feedstock and energy prices could affect operating margins and reduce future profitability.

Construction of LNG terminals on the United States Gulf Coast could stabilize natural gas prices at a lower-than-current level and thereby help improve the competitive position of efficient Gulf Coast chemical facilities. However, this construction may not occur in the immediate future.

Chlor-alkali

Industry operating rates ended 2005 at 90 percent of capacity, which is a considerable decline from 2004’s performance of 99 percent. Demand growth is expected to be moderate despite the potential positive effect of Gulf Coast rebuilding efforts. However, due to the currently high level of energy and other key raw material costs, margins are expected to remain under pressure. Moreover, a significant portion of 2005 results were due to sharply higher caustic soda prices versus 2004. This price increase has led to additional United States imports and intense competition among producers for market share.

Vinyls

Industry-wide PVC operating rates are expected to be slightly lower in 2006 as a result of the restart of some idled capacity coupled with lower housing starts and reduced exports. VCM rates are expected to improve as Dow Chemical Company completes the announced shutdown of two production facilities.

The growing cost disparity in the vinyls chain between the United States Gulf Coast and southeast Asia, as well as the growth of acetylene-based PVC capacity in China, have resulted in a dramatic shift in trade flows and imports of PVC into the United States and Latin America.

CORPORATE AND OTHER

Corporate and Other includes the investments in Lyondell Chemical Company (Lyondell) and Premcor, Inc., (Premcor), and a leased cogeneration facility in Taft, Louisiana. The Premcor investment was sold in 2005. Beginning in 2004, Corporate and Other also included the results of a 1,300-mile oil pipeline and gathering system located in the Permian Basin, which was acquired in January 2004, and is used in corporate-directed oil and gas marketing and trading operations.

Lyondell

In November 2004, Lyondell acquired Millennium Chemicals Inc. (Millennium) by issuing additional shares of Lyondell common stock. Under SEC Staff Accounting Bulletin No. 51, Occidental was required to record its share of the increase in Lyondell's net equity resulting from this issuance. The effect of this was an increase in the carrying value of Occidental's investment in Lyondell and a pre-tax gain of $121 million. As a result of the stock issuance, Occidental's ownership percentage of Lyondell decreased from approximately 22 percent to 17 percent.

In 2005, Occidental sold 11 million shares of Lyondell common stock for gross proceeds of approximately $300 million. This sale resulted in a 2005 pre-tax gain of $140 million. At December 31, 2005, Occidental still owned 30.3 million shares of Lyondell common stock (12 percent ownership), with a carrying value of $468 million and a fair market value of $722 million, and warrants to purchase an additional five million shares of Lyondell common stock. Occidental has no current plans to divest the remaining Lyondell shares. However, Occidental regularly reviews and analyzes its investments and other operations in order to determine how its stockholders’ interests are best served. Occidental continues to account for this investment on the equity method since it has the ability to exercise significant influence over Lyondell.

Premcor

In 2005, Valero Energy Corp. (Valero) and Premcor executed a merger agreement for Valero to acquire Premcor. Occidental tendered its 9 million shares of Premcor common stock for cash and shares of Valero common stock pursuant to the Premcor-Valero agreement. Valero’s acquisition of Premcor resulted in a $704 million pre-tax gain and the subsequent sale of all of the Valero shares received resulted in an additional $22 million pre-tax gain.

SEGMENT RESULTS OF OPERATIONS

The following discussion of Occidental’s two operating segments and corporate items should be read in conjunction with Note 15 to the Consolidated Financial Statements.

Segment earnings generally exclude interest income, interest expense, unallocated corporate expenses, discontinued operations and the cumulative effect of changes in accounting principles, but include gains and losses from dispositions of segment assets and results from the segments' equity investments.

As of January 1, 2005, Occidental revised its reporting of segment earnings to show segment earnings before income taxes. All domestic and foreign income tax expense is now reflected in the “Corporate and Other” column. This change has been retrospectively applied to prior period results.

The following table sets forth the sales and earnings of each operating segment and corporate items:


In millions, except per share amounts For the years ended December 31,	2005			2004			2003
SALES
Oil and Gas	$	10,416		$	7,582		$	6,003
Chemical		4,641			3,675			3,092
Other ^(a)	151			111			145
	$	15,208		$	11,368		$	9,240
EARNINGS(LOSS)
Oil and Gas ^(b)	$	6,293		$	4,290		$	3,213
Chemical ^(c)	607			414			223
		6,900			4,704			3,436
Unallocated corporate items
Interest expense, net ^(d)
Debt and trust preferred
distributions		(201	)		(240	)		(333	)
Income taxes ^(e)		(2,020	)		(1,708	)		(1,231	)
Other ^(f)	593			(150		)	(271		)
Income from continuing
operations		5,272			2,606			1,601
Discontinued operations, net		6			(38	)		(6	)
Cumulative effect of changes in
accounting principles, net	3			—			(68		)
Net Income	$	5,281		$	2,568		$	1,527
Basic Earnings per
Common Share	$	13.09		$	6.49		$	3.98

(a)	The 2005 and 2004 amounts represent revenue from a Taft, Louisiana cogeneration plant and the Permian Basin pipeline and gathering system. The 2003 amount represents revenue from a Taft, Louisiana cogeneration plant.
(b)	The 2005 and 2004 amounts include interest income of $11 million and $18 million, respectively, from loans made to an equity investee.
(c)	The 2005 amount includes a $139 million charge for the write-off of two previously idled chemical plants and one currently operated plant and an additional charge of $20 million for the write-down of another chemical plant.
(d)	The 2005 amount includes $42 million of interest charges to redeem an unsecured subsidiary note and all of the outstanding 5.875-percent senior notes, 4.1-percent medium-term notes and 7.65-percent senior notes and to purchase in the open market and retire various amounts of Occidental senior notes and unsecured subsidiary notes. The 2004 amount includes $17 million of interest charges to redeem or repurchase various debt issues during the year. The 2003 amount includes a $61 million interest charge to repay a $450 million senior note that had 10 years of remaining life, but was subject to remarketing on April 1, 2003.
(e)	The 2005 amount includes a $335 million tax benefit due to the reversal of tax reserves no longer required as United States corporate returns for tax years 1998-2000 became closed by lapsing of the statute of limitations, a $619 million tax benefit resulting from a closing agreement with the IRS resolving certain foreign tax credit issues and a $10 million charge related to a state income tax issue. The 2004 amount includes $47 million of credits related to tax settlements with the IRS. The 2005 and 2004 amounts also reflect a lower United States income tax rate resulting from the crediting of foreign income taxes.
(f)	The 2005 amount includes a $726 million pre-tax gain from Valero’s acquisition of Premcor and the subsequent sale of the Valero common shares received, a $140 million pre-tax gain from the sale of 11 million shares of Lyondell common stock, which represented approximately 27 percent of Occidental’s investment, $95 million of corporate equity-method investment income and $62 million environmental remediation expense. The 2004 amount includes $169 million of corporate equity-method investment income, $59 million of environmental remediation expense and the costs attributable to the cogeneration plant in Taft, Louisiana. The 2003 amount includes $58 million of corporate equity-method investment losses and $63 million of environmental remediation expense.


Oil and Gas In millions, except as indicated	2005			2004			2003
Segment Sales	$	10,416		$	7,582		$	6,003
Segment Earnings	$	6,293		$	4,290		$	3,213
Core Earnings ^(a)	$	6,337		$	4,290		$	3,213
Net Production per Day
United States
Crude oil and liquids (MBBL)
California		76			78			81
Permian		161			154			150
Horn Mountain		13			19			21
Hugoton and other	3			3			4
Total		253			254			256
Natural Gas (MMCF)
California		242			237			252
Hugoton and other		133			127			138
Permian		170			130			129
Horn Mountain	8			13			13
Total		553			507			532
Latin America
Crude oil & condensate (MBBL)
Colombia		36			37			37
Ecuador	42			46			25
Total		78			83			62
Middle East/North Africa
Crude oil & condensate (MBBL)
Oman		17			13			12
Qatar		42			45			45
Yemen		28			32			35
Libya	8			—			—
Total		95			90			92
Natural Gas (MMCF)
Oman		44			55			—
Other Eastern Hemisphere
Crude oil & condensate (MBBL)
Pakistan		5			7			9
Natural Gas (MMCF)
Pakistan		77			75			74
Barrels of Oil Equivalent (MBOE)
Subtotal Consolidated Subsidiaries		543			540			520
Colombia-minority interest		(4	)		(4	)		(5	)
Russia-Occidental net interest		28			29			30
Yemen-Occidental net interest	1			1			2
Total Worldwide Production
(MBOE)	568			566			547


Oil and Gas (continued) In millions, except as indicated	2005		2004		2003
Average Sales Prices
Crude Oil Prices ($ per barrel)
United States	$	50.21	$	37.72	$	28.74
Latin America	$	45.43	$	33.09	$	27.21
Middle East/North Africa ^(b)	$	49.88	$	34.88	$	27.81
Other Eastern Hemisphere	$	46.84	$	33.13	$	26.61
Total consolidated subsidiaries	$	49.05	$	35.95	$	28.18
Other interests	$	36.16	$	23.83	$	15.95
Total worldwide	$	48.20	$	35.09	$	27.25
Gas Prices ($ per thousand cubic feet)
United States	$	7.11	$	5.35	$	4.81
Middle East/North Africa ^(b)	$	0.96	$	0.97	$	—
Other Eastern Hemisphere	$	2.44	$	2.25	$	2.04
Total consolidated subsidiaries	$	6.11	$	4.56	$	4.45
Other interests	$	0.16	$	—	$	—
Total worldwide	$	5.98	$	4.56	$	4.45
Expensed Exploration ^(c)	$	337	$	219	$	139
Capital Expenditures
Development	$	1,856	$	1,438	$	1,097
Exploration	$	269	$	102	$	43
Acquisitions and other ^{(d, e)}	$	111	$	109	$	97

(a)	For an explanation of core earnings, see "Significant Items Affecting Earnings."
(b)	These prices exclude taxes owed by Occidental but paid by governmental entities on its behalf.
(c)	Includes dry hole write-offs and lease impairments of $242 million in 2005, $159 million in 2004 and $80 million in 2003.
(d)	Includes capitalized portion of injected CO₂ of $59 million, $54 million and $48 million in 2005, 2004 and 2003, respectively.
(e)	Includes mineral acquisitions but excludes significant acquisitions individually discussed in this report.

Core earnings in 2005 were $6.3 billion, compared with $4.3 billion in 2004. The increase in core earnings is primarily due to higher prices and volumes for crude oil and natural gas, partially offset by higher operating expenses, higher exploration expense and increased DD&A rates.

Core earnings in 2004 were $4.3 billion, compared with $3.2 billion in 2003. The increase in core earnings primarily reflects the effect of higher crude oil and natural gas prices and higher crude oil volumes, partially offset by higher operating expenses, higher exploration expense and increased DD&A rates.

Average consolidated production costs for 2005 were $8.71 per BOE, compared to the average 2004 production cost of $6.95 per BOE. At least 62 percent of the increase was a result of higher energy prices, which increased utility, gas plant and CO₂ costs and ad valorem taxes, and the impact of higher crude oil prices on PSCs. The remaining cost increases were the result of workover, maintenance and other costs.

Occidental expects the first quarter 2006 production to be higher than the fourth quarter 2005 production.

Also, see "Production-Sharing Contracts" above.


Chemical In millions, except as indicated	2005		2004		2003
Segment Sales	$	4,641	$	3,675	$	3,092
Segment Earnings	$	607	$	414	$	223
Core Earnings ^(a)	$	777	$	414	$	223
Key Product Price Indexes (1987
through 1990 average price = 1.0)
Chlorine ^{(b, c)}		2.65		2.05		1.72
Caustic soda ^{(b, c)}		1.69		0.84		0.84
Ethylene dichloride ^{(b, c)}		1.44		1.56		1.16
PVC commodity resins ^(c)		1.32		1.08		0.89
Key Product Volumes
Chlorine (thousands of tons) ^{(b, d)}		3,118		2,892		2,733
Caustic soda (thousands of tons) ^(b)		3,178		3,109		2,764
Ethylene dichloride
(thousands of tons) ^(b)		682		458		546
PVC commodity resins
(millions of pounds)		3,977		4,208		3,954
Capital Expenditures ^(e)	$	173	$	155	$	344

(a)	For an explanation of core earnings, see "Significant Items Affecting Earnings."
(b)	The 2005 amounts include product volumes and prices from the Vulcan chemical operating assets.
(c)	Product volumes produced at former PolyOne and Vulcan facilities are excluded from the product price indexes.
(d)	Product volumes include those manufactured and consumed internally.
(e)	The 2003 amount includes $180 million for the purchase of a previously leased facility in LaPorte, Texas and $44 million related to the exercise of purchase options for certain leased railcars.

Core earnings in 2005 were $777 million, compared with $414 million in 2004. The increase in core earnings is primarily due to higher margins resulting from higher prices for chlorine, caustic soda and PVC resins, partially offset by higher energy and feedstock costs.

Core earnings were $414 million in 2004, compared with $223 million in 2003. The increase in core earnings reflects the impact of higher prices for most major products (PVC resins, EDC, chlorine and VCM), partially offset by higher energy and ethylene costs.

SIGNIFICANT ITEMS AFFECTING EARNINGS

Occidental’s results of operations often include the effects of significant transactions and events affecting earnings that vary widely and unpredictably in nature, timing and amount. Therefore, management uses a measure called "core earnings," which excludes those items. This non-GAAP measure is not meant to disassociate those items from management’s performance, but rather is meant to provide useful information to investors interested in comparing Occidental’s earnings performance between periods. Reported earnings are considered representative of management’s performance over the long term. Core earnings is not considered to be an alternative to operating income in accordance with generally accepted accounting principles.


Significant Items Affecting Earnings Benefit (Charge) (in millions)	2005			2004			2003
TOTAL REPORTED EARNINGS	$	5,281		$	2,568		$	1,527
OIL AND GAS
Segment Earnings	$	6,293		$	4,290		$	3,213
Less:
Contract settlement		(26	)		—			—
Hurricane insurance charge	(18		)	—			—
Segment Core Earnings	$	6,337		$	4,290		$	3,213
CHEMICAL
Segment Earnings	$	607		$	414		$	223
Less:
Write-off of plants		(159	)		—			—
Hurricane insurance charge	(11		)	—			—
Segment Core Earnings	$	777		$	414		$	223
TOTAL SEGMENT CORE EARNINGS	$	7,114		$	4,704		$	3,436
CORPORATE
Results ^(a)	$	(1,619	)	$	(2,136	)	$	(1,909	)
Less:
Debt purchase expense		(42	)		—			(61	)
Trust preferred redemption charge		—			(11	)		—
Gain on sale of Lyondell shares		140			—			—
Gain on sale of Premcor-Valero shares		726			—			—
Gain on Lyondell stock issuance		—			121			—
State tax issue charge		(10	)		—			—
Settlement of federal tax issue		619			47			—
Reversal of tax reserves		335			—			—
Equity investment impairment		(15	)		—			—
Equity investment hurricane insurance
charge		(2	)		—			—
Hurricane insurance charge		(10	)		(15	)		—
Tax effect of pre-tax adjustments		(219	)		(35	)		21
Discontinued operations, net of tax		6			(38	)		(6	)
Cumulative effect of changes in
accounting principles, net of tax	3			—			(68		)
CORPORATE CORE RESULTS	$	(3,150	)	$	(2,205	)	$	(1,795	)
TOTAL CORE EARNINGS	$	3,964		$	2,499		$	1,641

(a)	Includes interest expense, income taxes, general and administrative and other expense, and certain non-core items.

TAXES

Deferred tax liabilities, net of deferred tax assets of $1.1 billion, were $0.8 billion at December 31, 2005. The current portion of the deferred tax assets of $200 million is included in prepaid expenses and other. The net deferred tax assets are expected to be realized through future operating income and reversal of taxable temporary differences.

Worldwide Effective Tax Rate

The following table sets forth the calculation of the worldwide effective tax rate for reported income from continuing operations and core earnings:


In millions	2005			2004			2003
REPORTED INCOME
Oil and Gas ^(a)	$	6,293		$	4,290		$	3,213
Chemical		607			414			223
Corporate and Other	392			(390		)	(604		)
Pre-tax income		7,292			4,314			2,832
Income tax expense
Federal and State		671			946			673
Foreign ^(a)	1,349			762			558
Total	2,020			1,708			1,231
Income from continuing operations	$	5,272		$	2,606		$	1,601
Worldwide effective tax rate	28%			40%			43%
CORE INCOME
Oil and Gas ^(a)	$	6,337		$	4,290		$	3,213
Chemical		777			414			223
Corporate and Other	(405		)	(485		)	(543		)
Pre-tax income		6,709			4,219			2,893
Income tax expense
Federal and State		1,396			958			694
Foreign ^(a)	1,349			762			558
Total	2,745			1,720			1,252
Core income	$	3,964		$	2,499		$	1,641
Worldwide effective tax rate	41%			41%			43%

(a)	Revenues and income tax expense include taxes owed by Occidental but paid by governmental entities on its behalf. Oil and gas pre-tax income includes revenue amounts for the years ended December 31, 2005, 2004 and 2003, of $887 million, $525 million and $397 million, respectively.

Occidental's 2005 worldwide effective tax rate was 28 percent for reported income and 41 percent for core income. The decrease in the United States income tax rate for reported income in 2005, compared to 2004, resulted from a $335 million tax benefit due to the reversal of tax reserves no longer required as United States corporate returns for tax years 1998-2000 became closed due to the lapsing of statutes of limitations and a $619 million tax benefit resulting from a closing agreement with the IRS resolving certain foreign tax credit issues. The lower United States income tax rate in 2005 and 2004, compared to 2003, resulted from the crediting of foreign income taxes. Previously, Occidental deducted foreign income taxes in determining United States taxable income. An annual tax election permits a taxpayer to claim either a credit or a deduction for foreign income taxes, whichever is more beneficial. Occidental expects to continue its election to credit foreign income taxes in future years.

CONSOLIDATED RESULTS OF OPERATIONS


Selected Revenue Items In millions	2005		2004		2003
Net sales	$	15,208	$	11,368	$	9,240
Interest, dividends and other income	$	181	$	144	$	89
Gain on disposition of assets, net	$	870	$	1	$	32

The increase in net sales in 2005, compared to 2004, reflects higher crude oil, natural gas and chemical prices.

The increase in sales in 2004, compared to 2003, reflects higher crude oil, natural gas and chemical prices, higher crude oil production and higher chemical volumes, partially offset by lower domestic natural gas production volumes.

The increase in interest, dividends and other income in 2005, compared to 2004, reflects interest income earned on a higher level of cash and cash equivalents.

The increase in interest, dividends and other income in 2004, compared to 2003, is due to 2004 interest income earned from a loan made to an equity investee and a mark-to-market income adjustment for equity investee stock warrants.

Gain on disposition of assets, net in 2005 includes a gain of $726 million resulting from Valero’s acquisition of Premcor and the subsequent sale of all of the Valero shares received and a gain of $140 million on the sale of 11 million shares of Lyondell stock.


Selected Expense Items In millions	2005		2004		2003
Cost of sales ^(a)	$	5,534	$	4,509	$	3,897
Selling, general and administrative
and other operating expenses	$	1,415	$	1,008	$	852
Depreciation, depletion and
amortization	$	1,485	$	1,303	$	1,175
Exploration expense	$	337	$	219	$	139
Interest and debt expense, net	$	293	$	260	$	332

(a)	Excludes depreciation, depletion and amortization of $1,445 million in 2005, $1,263 million in 2004 and $1,137 million in 2003.

Cost of sales increased in 2005, compared to 2004, mainly due to higher oil and gas production costs and higher energy and feedstock costs.

Cost of sales increased in 2004, compared to 2003, due primarily to higher oil and gas production volumes and other operating costs, higher energy and feedstock costs and higher crude oil volumes.

Selling, general and administrative and other operating expenses increased in 2005, compared to 2004, due to the chemical plant write-offs and writedowns in 2005, higher costs in oil and gas, including higher production-related taxes, and increases in share-based compensation expense.

Selling, general and administrative and other operating expenses increased in 2004, compared to 2003, mainly due to higher general and administrative costs for corporate infrastructure and general support areas and higher oil and gas costs, including higher production-related taxes and other operating costs.

DD&A increased in 2005, compared to 2004, due to higher costs of new reserve additions resulting in a higher DD&A rate.

The increase in DD&A in 2004, compared to 2003, was due to the increase in oil and gas production from the prior year and a higher DD&A rate.

The increase in exploration expense in 2005, compared to 2004, was due mostly to higher dry hole write-offs and impairment costs and higher seismic and geological and geophysical costs.

The increase in exploration expense in 2004, compared to 2003, was due mostly to higher dry hole write-offs and impairment costs in California and the Other Eastern Hemisphere region.

Interest and debt expense in 2005, 2004 and 2003 included pre-tax debt purchase charges of $42 million, $17 million and $61 million, respectively. Excluding the effects of these debt repayment charges, interest expense increased in 2005, compared to 2004, due to higher interest rates which were partially offset by lower debt levels. Interest and debt expense decreased in 2004, compared to 2003, due primarily to lower average debt levels.


Other Items In millions	2005			2004			2003
Provision for income taxes	$	2,020		$	1,708		$	1,231
(Income) loss from equity investments	$	(232	)	$	(113	)	$	9
Gain on Lyondell stock issuance	$	—		$	(121	)	$	—

The increase in the provision for income taxes in 2005, compared to 2004, was primarily due to an increase in income before taxes, partially offset by a $335 million tax benefit due to the reversal of tax reserves no longer required as United States corporate returns for tax years 1998-2000 became closed due to the lapsing of statutes of limitations and a $619 million tax benefit related to the resolution of certain IRS tax issues.

The increase in the provision for income taxes in 2004, compared to 2003, was primarily due to an increase in income before taxes, partially offset by the use of a lower tax rate in 2004 resulting from the crediting of foreign income taxes. See the "Taxes" section above for further information.

The increase in income from equity investments in 2005, compared to 2004, was due to improved results from the Lyondell equity investment and higher income from a Russian oil and gas equity investee.

The increase in the income from equity investments in 2004, compared to results reported in 2003, was mostly attributable to improved results from Lyondell and higher income from a Russian oil and gas equity investee.

The gain on Lyondell stock issuance in 2004 represents Occidental's share of the increase in Lyondell's net equity resulting from Lyondell's issuance of stock to purchase Millennium.

CONSOLIDATED ANALYSIS OF FINANCIAL POSITION

The changes in the following components of Occidental’s balance sheet are discussed below:


Selected Balance Sheet Components In millions	2005		2004
CURRENT ASSETS
Cash and cash equivalents	$	2,189	$	1,199
Short-term investments		252		250
Trade receivables, net		2,571		1,882
Receivables from joint ventures, partnerships
and other		570		353
Inventories		735		545
Prepaid expenses and other	257		202
Total current assets	$	6,574	$	4,431
Long-term receivables, net	$	377	$	239
Investments in unconsolidated entities	$	1,209	$	1,727
Property, plant and equipment, net	$	17,534	$	14,633
CURRENT LIABILITIES
Current maturities of long-term debt and capital
lease liabilities	$	46	$	459
Accounts payable		2,069		1,557
Accrued liabilities		1,635		1,034
Dividends payable		147		110
Domestic and foreign income taxes	383		263
Total current liabilities	$	4,280	$	3,423
Long-term debt, net	$	2,873	$	3,345
Deferred credits and other liabilities-income taxes	$	962	$	1,248
Deferred credits and other liabilities-other	$	2,621	$	2,498
Stockholders’ equity	$	15,032	$	10,550

The following analysis discusses increases and decreases in balance sheet items by comparing the balance at December 31, 2005, to the balance at December 31, 2004, unless otherwise indicated.

Assets

See “Cash Flow Analysis” for discussion about the increase in cash and cash equivalents. The increase in trade receivables is due to higher product prices and oil and gas sales volumes during the fourth quarter 2005 versus 2004. The increase in receivables from joint ventures, partnerships and other was due to higher mark-to-market adjustments on derivative financial instruments and higher account balances related to the oil and gas marketing and trading operations. The higher balance in inventories is due to higher oil and gas marketing and trading inventory due to higher prices and volumes during the fourth quarter 2005 versus 2004. The higher inventory balance is also due to an increase in chemical inventories.

The increase in long-term receivables reflects higher mark-to-market adjustments on long-term derivative financial instruments. The decrease in investment in unconsolidated subsidiaries is due to the sale of all of the shares of Premcor common stock and a partial sale of the Lyondell stock during the year. The increase in property, plant and equipment reflects capital expenditures and acquisitions, partially offset by DD&A expense.

Liabilities and Stockholders' Equity

Debt to Capitalization ^(a)

(a)	This ratio is computed by dividing year-end Total Debt, as shown in the “MD&A-Strategy-Key Performance Indicators-Debt Structure,” by the sum of year-end Total Debt plus year-end Stockholders’ Equity.

The decrease in current maturities of long-term debt and capital lease liabilities reflects the 2005 payment of the 7.65-percent senior notes that were classified as current in 2004. The higher balance in accounts payable is due to higher prices and volumes for purchased oil and gas in Occidental’s marketing and trading operations. The increase in accrued liabilities is primarily due to higher mark-to-market adjustments on derivative financial instruments and higher accruals mainly related to the Vulcan acquisition.

The higher balance in domestic and foreign income taxes-current reflects additional taxes payable due to higher income. The lower balance for long-term debt is due to various debt redemptions and repurchases throughout the year. The decrease in deferred credits and other liabilities – income taxes reflects the reduction in deferred taxes resulting from derivative activity in other comprehensive income (OCI) related to the production hedges and the sale of all of the shares of Valero common stock. The higher balance in deferred credits and other liabilities – other is due to an increase in long-term derivative liabilities related to crude oil production hedges, accruals related to the Permian Basin and Vulcan acquisitions and additional stock-based compensation liabilities, partially offset by the reduction in liabilities related to the IRS settlement and the reversal of tax reserves no longer required due to the lapsing of the statute of limitations.

The increase in stockholders’ equity reflects higher net income, partially offset by dividends paid and the impact of the crude oil production hedges in OCI.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2005, Occidental had approximately $2.4 billion in cash and short-term investments on hand, an increase of almost $1 billion from 2004. Although income and cash flows are largely dependent on oil and gas prices and production, Occidental believes that cash and short-term investments on hand and cash generated from operations will be sufficient to fund its operating needs, capital expenditure requirements, dividend payments, potential acquisitions and its announced common stock repurchase program. If needed, Occidental could access its existing credit facilities.

Available but unused lines of committed bank credit totaled approximately $1.5 billion at December 31, 2005. Occidental's $1.5 billion bank credit matures on June 18, 2009. None of Occidental's committed bank credits contain material adverse change (MAC) clauses or debt rating triggers that could restrict Occidental's ability to borrow under these lines. Occidental's credit facilities and debt agreements do not contain rating triggers that could terminate bank commitments or accelerate debt in the event of a ratings downgrade.

At December 31, 2005, under the most restrictive covenants of certain financing agreements, Occidental's capacity for additional unsecured borrowing was approximately $34.6 billion, and the capacity for the payment of cash dividends and other distributions on, and for acquisitions of, Occidental's capital stock was approximately $13.0 billion, assuming that such dividends, distributions and acquisitions were made without incurring additional borrowing.

In 2005, Occidental redeemed all of its 5.875-percent senior notes due 2007, all of its 4.101-percent medium-term senior notes due 2007, all of its 7.65-percent senior notes due 2006 and three of its unsecured subsidiary notes due 2028 through 2030. In addition, Occidental purchased and retired a total of $213 million of its 6.75-percent senior notes due 2012, its 10.125-percent senior notes due 2009, its 4-percent medium-term senior notes due 2007 and its 4.25-percent medium-term senior notes due 2010.

In January 2004, Occidental redeemed all of its outstanding 8.16 percent Trust Preferred Redeemable Securities (trust preferred securities) at par plus accrued interest, resulting in a decrease in current liabilities of $453 million. In the third quarter of 2004, Occidental redeemed all of its 6.5-percent senior notes, which reduced long-term debt by approximately $157 million.

In July 2004, Dolphin Energy, the operator of the Dolphin Project, entered into an agreement with banks to provide a $1.36 billion bridge loan for the Dolphin Project. Occidental guaranteed 24.5 percent of the obligations of Dolphin Energy under the bridge loan. In July 2005, Dolphin Energy entered into an agreement with banks to refinance the $1.36 billion bridge loan with a new bridge loan in an amount of $2.45 billion. The proceeds of the new bridge loan were used to pay off amounts outstanding on the $1.36 billion bridge loan and will be used to fund the construction of the Dolphin Project. The new bridge loan has a term of four years and is a revolving credit facility, which may be converted to a term loan. In September 2005, Dolphin Energy entered into an agreement with banks to provide a $1.0 billion Islamic-law-compliant facility to fund the construction of a certain portion of the Dolphin Project.

This four-year financing facility is structured as a transaction in which Dolphin Energy constructs part of the midstream portion of the Dolphin Project on behalf of a group of Islamic investors and enters into a lease to use such assets upon construction completion. Occidental guarantees 24.5 percent of both of these obligations of Dolphin Energy. At December 31, 2005, Occidental’s portion of the bridge loan drawdown was approximately $400 million, of which $299 million is recorded on the balance sheet. The remaining amount is discussed in “Off-Balance-Sheet Arrangements — Guarantees” below. There were no draw downs on the Islamic-law-compliant facility at December 31, 2005.

In the first quarter of 2005, Occidental filed a shelf registration statement for up to $1.5 billion of various securities. As of December 31, 2005, no securities had been issued under this shelf.

In January 2006, Occidental completed the Vintage acquisition and paid $1.4 billion to former Vintage shareholders for the cash portion of the merger consideration and issued 28 million shares for the stock portion, which was valued at $2.1 billion. The value of Occidental’s shares was determined by the average share price for the five-day period beginning two days before the acquisition announcement. In addition, Occidental assumed Vintage’s debt, which had an estimated fair market value of $585 million at closing. Occidental intends to divest a portion of these assets.


Cash Flow Analysis In millions	2005		2004		2003
Net cash provided by operating
activities	$	5,337	$	3,878	$	3,074

The significant increase in operating cash flow in 2005, compared to 2004, resulted from several factors. The most important drivers were the significantly higher oil and natural gas prices and, to a much lesser extent, chemical prices. Although the changes in realized prices varied among the regions in which Occidental operates, in 2005, Occidental's realized oil prices were higher overall by 37 percent. Occidental’s realized natural gas price increased over 33 percent in the United States, where approximately 80 percent of Occidental’s natural gas was produced in 2005.

Increases in the costs of producing oil and gas, such as purchased goods and services, and higher utility, gas plant and production taxes, partially offset oil and gas sales price increases, but such cost increases had a much lower effect on cash flow than the realized price increases. Other cost elements, such as labor costs and overheads, are not significant drivers of cash flow because they are mainly fixed within a narrow range over the short to intermediate term.

Most major chemical prices increased in 2005 at a higher rate than the energy-driven increase in feedstock and power costs, thereby improving profits and cash flow. The overall impact of the chemical price changes on cash flow was much less than for oil and gas price changes, not only because the chemical segment earnings and cash flow are significantly smaller than those for the oil and gas segment, but also because of increases in energy price-driven feedstock and electric power costs, which are major elements of manufacturing cost for the chemical segment's products. Sales volumes for chemical products generally were higher in 2005, but this did not have a significant effect on Occidental's earnings and cash flow.

The significant increase in operating cash flow in 2004, compared to 2003, resulted from the significantly higher oil and natural gas prices and, to a much lesser extent, chemical prices. In 2004, Occidental's realized oil prices were higher overall by 29 percent and the realized United States natural gas price increased over 11 percent. Oil and gas worldwide production, on a BOE basis, increased for 2004 overall by over 3 percent on a daily basis, as compared with 2003, which also contributed to increased cash flow.

Increases in sales prices realized for Occidental's major chemical product lines ranged from zero to 34 percent, compared to 2003. Chemical prices increased in 2004 at a higher rate than the energy-driven increase in feedstock and power costs, thereby improving profits and cash flow. The overall impact of the chemical price changes on cash flow was much less than for oil and gas price changes. Sales volumes for chemical products generally were higher in 2004, but this did not have a significant effect on Occidental's earnings and cash flow.

Increases in the costs of production partially offset sales price increases, but such cost increases had a much lower effect on cash flow than the realized price increases.

Other non-cash charges to income in 2005 include chemical asset write-downs, deferred compensation, stock incentive plan amortization and environmental remediation accruals. Other non-cash charges in 2004 include deferred compensation, stock incentive plan amortization, environmental remediation accruals and a chemical asset writedown. Other non-cash charges in 2003 include deferred compensation, stock incentive plan amortization and environmental remediation accruals.


In millions	2005			2004			2003
Net cash used by investing activities	$	(3,161	)	$	(2,428	)	$	(2,131	)

The 2005 amount includes the cash payments for several Permian Basin acquisitions, the acquisition of the Vulcan chlor-alkali manufacturing facilities and the payments to re-enter Libya and to assume operations of the Mukhaizna field in Oman. These were partially offset by the cash proceeds from the sale of the Premcor-Valero shares and the Lyondell shares.

The 2004 amount includes the purchase of a pipeline and gathering system in the Permian Basin and a $204 million advance to the Elk Hills Power LLC (EHP) equity investment, which EHP used to repay a portion of its debt.

The 2003 amount includes several Permian Basin acquisitions totaling $317 million.

Also, see the "Capital Expenditures" section below.


In millions	2005			2004			2003
Net cash used by financing activities	$	(1,186	)	$	(824	)	$	(516	)

The 2005 amount includes net debt payments of approximately $900 million.

The 2004 amount includes $466 million paid to redeem the trust preferred securities in January 2004 and $159 million paid to redeem Occidental's 6.5-percent senior notes.

The 2003 amount includes net debt repayments of $334 million.

Occidental paid common stock dividends of $483 million in 2005, $424 million in 2004 and $392 million in 2003.


Capital Expenditures In millions	2005		2004		2003
Oil and Gas	$	2,236	$	1,649	$	1,237
Chemical ^(a)		173		155		344
Corporate and Other	14		39		19
TOTAL ^(b)	$	2,423	$	1,843	$	1,600

(a)	The 2003 amount includes $180 million for the purchase of a previously leased facility in LaPorte, Texas and $44 million related to the exercise of purchase options for certain leased railcars.
(b)	Excludes significant acquisitions individually discussed in this report.

Occidental’s capital spending estimate for 2006 is approximately $3.0 billion. Most of the capital spending will be allocated to oil and gas exploration, production and development activities in Elk Hills, the Permian Basin, Oman, Qatar and the Dolphin Project.

Commitments at December 31, 2005, for major capital expenditures during 2006 and thereafter were approximately $804 million. Occidental will fund these commitments and capital expenditures with cash from operations.

OFF-BALANCE-SHEET ARRANGEMENTS

In the course of its business activities, Occidental pursues a number of projects and transactions to meet its core business objectives. The accounting and financial statement treatment of these transactions is a result of the varying methods of funding employed. Occidental also makes commitments on behalf of unconsolidated entities. These transactions, or groups of transactions, are recorded in compliance with generally accepted accounting principles and, unless otherwise noted, are not reflected on Occidental’s balance sheets. The following is a description of the business purpose and nature of these transactions.

Dolphin Project

See "Oil and Gas Segment — Business Review — Middle East" and "Liquidity and Capital Resources" for further information.

Ecuador

In Ecuador, Occidental has a 14-percent interest in the OCP oil export pipeline. As of December 31, 2005, Occidental’s net investment and advances to the project totaled $73 million. Occidental reports this investment in its consolidated statements using the equity method of accounting. The project was funded in part by senior project debt. The senior project debt is to be repaid with the proceeds of ship-or-pay tariffs of certain upstream producers in Ecuador, including Occidental. Under their ship-or-pay commitments, Occidental and the other upstream producers have each assumed their respective share of project-specific risks, including operating risk, political risk and force-majeure risk. Occidental would be required to make an advance tariff payment in the event of prolonged force majeure, upstream expropriation events, bankruptcy of the pipeline company or its parent company, abandonment of the project, termination of an investment guarantee agreement with Ecuador, or certain defaults by Occidental. This advance tariff would be used by the pipeline company to service or prepay project debt. At December 31, 2005, Occidental’s obligation relating to the pipeline company’s senior project debt totaled $100 million, and Occidental's obligations relating to performance bonds totaled $14 million. Occidental's overall obligations will decrease with the reduction of the pipeline company’s senior project debt.

Leases

Occidental has entered into various operating-lease agreements, mainly for railcars, power plants, manufacturing facilities and office space. Occidental leases assets when it offers greater operating flexibility. Lease payments are expensed mainly as cost of sales. See the Contractual Obligations table below.

Guarantees

Occidental has entered into various guarantees including performance bonds, letters of credit, indemnities, commitments and other forms of guarantees provided by Occidental to third parties, mainly to provide assurance that OPC and/or its subsidiaries and affiliates will meet their various obligations (guarantees).

At December 31, 2005, the notional amount of the guarantees was approximately $575 million. Of this amount, approximately $475 million relates to Occidental’s guarantee of equity investees’ debt and other commitments. The debt guarantees and other commitments primarily relate to the Dolphin Energy equity investment and the investment in the Ecuador OCP pipeline, which are discussed above. The remaining $100 million relates to various indemnities and guarantees provided to third parties.

Contractual Obligations

The table below summarizes and cross-references certain contractual obligations that are reflected in the Consolidated Balance Sheets and/or disclosed in the accompanying Notes.


			Payments Due by Year
Contractual Obligations (in millions)	Total		2006		2007 to 2008		2009 to 2010		2011 and thereafter
Consolidated
Balance Sheet
Long-term debt
(Note 6) ^(a)	$	2,910	$	46	$	562	$	785	$	1,517
Capital leases
(Note 7)		37		1		2		2		32
Other liabilities ^{(b, c)}		5,058		3,548		790		316		404
Other Obligations
Operating leases
(Note 7) ^(d)		1,325		131		207		162		825
Purchase
obligations ^{(e, f)}	7,739		1,299		2,111		1,680		2,649
TOTAL	$	17,069	$	5,025	$	3,672	$	2,945	$	5,427

(a)	Excludes unamortized interest swap net gains and unamortized debt discounts.
(b)	Includes obligations under postretirement benefit and deferred compensation plans.
(c)	Other liabilities include accounts payable and certain accrued liabilities.
(d)	Amounts have not been reduced for sublease rental income.
(e)	Includes long-term purchase contracts and purchase orders and contracts for goods and services used in manufacturing and producing operations in the normal course of business. Some of these arrangements involve take-or-pay commitments but they do not represent debt obligations. Due to their long-term nature, purchase contracts with terms greater than 5 years are discounted using a 6-percent discount rate.
(f)	Amounts exclude purchase obligations related to oil and gas marketing and trading activities where an offsetting sales position exists.

LAWSUITS, CLAIMS COMMITMENTS CONTINGENCIES AND RELATED MATTERS

OPC and certain of its subsidiaries have been named in a substantial number of lawsuits, claims and other legal proceedings. These actions seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. OPC and certain of its subsidiaries also have been named in proceedings under the 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 and civil penalties; however, Occidental is usually one of many companies in these proceedings and has to date been successful in sharing response costs with other financially sound companies. With respect to all such lawsuits, claims and proceedings, including environmental proceedings, Occidental accrues reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated.

Since April 2004, OxyChem has been served with eight lawsuits filed in Nicaragua by approximately 2,200 individual plaintiffs. These individuals allege that they have sustained several billion dollars of personal injury damages as a result of their alleged exposure to a pesticide. OxyChem is aware of, but has not been served in, 20 additional cases in Nicaragua, which Occidental understands make similar allegations. OxyChem has no assets in Nicaragua and, in the opinion of management, these claims are without merit because, among other things, OxyChem believes that none of the pesticide it manufactured was ever sold or used in Nicaragua. Under the applicable Nicaraguan statute, defendants are required to pay pre-trial deposits so large as to effectively prohibit defendants from participating fully in their defense. In previous situations, involving other defendants, Nicaraguan courts have proceeded to enter significant judgments against the defendants under that statute. OxyChem has filed a response to the complaints contesting jurisdiction without posting such pre-trial deposit. In December 2004, the judge in one of the cases (the "Osorio Case"), ruled the court had jurisdiction over the defendants, including OxyChem, and that the plaintiffs had waived the requirement of the pre-trial deposit. OxyChem has appealed that portion of the ruling relating to the jurisdiction of the Nicaraguan courts. Thereafter, the trial court ordered defendants, including OxyChem, to file an answer. In order to preserve its jurisdictional defense, OxyChem elected not to make a substantive appearance in the case. In August 2005, the judge in the Osorio case entered judgment against several defendants, including OxyChem, for damages totaling approximately $97 million. In the opinion of management, any judgment rendered under the statute, including in the Osorio case, would be unenforceable in the United States.

In September 2004, Occidental received formal notification that Petroecuador, the state oil company of Ecuador, was initiating proceedings to determine if Occidental had violated either its Participation Contract for Block 15 or the Ecuadorian Hydrocarbons Law and whether the alleged violations constitute grounds for terminating the Participation Contract. Block 15 operations represent approximately 7 percent of Occidental's 2005 consolidated production, 4 percent of its proved consolidated reserves, and 2 percent of its total PP&E, net of accumulated DD&A. In August 2005, Petroecuador issued a report recommending that the Minister of Energy declare the termination of Occidental’s Participation Contract for Block 15. The principal allegation stated in the notice and the Petroecuador report is an assertion that Occidental should have obtained government approval for the farmout agreement entered into in 2000. In November 2005, the Minister of Energy, following the procedure set forth in the Ecuadorian Hydrocarbons Law, requested that Occidental respond to the allegations against it. In February 2006, Occidental submitted its response to the Minister of Energy, in which Occidental confirmed its belief that it has complied with all material obligations under the Participation Contract and Ecuadorian law, and that any termination of the contract based upon the stated allegations would be unfounded and would constitute an unlawful expropriation. Occidental has been cooperating with the Ecuadorian authorities in these proceedings, and will continue to strive for an

amicable resolution. Occidental currently is unable to determine the outcome of these proceedings, but if there were to be a negotiated settlement, it is probable that the terms would effectively reduce the future profitability of Block 15 operations. See also "Off-Balance-Sheet Arrangements — Ecuador" for information about the OCP pipeline.

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. Disputes may arise during the course of such audits as to facts and matters of law. In May 2005, Occidental entered into a closing agreement with the IRS resolving certain foreign tax credit issues as part of the IRS audit of tax years 1997-2000. The closing agreement was completed after an extensive IRS review of various complex tax issues and negotiations between Occidental and the IRS. As a result of the closing agreement, Occidental recorded a tax benefit of $619 million in 2005 for the reversal of tax reserves that were previously established for those foreign tax credit issues. In addition, Occidental recorded a tax benefit of $335 million in 2005 due to the reversal of tax reserves no longer required as United States corporate returns for tax years 1998-2000 became closed due to the lapsing of the statute of limitations. These tax benefits did not have a significant current cash effect.

Occidental has entered into agreements providing for future payments to secure terminal and pipeline capacity, drilling services, electrical power, steam and certain chemical raw materials. See Note 9 of the Consolidated Financial Statements for further discussion. See “Off-Balance-Sheet Arrangements — Contractual Obligations” for further information.

Occidental has certain other commitments under contracts, guarantees and joint ventures, including purchase commitments for goods and services at market-related prices and certain other contingent liabilities. See “Off-Balance-Sheet Arrangements” for further information. Some of these commitments, although not fixed or determinable, involve capital expenditures and are part of the $3.0 billion capital expenditures estimated for 2006.

Occidental has indemnified various parties against specified liabilities that 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 of December 31, 2005, Occidental is not aware of circumstances that would lead to future indemnity claims against it for material amounts in connection with these transactions.

It is impossible at this time to determine the ultimate liabilities that OPC and its subsidiaries may incur resulting from any lawsuits, claims and proceedings, audits, commitments, contingencies and related matters. If these matters were to be ultimately resolved unfavorably at amounts substantially exceeding Occidental’s reserves, an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect upon Occidental’s consolidated financial position or results of operations. However, after taking into account reserves, management does not expect the ultimate resolution of any of these matters to have a material adverse effect upon Occidental’s consolidated financial position or results of operations.

ENVIRONMENTAL LIABILITIES AND EXPENDITURES

Occidental’s operations in the United States are subject to stringent federal, state and local laws and regulations relating to improving or maintaining environmental quality. Foreign operations also are subject to environmental protection laws. Costs associated with environmental compliance have increased over time and are expected to rise in the future. Environmental expenditures related to current operations are factored into the overall business planning process and are considered an integral part of production in manufacturing quality products responsive to market demand.

Environmental Remediation

The laws that require or address environmental remediation may apply retroactively to past waste disposal practices and releases. In many cases, the laws apply regardless of fault, legality of the original activities or current ownership or control of sites. OPC or certain of its subsidiaries are currently participating in environmental assessments and cleanups under these laws at federal Superfund sites, comparable state sites and other domestic and foreign remediation sites, including Occidental facilities and previously owned sites. Also, OPC and certain of its subsidiaries have been involved in a substantial number of governmental and private proceedings involving historical practices at various sites including, in some instances, having been named in proceedings under CERCLA and similar federal, state and local environmental laws. These proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages and civil penalties.

Occidental manages its environmental remediation efforts through a wholly owned subsidiary, Glenn Springs Holdings, Inc., which reports its results directly to Occidental’s corporate management.

The following table presents Occidental’s environmental remediation reserves at December 31, 2005, 2004 and 2003 grouped by three categories of environmental remediation sites:


$ amounts in millions	2005			2004			2003
	# of Sites	Reserve Balance		# of Sites	Reserve Balance		# of Sites	Reserve Balance
CERCLA & equivalent sites	128	$	236	125	$	239	131	$	240
Active facilities	18		114	16		75	13		79
Closed or sold facilities	39	68		39	61		39	53
TOTAL	185	$	418	180	$	375	183	$	372

The following table shows environmental reserve activity for the past three years:


In millions	2005			2004			2003
Balance - Beginning of Year	$	375		$	372		$	393
Increases to provision including interest accretion		63			60			64
Changes from acquisitions		45			6			—
Payments		(71	)		(63	)		(83	)
Other	6			—			(2		)
Balance — End of Year	$	418		$	375		$	372

Occidental expects to expend funds equivalent to about half of the current environmental reserve over the next three years and the balance over the next ten or more years. Occidental believes it is reasonably possible that it will continue to incur additional liabilities beyond those recorded for environmental remediation at these and other sites. The range of reasonably possible loss for existing environmental remediation matters could be up to $420 million beyond the amount accrued.

For management’s opinion, refer to the "Lawsuits, Claims, Commitments, Contingencies and Related Matters" section above.

CERCLA and Equivalent Sites

At December 31, 2005, OPC or certain of its subsidiaries have been named in 128 CERCLA or state equivalent proceedings, as shown below.


Description ($ amounts in millions)	# of Sites	Reserve Balance
Minimal/No Exposure ^(a)	105	$	4
Reserves between $1-$10 MM	15		44
Reserves over $10 MM	8	188
TOTAL	128	$	236

(a)

Includes 28 sites for which Maxus Energy Corporation has retained the liability and indemnified Occidental, 7 sites where Occidental has denied liability without challenge, 57 sites where Occidental’s reserves are less than $50,000 each, and 13 sites where reserves are between $50,000 and $1 million each.

The eight sites with individual reserves over $10 million in 2005 include a former copper mining and smelting operation in Tennessee, two closed landfills in western New York, groundwater treatment facilities at four closed chemical plants (Montague, Michigan, Hicksville, New York, western New York and Tacoma, Washington) and replacement of a municipal drinking water treatment plant in western New York.

Active Facilities

Certain subsidiaries of OPC are currently addressing releases of substances from past operations at 18 active facilities. Five facilities — a chemical plant in Louisiana, a phosphorus recovery operation in Tennessee, a chemical plant in Texas, a chemical plant in Kansas and certain oil and gas properties in the southwestern United States — account for 76 percent of the reserves associated with these facilities.

Closed or Sold Facilities

There are 39 sites formerly owned or operated by certain subsidiaries of OPC that have ongoing environmental remediation requirements in which Occidental or its subsidiaries are involved. Four sites account for 63 percent of the reserves associated with this group. The four sites are: an active refinery in Louisiana where Occidental indemnifies the current owner and operator for certain remedial actions, a water treatment facility at a former coal mine in Pennsylvania, a closed OxyChem chemical plant in Pennsylvania and a water treatment facility at a former OxyChem chemical plant in North Carolina.

Environmental Costs

Occidental’s costs, some of which may include estimates, relating to compliance with environmental laws and regulations, are shown below for each segment:


In millions	2005		2004		2003
Operating Expenses
Oil and Gas	$	71	$	54	$	40
Chemical	67		59		55
	$	138	$	113	$	95
Capital Expenditures
Oil and Gas	$	47	$	48	$	98
Chemical	21		12		15
	$	68	$	60	$	113
Remediation Expenses
Corporate	$	62	$	59	$	63

Operating expenses are incurred on a continual basis. Capital expenditures relate to longer-lived improvements in currently operating facilities. Remediation expenses relate to existing conditions caused by past operations and do not contribute to current or future revenue generation. Although total costs may vary in any one year, over the long term, segment operating and capital expenditures for environmental compliance generally are expected to increase.

Occidental presently estimates that capital expenditures for environmental compliance will be approximately $79 million for 2006 and $77 million for 2007.

FOREIGN INVESTMENTS

Portions of Occidental’s assets outside North America are exposed to political and economic risks. Occidental conducts its financial affairs so as to mitigate its exposure against those risks. At December 31, 2005, the carrying value of Occidental’s assets in countries outside North America aggregated approximately $5.2 billion, or approximately 20 percent of Occidental’s total assets at that date. Of such assets, approximately $3.9 billion are located in the Middle East/North Africa, approximately $1.0 billion are located in Latin America, and substantially all of the remainder are located in the Other Eastern Hemisphere region. For the year ended December 31, 2005, net sales outside North America totaled $4.4 billion, or approximately 29 percent of total net sales.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The process of preparing financial statements in accordance with GAAP requires the management of Occidental to make estimates and judgments regarding certain items and transactions. It is possible that materially different amounts could be recorded if these estimates and judgments change or if the actual results differ from these estimates and judgments. Occidental considers the following to be its most critical accounting policies and estimates that involve the judgment of Occidental’s management. There has been no material change to these policies over the past three years. The selection and development of these critical accounting policies and estimates have been discussed with the Audit Committee of the Board of Directors.

Oil and Gas Properties

Occidental uses the successful efforts method to account for its oil and gas properties. Under this method, costs of acquiring properties, costs of drilling successful exploration wells and development costs are capitalized. The costs of exploratory wells are initially capitalized pending a determination of whether proved reserves have been found. At the completion of drilling activities, the costs of exploratory wells remain capitalized if a determination is made that proved reserves have been found. If no proved reserves have been found, the costs of each of the related exploratory wells are charged to expense. In some cases, a determination of proved reserves cannot be made at the completion of drilling, requiring additional testing and evaluation of the wells. Occidental's practice is to expense the costs of such exploratory wells if a determination of proved reserves has not been made within a twelve-month period after drilling is complete. Occidental has no proved oil and gas reserves for which the determination of commercial viability is subject to the completion of major additional capital expenditures. Annual lease rentals and exploration, geological, geophysical and seismic costs are expensed as incurred.

Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and NGLs that geological and engineering data demonstrate, with reasonable certainty, can be recovered in future years from known reservoirs under existing economic and operating conditions considering future production and development costs.

Several factors could change Occidental’s recorded oil and gas reserves. Occidental receives a share of production from PSCs to recover its costs and an additional share for profit. Occidental’s share of production from these contracts decreases when oil prices rise and increases when oil prices decline. Overall, Occidental’s net economic benefit from these contracts is greater at higher oil prices. In other contractual arrangements, sustained lower product prices may lead to a situation where production of proved reserves becomes uneconomical. 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 a reduction in the quantity of recorded proved reserves. PSCs also affect reserves. As prices increase, Occidental's share of proved recorded reserves decreases while a decrease in price causes recorded proved reserves to increase. An additional factor that could result in a change of proved reserves is the reservoir decline rates being different from those assumed when the reserves were initially recorded. Occidental’s revisions to proved reserves were negative for 2005 and amounted to less than 2 percent of the total reserves for the year. The negative revisions in 2005 were primarily a result of PSC price effects. In 2004 and 2003, revisions to proved reserves were positive and amounted to less than 2 percent of the total reserves for each year. Additionally, Occidental is required to perform impairment tests pursuant to Statement of Financial Accounting Standards (SFAS) No. 144 generally when prices decline and/or reserve estimates change significantly. There have been no impairments of reserves over the past three years.

If Occidental’s consolidated oil and gas reserves were to change based on the factors mentioned above, the most significant impact would be on the depreciation and depletion rate. For example, a 5-percent increase in the amount of consolidated oil and gas reserves would change the rate from $6.13 per barrel to $5.82 per barrel, which would increase pre-tax income by $61 million annually. A 5-percent decrease in the oil and gas reserves would change the rate from $6.13 per barrel to $6.43 per barrel and would result in a decrease in pre-tax income of $61 million annually.

DD&A of oil and gas producing properties is determined by the unit-of-production method and could change with revisions to estimated proved reserves. The change in the DD&A rate over the past three years due to revisions of previous proved reserve estimates has been immaterial.

A portion of the carrying value of Occidental’s oil and gas properties is attributable to unproved properties. At December 31, 2005, the capitalized costs attributable to unproved properties, net of accumulated valuation allowance, were $788 million. These costs are not currently being depreciated or depleted. As exploration and development work progresses and the reserves on these properties are proven, capitalized costs attributable to the properties will be subject to depreciation and depletion. If the exploration and development work were to be unsuccessful, the capitalized costs of the properties related to this unsuccessful work would be expensed in the year in which the determination was made. The timing of any writedowns of these unproven properties, if warranted, depends upon the nature, timing and extent of future exploration and development activities and their results. Occidental believes its exploration and development efforts will allow it to realize the unproved property balance.

Chemical Assets

The most critical accounting policy affecting Occidental’s chemical assets is the determination of the estimated useful lives of its PP&E. Occidental's chemical plants are depreciated using either the unit-of-production or straight-line method based upon the estimated useful life of the facilities. The estimated useful lives of Occidental’s chemical assets, which range from 3 years to 50 years, are used to compute depreciation expense and are also used for impairment tests. The estimated useful lives used for the chemical facilities are based on the assumption that Occidental will provide an appropriate level of annual expenditures to ensure productive capacity is sustained. Without these continued expenditures, the useful lives of these plants could significantly decrease. Other factors that could change the estimated useful lives of Occidental’s chemical plants include sustained higher or lower product prices, which are particularly affected by both domestic and foreign competition, feedstock costs, energy prices, environmental regulations, competition and technological changes. Over the prior three years, the change in the depreciation rate due to changes in estimated useful lives has been immaterial.

Occidental performs impairment tests on its assets whenever events or changes in circumstances lead to a reduction in the estimated useful lives or estimated future cash flows that would indicate that the carrying amount may not be recoverable, or when management’s plans change with respect to those assets. Occidental compares the undiscounted future cash flows of an asset to its carrying value. The key factors that could significantly affect future cash flows are future product prices, which are particularly affected by both domestic and foreign competition, feedstock costs, energy costs, significantly increased regulation and remaining estimated useful life.

Due to a temporary decrease in demand for some of its products, Occidental temporarily idled an EDC plant in June 2001 and a chlor-alkali plant in December 2001. Subsequent to the purchase of the Vulcan chemical assets, Occidental reviewed all of its chemical assets and decided to close its least competitive plants and upgrade the remaining operations. As a result of this review, Occidental recorded a $139 million pre-tax charge for the write-off of these two previously idled chemical plants and one currently operated plant and a pre-tax additional charge of $20 million for the writedown of another chemical plant in 2005.

Occidental's net PP&E for chemicals is approximately $2.6 billion and its depreciation expense for 2006 is expected to be approximately $240 million. If the estimated useful lives of Occidental’s chemical plants were to decrease based on the factors mentioned above, the most significant impact would be on depreciation expense. For example, a reduction in the remaining useful lives of one year would increase depreciation and reduce pre-tax earnings by approximately $21 million per year.

Environmental Liabilities and Expenditures

Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Reserves for estimated costs that relate to existing conditions caused by past operations and that do not contribute to current or future revenue generation are recorded when environmental remedial efforts are probable and the costs can be reasonably estimated. In determining the reserves and the reasonably possible range of loss, Occidental refers to currently available information, including relevant past experience, available technology, regulations in effect, the timing of remediation and cost-sharing arrangements. The environmental reserves are based on management’s estimate of the most likely cost to be incurred and are reviewed periodically and adjusted as additional or new information becomes available. Environmental reserves are recorded on a discounted basis only when a reserve is initially established and the aggregate amount of the estimated costs for a specific site and the timing of cash payments are reliably determinable. The reserve methodology for a specific site is not modified once it has been established. Recoveries and reimbursements are recorded in income when receipt is probable. For the years ended December 31, 2005 and 2004, Occidental has not accrued any reimbursements or indemnification recoveries for environmental remediation matters as assets.

Many factors could result in changes to Occidental’s environmental reserves and reasonably possible range of loss. The most significant are:

Ø	The original cost estimate may have been inaccurate.
Ø	Modified remedial measures might be necessary to achieve the required remediation results. Occidental generally assumes that the remedial objective can be achieved using the most cost-effective technology reasonably expected to achieve that objective. Such technologies may include air sparging or phyto-remediation of shallow groundwater, or limited surface soil removal or in-situ treatment producing acceptable risk assessment results. Should such remedies fail to achieve remedial objectives, more intensive or costly measures may be required.
Ø	The remedial measure might take more or less time than originally anticipated to achieve the required contaminant reduction. Site-specific time estimates can be affected by factors such as groundwater capture rates, anomalies in subsurface geology, interactions between or among water-bearing zones and non-water-bearing zones, or the ability to identify and control contaminant sources.
Ø	The regulatory agency might ultimately reject or modify Occidental’s proposed remedial plan and insist upon a different course of action.

Additionally, other events might occur that could affect Occidental’s future remediation costs, such as:

Ø	The discovery of more extensive contamination than had been originally anticipated. For some sites with impacted groundwater, accurate definition of contaminant plumes requires years of monitoring data and computer modeling. Migration of contaminants may follow unexpected pathways along geologic anomalies that could initially go undetected. Additionally, the size of the area requiring remediation may change based upon risk assessment results following site characterization or interim remedial measures.
Ø	Improved remediation technology might decrease the cost of remediation. In particular, for groundwater remediation sites with projected long-term operation and maintenance, the development of more effective treatment technology, or acceptance of alternative and more cost-effective treatment methodologies such as bioremediation, could significantly affect remediation costs.
Ø	Laws and regulations might change to impose more or less stringent remediation requirements.

At sites involving multiple parties, Occidental provides environmental reserves based upon its expected share of liability. When other parties are jointly liable, the financial viability of the parties, the degree of their commitment to participate and the consequences to Occidental of their failure to participate are evaluated when estimating Occidental's ultimate share of liability. Based on these factors, Occidental believes that it will not be required to assume a share of liability of other potentially responsible parties, with whom it is alleged to be jointly liable, in an amount that would have a material effect on Occidental’s consolidated financial position, liquidity or results of operations.

Most cost sharing arrangements with other parties fall into one of the following three categories:

Category 1: CERCLA or state-equivalent sites wherein Occidental and other alleged potentially responsible parties share the cost of remediation in accordance with negotiated or prescribed allocations;

Category 2: Oil and gas joint ventures wherein each joint venture partner pays its proportionate share of remedial cost; and

Category 3: Contractual arrangements typically relating to purchases and sales of property wherein the parties to the transaction agree to methods of allocating the costs of environmental remediation.

In all three of these categories, Occidental records as a reserve its expected net cost of remedial activities, as adjusted by recognition for any nonperforming parties.

In addition to the costs of investigating and implementing remedial measures, which often take in excess of ten years at CERCLA sites, Occidental’s reserves include management’s estimates of the cost of operation and maintenance of remedial systems. To the extent that the remedial systems are modified over time in response to significant changes in site-specific data, laws, regulations, technologies or engineering estimates, Occidental reviews and changes the reserves accordingly on a site-specific basis.

If the environmental reserve balance were to either increase or decrease based on the factors mentioned above, the amount of the increase or decrease would be immediately recognized in earnings. For example, if the reserve balance were to decrease by 10 percent, Occidental would record a pre-tax gain of $42 million. If the reserve balance were to increase by 10 percent, Occidental would record an additional remediation expense of $42 million.

Other Loss Contingencies

Occidental is involved with numerous lawsuits, claims, proceedings and audits in the normal course of its operations. Occidental records a loss contingency for these matters when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss 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 so that they are adequately reserved on the balance sheet.

These reserves 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 laws or regulations, changes in management’s plans or intentions, the outcome of legal proceedings, settlements or other factors.

SIGNIFICANT ACCOUNTING CHANGES

Listed below are significant changes in accounting principles.

EITF Issue No. 04-13

In September 2005, the Emerging Issues Task Force (EITF) finalized the provisions of EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”, which provides accounting guidance about whether buy/sell arrangements should be accounted for at historical cost and whether these arrangements should be reported on a gross or net basis. Buy/sell arrangements typically are contractual arrangements where the buy and sell agreements are entered into in contemplation of one another with the same counterparty. Occidental reports all buy/sell arrangements on a net basis and at historical cost. This EITF is effective in the first interim period beginning after March 15, 2006, and Occidental will prospectively adopt this statement in the second quarter of 2006. Occidental is currently assessing the effect of EITF Issue No. 04-13, but does not expect it to have a material effect on its financial statements.

FIN No. 47

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations.” FIN 47 specifies the accounting treatment for conditional asset retirement obligations under the provisions of SFAS No. 143. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Occidental has identified conditional asset retirement obligations at a certain number of its facilities that are mainly related to plant decommissioning. Under FIN 47, which Occidental adopted on December 31, 2005, Occidental is required to record the fair value of these conditional liabilities if they can be reasonably estimated. However, Occidental believes that there is an indeterminate settlement date for these asset retirement obligations because the range of time over which Occidental may settle these obligations is unknown or cannot be estimated. Therefore, Occidental cannot reasonably estimate the fair value of these liabilities. Occidental will recognize these conditional asset retirement obligations in the periods in which sufficient information becomes available to reasonably estimate their fair values.

SFAS No. 123R

On July 1, 2005, Occidental early adopted the fair value recognition provisions of SFAS No. 123R (SFAS 123R), “Share-Based Payments”, under the modified prospective transition method. Since most of Occidental’s existing stock-based compensation was already being recorded in the income statement, Occidental decided to early adopt SFAS 123R, so that the remaining awards would be accounted for in a similar manner. Prior to July 1, 2005, Occidental applied the Accounting Principles Board (APB) Opinion No. 25 intrinsic value accounting method for its stock incentive plans. Under the modified prospective transition method, the fair value recognition provisions apply only to new awards or awards modified after July 1, 2005. Additionally, the fair value of existing unvested awards at the date of adoption is recorded in compensation expense over the remaining requisite service period. Results from prior periods have not been restated. As a result of adopting this statement in the third quarter of 2005, Occidental recorded a $3 million after-tax credit as a cumulative effect of a change in accounting principles. See Note 12 to the Consolidated Financial Statements for more information.

FASB Staff Position No. (FSP) FAS 19-1

In April 2005, the FASB issued FASB Staff Position No. (FSP) FAS 19-1, “Accounting for Suspended Well Costs.” FSP FAS 19-1 provides new accounting guidance that specifies when successful efforts companies can capitalize exploratory well costs. The guidance also requires new disclosures related to these costs. FSP FAS 19-1 is effective in the first reporting period beginning after April 4, 2005, and will be applied prospectively to existing and new exploratory well costs. Occidental adopted this statement effective July 1, 2005, and there was no material effect on the financial statements upon adoption. See Note 1 to the Consolidated Financial Statements for the new disclosures.

SFAS No. 153

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29." SFAS No. 153 specifies the criteria required to record a nonmonetary asset exchange using carryover basis. SFAS No. 153 is effective for nonmonetary asset exchanges occurring after July 1, 2005. Occidental adopted this statement in the third quarter of 2005 and there was no material effect on the financial statements upon adoption.

SFAS No. 151

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4." SFAS No. 151 clarifies the accounting treatment for various inventory costs and overhead allocations. SFAS No. 151 is effective for inventory costs incurred after July 1, 2005. Occidental adopted this statement in the third quarter of 2005 and it did not have a material effect on the financial statements when adopted.

FSP FAS 106-2

In May 2004, the FASB issued FSP FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which specifies the accounting and disclosure requirements for the prescription drug benefits that are available under this new plan. Occidental adopted the disclosure provisions of this pronouncement in the second quarter of 2004. See Note 13 to the Consolidated Financial Statements for more information.

FIN 46-R (Revised)

In December 2003, the FASB revised FIN 46 to exempt certain entities from its requirements and to clarify certain issues arising during the initial implementation of FIN 46. Occidental adopted the revised interpretation in the first quarter of 2004 and it did not have a material impact on the financial statements when adopted.

SFAS No. 143

Effective January 1, 2003 Occidental adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. See Note 1 to the Consolidated Financial Statements for more information.

The initial adoption of SFAS No. 143 on January 1, 2003 resulted in an after-tax charge of $50 million, which was recorded as a cumulative effect of a change in accounting principles. The adoption increased net PP&E by $73 million, increased asset retirement obligations by $151 million and decreased deferred tax liabilities by $28 million.

EITF Issue No. 02-3

In October 2002, Occidental adopted certain provisions of EITF Issue No. 02-3, "Issues involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." As a result of adopting EITF Issue No. 02-3, there were no changes to gross margins, net income, cash flow, or earnings per share for any period; however, net sales and cost of sales were reduced by equal and offsetting amounts to reflect the adoption of this requirement.

From 1999 to 2002, Occidental accounted for certain energy-trading contracts in accordance with EITF Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF Issue No. 98-10 required that all energy-trading contracts must be marked to fair value with gains and losses included in earnings, whether the contracts were derivatives or not. In October 2002, the EITF rescinded EITF Issue No. 98-10 thus precluding mark-to-market accounting for all energy-trading contracts that are not derivatives and fair value accounting for inventories purchased from third parties. Also, the rescission requires derivative gains and losses to be presented net on the income statement, whether or not they are physically settled, if the derivative instruments are held for trading purposes. Occidental adopted this accounting change in the first quarter of 2003 and recorded an $18 million after-tax charge as a cumulative effect of a change in accounting principles.

DERIVATIVE ACTIVITIES AND MARKET RISK

General

Occidental's market risk exposures relate primarily to commodity prices and, to a lesser extent, interest rates and foreign currency exchange rates. Occidental periodically enters into derivative instrument transactions to reduce these price and rate fluctuations. A derivative is an instrument that, among other characteristics, derives its value from changes in another instrument or variable.

In general, the fair value recorded for derivative instruments is based on quoted market prices, dealer quotes and the Black Scholes or similar valuation models.

Commodity Price Risk

General

Occidental’s results are sensitive to fluctuations in crude oil and natural gas prices. Based on current levels of production, if oil prices vary overall by $1 per barrel, it would have an estimated annual effect on pre-tax income of approximately $150 million. If natural gas prices vary by $0.25 per Mcf, it would have an estimated annual effect on pre-tax income of approximately $42 million. If production levels change in the future, the sensitivity of Occidental’s results to oil and gas prices also would change.

Occidental’s results are also sensitive to fluctuations in chemical prices; however, changes in cost usually offset part of the effect of price changes on margins. If chlorine and caustic soda prices vary by $10/ton, it would have approximately a $15 million and $30 million, respectively, pre-tax annual effect on income. If PVC prices vary by $.01/lb, it would have approximately a $25 million pre-tax annual effect on income. If EDC prices vary by $10/ton, it would have approximately a $5 million pre-tax annual effect on income. Historically, price changes either precede or follow raw material and feedstock price changes; therefore, the margin improvement of price changes can be mitigated. According to Chemical Market Associates, Inc., December 2005 average contract prices were: chlorine—$358/ton, caustic soda—$455/ton, PVC—$0.645/lb and EDC—$250/ton.

Marketing and Trading Operations

Occidental periodically uses different types of derivative instruments to achieve the best prices for oil and gas. Derivatives are also used by Occidental to reduce its exposure to price volatility and to mitigate fluctuations in commodity-related cash flows. Occidental enters into low-risk marketing and trading activities through its separate marketing organization, which operates under established policy controls and procedures. With respect to derivatives used in its oil and gas marketing operations, Occidental utilizes a combination of futures, forwards, options and swaps to offset various physical transactions. Occidental's use of derivatives in marketing and trading activities relates primarily to managing cash flows from third-party purchases, which includes Occidental’s periodic gas storage activities.

Risk Management

Occidental conducts its risk management activities for energy commodities (which include buying, selling, marketing, trading, and hedging activities) under the controls and governance of its Risk Control Policy. The Chief Financial Officer and the Risk Management Committee, comprising members of Occidental's management, oversee these controls, which are implemented and enforced by the Trading Control Officer. The Trading Control Officer provides an independent and separate check on results of marketing and trading activities. Controls for energy commodities include limits on credit, limits on trading, segregation of duties, delegation of authority and a number of other policy and procedural controls.

Fair Value of Marketing and Trading Derivative Contracts

The following tables reconcile the changes in the net fair value of Occidental’s marketing and trading contracts, a portion of which are hedges, during 2005 and 2004 and segregate the open contracts at December 31, 2005 by maturity periods.


In millions	2005			2004
Fair value of contracts outstanding at
beginning of year	$	30		$	32
Losses (gains) on changes for contracts realized
or otherwise settled during the year		56			(94	)
Changes in fair value attributable to changes in
valuation techniques and assumptions		—			—
(Losses) gains or other changes in fair value	(543		) ^(a)	92
Fair value of contracts outstanding at end of year	$	(457	)	$	30

(a)	Primarily relates to production hedges.


	Maturity Periods
Source of Fair Value	2006			2007 to 2008			2009 to 2010			2011 and thereafter			Total Fair Value
Prices actively quoted	$	(42	)	$	(42	)	$	4		$	5		$	(75	)
Prices provided by
other external
sources		1			(15	)		7			(4	)		(11	)
Prices based on
models and other
valuation methods ^(a)	(42		)	(133		)	(137		)	(59		)	(371		)
TOTAL	$	(83	)	$	(190	)	$	(126	)	$	(58	)	$	(457	)

(a)

The underlying prices utilized for the 2006 and 2007 fair value calculation of the options are based on monthly NYMEX published prices. The underlying prices for years 2008 through 2011 are based on the year-end NYMEX published prices, as published monthly prices are not available. These prices are input into an industry standard options pricing model to determine fair value.

Production Hedges

During the first quarter of 2005, Occidental entered into a series of fixed price swaps and costless collar agreements that qualify as cash-flow hedges for the sale of its crude oil production. These hedges, which began in July 2005 and continue to the end of 2011, hedge less than 4 percent of Occidental’s 2005 crude oil production. Information about these cash-flow hedges, which are included in the total fair value of ($457) million in the table above, is presented in a tabular presentation below.


	Crude Oil Fixed Price Swaps		Crude Oil Costless Collars
(Volumes in MBL/day)	Daily Volume	Average Price	Daily Volume	Average Floor	Average Cap
2006	10	$41.61	6	$41.33	$48.05
2007	8	$40.04	7	$40.43	$45.21
2008	—	—	14	$34.07	$47.47
2009	—	—	13	$33.15	$47.41
2010	—	—	12	$33.00	$46.35
2011	—	—	12	$32.92	$46.27

($ millions)		Crude Oil Fixed Price Swaps		Crude Oil Costless Collars		Total
Fair Value Liability ^(a)		($142)		($362)		($504)

(a)	Fair value at December 31, 2005

Quantitative Information

Occidental uses value at risk to estimate the potential effects of changes in fair values of commodity-based derivatives and commodity contracts used in marketing and trading activities. This method determines the maximum potential negative short-term change in fair value with a 95-percent level of confidence. The marketing and trading value at risk was immaterial during all of 2005.

Interest Rate Risk

General

Occidental's exposure to changes in interest rates relates primarily to its long-term debt obligations. In 2005, Occidental terminated all of its interest-rate swaps that were accounted for as fair-value hedges. These hedges had effectively converted approximately $1.7 billion of fixed-rate debt to variable-rate debt. The fair value of the swaps at termination resulted in a gain of approximately $20 million, which is being amortized into income over the remaining life of the previously hedged debt. The amount of interest expense recorded in the income statement was lower, as a result of the swaps and amortization of the deferred gain, by approximately $21 million, $56 million and $58 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Occidental was a party to a series of forward interest-rate locks, which qualified as cash-flow hedges. The hedges were related to the construction of a cogeneration plant leased by Occidental that was completed in December 2002. The unamortized loss on the hedges at December 31, 2005 was approximately $19 million after-tax, which is recorded in accumulated OCI and is being recognized in earnings over the lease term of 26 years on a straight-line basis.

Certain of Occidental's equity investees have entered into additional derivative instruments that qualify as cash-flow hedges. Occidental reflects its proportionate share of these cash-flow hedges in OCI.

Tabular Presentation of Interest Rate Risk

In millions of U.S. dollars, except rates

The table below provides information about Occidental's debt obligations which are sensitive to changes in interest rates. Debt amounts represent principal payments by maturity date.


Year of Maturity	U.S. Dollar Fixed-Rate Debt		U.S. Dollar Variable-Rate Debt		Grand Total ^(a)
2006	$	46	$	—	$	46
2007		157		—		157
2008		405		—		405
2009		221		299		520
2010		265		—		265
2011		—		68		68
Thereafter	1,402		47		1,449
TOTAL	$	2,496	$	414	$	2,910
Average interest rate	7.38%		4.11%		6.91%
Fair Value	$	2,939	$	414	$	3,353

(a)	Excludes $4 million of unamortized debt discounts and $13 million of net unamortized gains related to the settled interest-rate swaps.

Credit Risk

Occidental’s energy contracts are spread among several counterparties. Creditworthiness is reviewed before doing business with a new counterparty and on an ongoing basis. Occidental monitors aggregated counterparty exposure relative to credit limits, and manages credit-enhancement issues. Credit exposure for each customer is monitored for outstanding balances, current month activity, and forward mark-to-market exposure and losses associated with credit risk have been immaterial.

Foreign Currency Risk

A few of Occidental’s foreign operations have currency risk. Occidental manages its exposure primarily by balancing monetary assets and liabilities and maintaining cash positions only at levels necessary for operating purposes. Most international crude oil sales are denominated in U.S. dollars. Additionally, all of Occidental’s oil and gas consolidated foreign entities have the U.S. dollar as the functional currency. At December 31, 2005 and 2004, Occidental had not entered into any foreign currency derivative instruments. The effect of exchange-rate transactions in foreign currencies is included in periodic income and is immaterial.

SAFE HARBOR DISCUSSION REGARDING OUTLOOK AND OTHER FORWARD-LOOKING DATA

Portions of this report, including Items 1 and 2 and the information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," including the information under the sub captions "Strategy," "Oil and Gas Segment — Industry Outlook," and "Chemical Segment — Industry Outlook," contain forward-looking statements 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," "anticipate," "plan," "intend," "believe," "expect" or similar expressions that convey the uncertainty of future events or outcomes generally identify 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 or otherwise. Risks that may affect Occidental’s results of operations and financial position appear in Part I, Item 1A “Risk Factors.”

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT'S ANNUAL ASSESSMENT OF AND REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Occidental Petroleum Corporation (Occidental) is responsible for establishing and maintaining adequate internal control over financial reporting. Occidental’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Occidental’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Occidental’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that Occidental’s receipts and expenditures are being made only in accordance with authorizations of Occidental’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Occidental’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of Occidental’s internal control system as of December 31, 2005 based on the criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that, as of December 31, 2005, Occidental’s system of internal control over financial reporting is effective.

Occidental’s independent auditors, KPMG LLP, have issued an attestation report on management’s assessment of Occidental’s internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS

To the Board of Directors and Stockholders

Occidental Petroleum Corporation:

We have audited the accompanying consolidated balance sheets of Occidental Petroleum Corporation and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Occidental Petroleum Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As explained in Note 4 to the consolidated financial statements, effective July 1, 2005, the Company changed its method of accounting for share-based payments. Effective January 1, 2003, the Company changed its method of accounting for inventories purchased from third parties and its method of accounting for asset retirement obligations. Effective April 1, 2003, the Company changed its method of accounting for the consolidation of variable interest entities. Effective July 1, 2003, the Company changed its method of accounting for certain financial instruments with characteristics of both liabilities and equity.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Occidental Petroleum Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Los Angeles, California

February 28, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders

Occidental Petroleum Corporation:

We have audited management's assessment, included in the accompanying Management’s Annual Assessment of and Report on Occidental’s Internal Control Over Financial Reporting, that Occidental Petroleum Corporation and its subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Occidental Petroleum Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 28, 2006 expressed an unqualified opinion on those consolidated financial statements.

Los Angeles, California

February 28, 2006

Consolidated Statements of Income

In millions, except per-share amounts

Occidental Petroleum Corporation

and Subsidiaries


For the years ended December 31,	2005			2004			2003
REVENUES
Net sales	$	15,208		$	11,368		$	9,240
Interest, dividends and other income		181			144			89
Gains on disposition of assets, net	870			1			32
	16,259			11,513			9,361
COSTS AND OTHER DEDUCTIONS
Cost of sales (excludes depreciation, depletion and amortization of
$1,445 in 2005, $1,263 in 2004 and $1,137 in 2003)		5,534			4,509			3,897
Selling, general and administrative and other operating expenses		1,415			1,008			852
Total depreciation, depletion and amortization		1,485			1,303			1,175
Environmental remediation		62			59			63
Exploration expense		337			219			139
Interest and debt expense, net	293			260			332
	9,126			7,358			6,458
INCOME BEFORE TAXES AND OTHER ITEMS		7,133			4,155			2,903
Provision for domestic and foreign income and other taxes		2,020			1,708			1,231
Minority interest		73			75			62
(Income) loss from equity investments		(232	)		(113	)		9
Gain on Lyondell stock issuance	—			(121		)	—
INCOME FROM CONTINUING OPERATIONS		5,272			2,606			1,601
Discontinued operations, net		6			(38	)		(6	)
Cumulative effect of changes in accounting principles, net	3			—			(68		)
NET INCOME	$	5,281		$	2,568		$	1,527
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations	$	13.07		$	6.59		$	4.17
Discontinued operations, net		0.01			(0.10	)		(0.01	)
Cumulative effect of changes in accounting principles, net	0.01			—			(0.18		)
BASIC EARNINGS PER COMMON SHARE	$	13.09		$	6.49		$	3.98
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations	$	12.89		$	6.50		$	4.12
Discontinued operations, net		0.01			(0.10	)		(0.01	)
Cumulative effect of changes in accounting principles, net	0.01			—			(0.18		)
DILUTED EARNINGS PER COMMON SHARE	$	12.91		$	6.40		$	3.93
DIVIDENDS PER COMMON SHARE	$	1.29		$	1.10		$	1.04

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Balance Sheets

In millions

Occidental Petroleum Corporation

and Subsidiaries


Assets at December 31,	2005			2004
CURRENT ASSETS
Cash and cash equivalents	$	2,189		$	1,199
Short-term investments		252			250
Trade receivables, net of reserves of $27 in 2005 and 2004		2,571			1,882
Receivables from joint ventures, partnerships and other		570			353
Inventories		735			545
Prepaid expenses and other	257			202
Total current assets	6,574			4,431
LONG-TERM RECEIVABLES, NET	377			239
INVESTMENTS IN UNCONSOLIDATED ENTITIES	1,209			1,727
PROPERTY, PLANT AND EQUIPMENT
Oil and gas segment, successful efforts method		22,275			18,314
Chemical segment		4,869			4,476
Corporate and other	478			469
		27,622			23,259
Accumulated depreciation, depletion and amortization	(10,088		)	(8,626		)
		17,534			14,633
OTHER ASSETS	414			361
	$	26,108		$	21,391

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Balance Sheets

In millions, except share amounts

Occidental Petroleum Corporation

and Subsidiaries


Liabilities and Stockholders’ Equity at December 31,	2005			2004
CURRENT LIABILITIES
Current maturities of long-term debt and capital lease liabilities	$	46		$	459
Accounts payable		2,069			1,557
Accrued liabilities		1,635			1,034
Dividends payable		147			110
Domestic and foreign income taxes	383			263
Total current liabilities	4,280			3,423
LONG-TERM DEBT, NET OF CURRENT MATURITIES AND UNAMORTIZED DISCOUNT	2,873			3,345
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred and other domestic and foreign income taxes		962			1,248
Other	2,621			2,498
	3,583			3,746
CONTINGENT LIABILITIES AND COMMITMENTS
MINORITY INTEREST	340			327
STOCKHOLDERS’ EQUITY
Common stock, $.20 par value; authorized 500 million shares;
outstanding shares: 2005 — 402,215,025 and 2004 — 396,727,424		80			79
Treasury stock: 2005 — 96,781 shares and 2004 — 0 shares		(8	)		—
Additional paid-in capital		4,908			4,652
Retained earnings		10,425			5,664
Accumulated other comprehensive income	(373		)	155
	15,032			10,550
	$	26,108		$	21,391

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Stockholders’ Equity

In millions

Occidental Petroleum Corporation

and Subsidiaries


	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2002	$	75	$	—		$	3,967	$	2,303		$	(27	)
Net income		—		—			—		1,527			—
Other comprehensive income, net of tax		—		—			—		—			77
Dividends on common stock		—		—			—		(300	)		—
Issuance of common stock		—		—			11		—			—
Exercises of options and other, net	2		—			294		—			—
Balance, December 31, 2003	$	77	$	—		$	4,272	$	3,530		$	50
Net income		—		—			—		2,568			—
Other comprehensive income, net of tax		—		—			—		—			105
Dividends on common stock		—		—			—		(434	)		—
Issuance of common stock		—		—			8		—			—
Exercises of options and other, net	2		—			372		—			—
Balance, December 31, 2004	$	79	$	—		$	4,652	$	5,664		$	155
Net income		—		—			—		5,281			—
Other comprehensive income, net of tax		—		—			—		—			(528	)
Dividends on common stock		—		—			—		(520	)		—
Issuance of common stock		—		—			16		—			—
Exercises of options and other, net		1		—			240		—			—
Purchases of treasury stock	—		(8		)	—		—			—
Balance, December 31, 2005	$	80	$	(8	)	$	4,908	$	10,425		$	(373	)

Consolidated Statements of Comprehensive Income

In millions


For the years ended December 31,	2005			2004		2003
Net income	$	5,281		$	2,568	$	1,527
Other comprehensive income(loss) items:
Foreign currency translation adjustments ^(a)		(13	)		3		38
Derivative mark-to-market adjustments ^(b)		(330	)		7		2
Minimum pension liability adjustments ^(c)		(1	)		—		13
Reclassification of realized gains ^(d)		(463	)		—		—
Unrealized gains on securities ^(e)	279			95		24
Other comprehensive (loss) income, net of tax	(528		)	105		77
Comprehensive income	$	4,753		$	2,673	$	1,604

(a)	Net of tax of $13, $(1) and $15 in 2005, 2004 and 2003, respectively.
(b)	Net of tax of $188, $4 and $1 in 2005, 2004 and 2003, respectively.
(c)	Net of tax of $0, $0 and $7 in 2005, 2004 and 2003, respectively.
(d)	Net of tax of $264 in 2005. Amount represents the recognition of the gain due to Valero Energy Corporation’s acquisition of Premcor, Inc. and the subsequent sale of the Valero shares.
(e)	Net of tax of $165, $51 and $13 in 2005, 2004 and 2003, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Cash Flows

In millions

Occidental Petroleum Corporation

and Subsidiaries


For the years ended December 31,	2005			2004			2003
CASH FLOW FROM OPERATING ACTIVITIES
Income from continuing operations	$	5,272		$	2,606		$	1,601
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation, depletion and amortization of assets		1,485			1,303			1,175
Reversal of tax reserves		(954	)		(47	)		—
Deferred income tax (benefit) provision		(75	)		170			65
Other noncash charges to income		881			467			319
Gains on disposition of assets, net		(870	)		(1	)		(32	)
(Income) loss from equity investments		(232	)		(113	)		9
Gain on Lyondell stock issuance		—			(121	)		—
Dry hole and impairment expense		242			159			80
Changes in operating assets and liabilities:
Increase in accounts and notes receivable		(689	)		(1,081	)		(223	)
Increase in inventories		(127	)		(94	)		(2	)
Increase in prepaid expenses and other assets		(37	)		(57	)		(48	)
Increase in accounts payable and accrued liabilities		489			725			84
Increase in current domestic and foreign income taxes		202			130			231
Other operating, net	(250		)	(168		)	(185		)
Net cash provided by operating activities	5,337			3,878			3,074
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures		(2,423	)		(1,843	)		(1,600	)
Sale of businesses and disposal of property, plant and equipment, net		185			9			70
Purchase of businesses, net		(2,126	)		(208	)		(351	)
Purchase of short-term investments		(185	)		(260	)		(122	)
Sale of short-term investments		183			120			12
Sales of equity investments and available-for-sale investments		1,122			—			—
Equity investments and other, net	83			(246		)	(140		)
Net cash used by investing activities	(3,161		)	(2,428		)	(2,131		)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from long-term debt		236			60			297
Payments of long-term debt and capital lease liabilities		(1,134	)		(239	)		(631	)
Proceeds from issuance of common stock		13			7			10
Purchase of treasury stock		(8	)		—			—
Repurchase of trust preferred securities		—			(466	)		(2	)
Cash dividends paid		(483	)		(424	)		(392	)
Stock options exercised		126			238			200
Excess tax benefits related to share-based payments		36			—			—
Other financing, net	28			—			2
Net cash used by financing activities	(1,186		)	(824		)	(516		)
Increase in cash and cash equivalents		990			626			427
Cash and cash equivalents—beginning of year	1,199			573			146
Cash and cash equivalents—end of year	$	2,189		$	1,199		$	573

The accompanying notes are an integral part of these consolidated financial statements.

Notes to Consolidated Financial Statements

Occidental Petroleum Corporation

and Subsidiaries

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

In these Notes, the term "Occidental" or "the Company" refers to Occidental Petroleum Corporation (OPC) and/or one or more entities where it owns a majority voting interest. Occidental is a multinational organization whose principal business segments are oil and gas and chemical. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas. The chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of OPC, entities in which it owns a majority voting interest, variable-interest entities (VIE) in which it is the primary beneficiary and its undivided interests in oil and gas exploration and production ventures. Occidental's proportionate share of oil and gas exploration and production ventures, in which it has a direct working interest, is accounted for by reporting its proportionate share of assets, liabilities, revenues, costs and cash flows within the relevant lines on the balance sheets, income statements and cash flow statements.

In addition, certain financial statements, notes and supplementary data for prior years have been reclassified to conform to the 2005 presentation.

INVESTMENTS IN UNCONSOLIDATED ENTITIES

Investments in unconsolidated entities include both equity method and available-for-sale investments. Amounts representing Occidental’s percentage interest in the underlying net assets of affiliates (excluding undivided interests in oil and gas exploration and production ventures) in which it does not have a majority voting interest but as to which it exercises significant influence, are accounted for under the equity method. Occidental records its share of gains or losses that arise from equity-method investee stock issuances in the income statement. Occidental reviews equity method investments for impairment whenever events or changes in circumstances indicate that an other-than-temporary decline in value has occurred. The amount of impairment, if any, is based on quoted market prices, where available, or other valuation techniques, including discounted cash flows.

Investments in which Occidental does not exercise significant influence are accounted for as available-for-sale investments and are carried at fair value, based on quoted market prices, with unrealized gains and losses reported in other comprehensive income (OCI), net of taxes, until such investment is realized. In disposal, the accumulated unrealized gain or loss included in OCI is transferred to income.

REVENUE RECOGNITION

Revenue is recognized from oil and gas production when title has passed to the customer, which occurs when the product is shipped. Revenue from marketing and trading activities is recognized on settled transactions, upon completion of contract terms and for physical deliveries upon title transfer. For unsettled transactions, contracts that meet specified accounting criteria are marked to market. Revenue from all marketing and trading activities, including revenue from buy/sell arrangements with the same counterparty, is reported on a net basis.

Revenue from chemical product sales is recognized when the product is shipped and title has passed to the customer. Prices are fixed at the time of shipment. Customer incentive programs provide for payments or credits to be made to customers based on the volume of product purchased over a defined period. Total customer incentive payments over a given period are estimated and recorded as a reduction to revenue ratably over the contract period. Such estimates are evaluated and revised as warranted.

RISKS AND UNCERTAINTIES

The process of preparing consolidated financial statements in conformity with United States generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the consolidated financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts, generally not by material amounts. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of Occidental’s financial position and results of operations.

Included in the accompanying consolidated balance sheet are deferred tax assets of $1.1 billion as of December 31, 2005, the noncurrent portion of which is netted against deferred income tax liabilities. Realization of these assets is dependent upon Occidental generating sufficient future taxable income. Occidental expects to realize the recorded deferred tax assets through future operating income and reversal of taxable temporary differences.

The accompanying consolidated financial statements include assets of approximately $5.2 billion as of December 31, 2005, and net sales of approximately $4.4 billion for the year ended December 31, 2005, relating to Occidental’s operations in countries outside North America. Some of these countries may be considered politically and economically unstable. These assets and the related operations are subject to the risk of actions by governmental authorities and insurgent groups. Occidental attempts to conduct its financial affairs so as to mitigate its exposure against such risks and would seek compensation in the event of nationalization.

Since Occidental’s major products are commodities, significant changes in the prices of oil and gas and chemical products may have a significant impact on Occidental’s results of operations for any particular year.

Also, see "Property, Plant and Equipment" below.

CASH AND CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments that are readily convertible to cash. Cash equivalents totaled approximately $2.2 billion and $1.2 billion at December 31, 2005 and 2004, respectively.

SHORT-TERM INVESTMENTS

In 2005, Occidental reclassified its auction rate security investments from cash and cash equivalents to short-term investments on its consolidated balance sheets. These investments contain a short-term repricing feature. As a result, their carrying values approximate their fair values. There have been no realized gains or losses on these investments during 2005 or 2004. Prior period financial statements have been reclassified to conform to the current presentation. This reclassification resulted in no change to Occidental’s results of operations or cash flow from operations for any period.

INVENTORIES

For the oil and gas segment, materials and supplies are valued at the lower of average cost or market. Inventories are reviewed periodically for obsolescence. Oil and natural gas liquids (NGLs) inventories and natural gas trading and storage inventory are valued at the lower of cost or market.

For the chemical segment, Occidental generally values its inventories using the last-in, first-out (LIFO) method as it better matches current costs and current revenue. Accordingly, Occidental accounts for most of its domestic inventories in its chemical business, other than materials and supplies, on the LIFO method. For other countries, Occidental uses the first-in, first-out (FIFO) method (if the costs of goods are specifically identifiable) or the average-cost method (if the costs of goods are not specifically identifiable). Occidental accounts for materials and supplies using a weighted average cost method.

PROPERTY, PLANT AND EQUIPMENT

Oil and Gas

Property additions and major renewals and improvements are capitalized at cost. Interest costs incurred in connection with major capital expenditures are capitalized and amortized over the lives of the related assets (see Note 16).

The following table summarizes the activity of capitalized exploratory well costs for the past three years:


In millions	2005			2004			2003
Balance — Beginning of Year	$	23		$	9		$	3
Additions to capitalized exploratory well costs pending the determination of proved
reserves		46			22			7
Reclassifications to property, plant and equipment based on the determination of proved
reserves		(9	)		(4	)		—
Capitalized exploratory well costs charged to expense	(14		)	(4		)	(1		)
Balance — End of Year	$	46		$	23		$	9

The cost related to exploratory wells that have been capitalized longer than a twelve-month period was immaterial for 2005, 2004 and 2003.

The carrying value of Occidental’s property, plant and equipment (PP&E) is based on the cost incurred to acquire the PP&E, net of accumulated depreciation, depletion and amortization (DD&A) and net of any impairment charges. For acquisitions of a business, PP&E is determined by an allocation of total purchase price to the components on a relative fair-value basis. Occidental is required to perform impairment tests on its assets whenever events or changes in circumstances lead to a reduction in the estimated useful lives or estimated future cash flows that would indicate that the carrying amount may not be recoverable, or when management’s plans change with respect to those assets. Occidental assesses assets for impairment by comparing undiscounted future cash flows of an asset to its carrying value. Impaired assets are written down to their estimated fair values, generally their estimated discounted future net pre-tax cash flows.

A portion of the carrying value of Occidental’s oil and gas properties are attributable to unproved properties. At December 31, 2005, the capitalized costs attributable to unproved properties, net of accumulated valuation allowance, were $788 million. These costs are not currently being depreciated or depleted. As exploration and development work progresses and the reserves on these properties are proven, capitalized costs attributable to the properties will be subject to depreciation and depletion. If the exploration and development work were to be unsuccessful, the capitalized costs of the properties related to this unsuccessful work would be expensed in the year in which the determination was made. The timing of any writedowns of these unproven properties, if warranted, depends upon the nature, timing and extent of future exploration and development activities and their results. Occidental believes its exploration and development efforts will allow it to realize the unproved property balance.

Chemical

Occidental’s chemical plants are depreciated using either the unit-of-production or straight-line method based upon the estimated useful life of the facilities.

The estimated useful lives of Occidental’s chemical assets, which range from 3 years to 50 years, are used to compute depreciation expense and are also used for impairment tests. The estimated useful lives used for the chemical facilities are based on the assumption that Occidental will provide an appropriate level of annual expenditures to ensure productive capacity is sustained. Without these continued expenditures, the useful lives of these plants could significantly decrease. Other factors which could change the estimated useful lives of Occidental’s chemical plants include sustained higher or lower product prices, which are particularly affected by both domestic and foreign competition, feedstock costs, energy prices, environmental regulations, competition and technological changes.

Occidental performs impairment tests on its chemical assets whenever events or changes in circumstances lead to a reduction in the estimated useful lives or estimated future cash flows that would indicate that the carrying amount may not be recoverable, or when management’s plans change with respect to those assets. Occidental compares the undiscounted future cash flows of an asset to its carrying value. The key factors that could significantly affect future cash flows are future product prices, which are particularly affected by both domestic and foreign competition, feedstock costs, energy costs, significantly increased regulation and remaining estimated useful life. Impaired assets are written down to their estimated fair values.

Due to a temporary decrease in demand for some of its products, Occidental temporarily idled an ethylene dichloride (EDC) plant in June 2001 and a chlor-alkali plant in December 2001. Subsequent to the purchase of the Vulcan Materials Company (Vulcan) chemical assets, Occidental reviewed all of its chemical assets and decided to close its least competitive plants and upgrade the remaining operations. As a result of this review, Occidental recorded a $139 million pre-tax charge for the write-off of these two previously idled chemical plants and one currently operated plant and an additional pre-tax charge of $20 million for the writedown of another chemical plant in 2005.

ACCRUED LIABILITIES—CURRENT

Accrued liabilities include accrued payroll, commissions and related expenses of $304 million and $246 million at December 31, 2005 and 2004, respectively.

ENVIRONMENTAL LIABILITIES AND EXPENDITURES

Many factors could result in changes to Occidental’s environmental reserves and reasonably possible range of loss. The most significant are:

Ø	The original cost estimate may have been inaccurate.
Ø	Modified remedial measures might be necessary to achieve the required remediation results. Occidental generally assumes that the remedial objective can be achieved using the most cost-effective technology reasonably expected to achieve that objective. Such technologies may include air sparging or phyto-remediation of shallow groundwater, or limited surface soil removal or in-situ treatment producing acceptable risk assessment results. Should such remedies fail to achieve remedial objectives, more intensive or costly measures may be required.
Ø	The remedial measure might take more or less time than originally anticipated to achieve the required contaminant reduction. Site-specific time estimates can be affected by factors such as groundwater capture rates, anomalies in subsurface geology, interactions between or among water-bearing zones and non-water-bearing zones, or the ability to identify and control contaminant sources.
Ø	The regulatory agency might ultimately reject or modify Occidental’s proposed remedial plan and insist upon a different course of action.

Additionally, other events might occur that could affect Occidental’s future remediation costs, such as:

Ø	The discovery of more extensive contamination than had been originally anticipated. For some sites with impacted groundwater, accurate definition of contaminant plumes requires years of monitoring data and computer modeling. Migration of contaminants may follow unexpected pathways along geologic anomalies that could initially go undetected. Additionally, the size of the area requiring remediation may change based upon risk assessment results following site characterization or interim remedial measures.
Ø	Improved remediation technology might decrease the cost of remediation. In particular, for groundwater remediation sites with projected long-term operation and maintenance, the development of more effective treatment technology, or acceptance of alternative and more cost-effective treatment methodologies such as bioremediation, could significantly affect remediation costs.
Ø	Laws and regulations might change to impose more or less stringent remediation requirements.

Most cost sharing arrangements with other parties fall into one of the following three categories:

Category 1: Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or state-equivalent sites wherein Occidental and other alleged potentially responsible parties share the cost of remediation in accordance with negotiated or prescribed allocations;

Category 2: Oil and gas joint ventures wherein each joint venture partner pays its proportionate share of remedial cost; and

In all three of these categories, Occidental records as a reserve its expected net cost of remedial activities, as adjusted by recognition for any nonperforming parties.

ASSET RETIREMENT OBLIGATIONS

Occidental recognizes the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred or becomes reasonably estimable and if there is a legal obligation to dismantle the asset and reclaim or remediate the property at the end of its useful life. The liability amounts are based on future retirement cost estimates and incorporate many assumptions such as expected economic recoveries of oil and gas, time to abandonment, future inflation rates and the adjusted risk free rate of interest. When the liability is initially recorded, Occidental capitalizes the cost by increasing the related PP&E balances. Over time, the liability is increased and expense is recognized for the change in its present value, and the initial capitalized cost is depreciated over the useful life of the asset. No market risk premium has been included in Occidental’s liability since no reliable estimate can be made at this time. See Note 4.

The following table summarizes the activity of the asset retirement obligation, of which $228 million and $199 million is included in deferred credits and other liabilities - other, with the remaining current portion in accrued liabilities at December 31, 2005 and 2004, respectively.


For the years ended December 31, (in millions)	2005			2004
Beginning balance	$	206		$	167
Liabilities incurred		4			21
Liabilities settled		(6	)		(9	)
Accretion expense		15			12
Acquisitions and other		24			18
Revisions to estimated cash flows	(10		)	(3		)
Ending balance	$	233		$	206

DERIVATIVE INSTRUMENTS

All derivative instruments required to be marked-to-market under Statement of Financial Accounting Standards (SFAS) No. 133, as amended, are carried at fair value. The related assets are included in receivables from joint ventures, partnerships and other and long-term receivables. The related liabilities are included in accrued liabilities and deferred credits and other liabilities — other. Occidental classifies its fair value swap interest receipts as reductions of interest expense. Cash flow hedge realized gains and losses, and any ineffectiveness, are classified within the net sales line item. Gains and losses are netted in the income statement and are netted on the balance sheets when a right of offset exists.

Occidental applies either fair value or cash flow hedge accounting when transactions meet specified criteria for hedge accounting treatment. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss is immediately recognized in earnings. If the derivative qualifies for hedge accounting, the gain or loss on the derivative is either recognized in income with an offsetting adjustment to the basis of the item being hedged for fair value hedges, or deferred in OCI to the extent the hedge is effective for cash flow hedges.

A hedge is regarded as highly effective and qualifies for hedge accounting if, at inception and throughout its life, it is expected that changes in the fair value or cash flows of the hedged item are almost fully offset by the changes in the fair value or changes in cash flows of the hedging instrument and actual effectiveness is within a range of 80 percent to 125 percent. In the case of hedging a forecasted transaction, the transaction must be highly probable and must present an exposure to variations in cash flows that could ultimately affect reported net income or loss. Occidental discontinues hedge accounting when it is determined that a derivative has ceased to be highly effective as a hedge; when the derivative expires, or is sold, terminated, or exercised; when the hedged item matures or is sold or repaid; when a forecasted transaction is no longer deemed highly probable; or when the derivative is no longer designated as a hedge.

FINANCIAL INSTRUMENTS FAIR VALUE

Occidental values financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The carrying amounts of cash and cash equivalents approximate fair value because of the short maturity of those instruments. The carrying value of other on-balance-sheet financial instruments, other than fixed-rate debt, approximates fair value, and the cost, if any, to terminate off-balance-sheet financial instruments is not significant.

STOCK-BASED INCENTIVE PLANS

Occidental has established several shareholder-approved stock-based incentive plans for certain employees (Plans) that are more fully described in Note 12. Beginning July 1, 2005, Occidental accounted for those Plans under SFAS No. 123R, “Share Based Payments.” Prior to July 1, 2005, Occidental applied the APB Opinion No. 25 intrinsic value accounting method for its stock-based incentive plans. A summary of Occidental’s accounting policy under each method follows below.

SFAS No. 123R

For restricted stock units (RSUs), compensation expense is measured on the grant date using the quoted market price of Occidental’s common stock. For stock options (Options) and performance stock awards (PSAs), compensation expense is measured on the grant date using valuation models. Compensation expense for RSUs, Options and PSAs, is recognized on a straight-line basis over the requisite service periods, which is generally over the awards’ respective vesting periods. For the PSAs, every quarter until vesting, the cash settled portion is revalued using valuation models and the stock settled portion is adjusted for any change in the number of shares expected to be issued based on the performance criteria. Any change in fair value is recognized as compensation expense. For stock appreciation rights (SARs), compensation expense is initially measured on the grant date using a valuation model. For cash settled SARs, compensation expense is recorded on the accelerated amortization method over the vesting period and changes in the fair value between the date of grant and through when the cash-settled SARs are exercised are recognized as compensation expense.

APB Opinion No. 25

Through June 30, 2005, compensation expense for Options and RSUs, if any, was measured as the difference between the quoted market price of Occidental's stock at the grant date, less the amount that the employee must pay to acquire the stock. Any compensation expense for these awards was recognized on a straight-line basis over the vesting periods of the respective awards. For PSAs, compensation expense was measured for each period based on the number of shares expected to vest and the changes in the quoted market value of Occidental's stock during the vesting period. PSAs compensation expense or benefit, as applicable, was recognized on a straight-line basis over the vesting periods of the awards. Compensation expense for SARs, which was recorded on the accelerated amortization method over the vesting period, was measured as the amount by which the quoted market value of Occidental's stock exceeded the SAR exercise price. The effect of changes in Occidental's share price between the date of grant and the date when the SARs were exercised or expired was recognized as compensation expense in each period.

SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments, net of refunds, during the years 2005, 2004 and 2003 included federal, foreign and state income taxes of approximately $1.844 billion, $931 million and $538 million, respectively. Interest paid (net of interest capitalized) totaled approximately $253 million, $205 million and $310 million for the years 2005, 2004 and 2003, respectively. (See Note 3 for detail of noncash investing and financing activities regarding certain acquisitions.)

FOREIGN CURRENCY TRANSACTIONS

The functional currency applicable to all of Occidental’s foreign oil and gas operations is the U.S. dollar since cash flows are denominated principally in U.S. dollars. Occidental’s chemical operations in Brazil use the Real as the functional currency. Exchange-rate changes on transactions denominated in nonfunctional currencies generated losses of $9 million in 2005, $13 million in 2004 and $3 million in 2003.

NOTE 2 DERIVATIVE ACTIVITIES INCLUDING FAIR VALUE OF FINANCIAL INSTRUMENTS

Occidental's market risk exposures relate mainly to commodity prices and, to a lesser extent, interest rates and foreign currency exchange rates. Occidental periodically enters into derivative instrument transactions to reduce these price and rate fluctuations. A derivative is an instrument that, among other characteristics, derives its value from changes in another instrument or variable.

In general, the fair value recorded for derivative instruments is based on quoted market prices, dealer quotes and the Black Scholes or similar valuation models.

COMMODITY PRICE RISK

General

Occidental’s results are sensitive to fluctuations in crude oil and natural gas prices.

Marketing and Trading Operations

Occidental periodically uses different types of derivative instruments to achieve the best prices for oil and gas. Derivatives are also used by Occidental to reduce its exposure to price volatility and mitigate fluctuations in commodity-related cash flows. Occidental enters into low-risk marketing and trading activities through its separate marketing organization, which operates under established policy controls and procedures. With respect to derivatives used in its oil and gas marketing operations, Occidental utilizes a combination of futures, forwards, options and swaps to offset various physical transactions. Occidental's use of derivatives in marketing and trading activities primarily relates to managing cash flows from third-party purchases, which includes Occidental’s periodic gas storage activities.

Production Hedges

Fair Value of Marketing and Trading Derivative Contracts


In millions	2005			2004
Fair value of contracts outstanding at beginning of year	$	30		$	32
Losses (gains) on changes for contracts realized or otherwise settled during the year		56			(94	)
Changes in fair value attributable to changes in valuation techniques and assumptions		—			—
(Losses) gains or other changes in fair value	(543		) ^(a)	92
Fair value of contracts outstanding at end of year	$	(457	)	$	30

(a)	Primarily relates to production hedges.


	Maturity Periods
Source of Fair Value	2006			2007 to 2008			2009 to 2010			2011 and thereafter			Total Fair Value
Prices actively quoted	$	(42	)	$	(42	)	$	4		$	5		$	(75	)
Prices provided by other external sources		1			(15	)		7			4			(11	)
Prices based on models and other valuation methods ^(a)	(42		)	(133		)	(137		)	(59		)	(371		)
TOTAL	$	(83	)	$	(190	)	$	(126	)	$	(58	)	$	(457	)

(a)

INTEREST RATE RISK

General

Occidental is exposed to risk resulting from changes in interest rates and it enters into various derivative financial instruments to manage interest-rate exposure. Interest-rate swaps, forward locks and futures contracts are entered into periodically as part of Occidental’s overall strategy to manage its interest rate risk exposures.

Hedging Activities

In 2005, Occidental terminated all of its interest-rate swaps that were accounted for as fair-value hedges. These hedges had effectively converted approximately $1.7 billion of fixed-rate debt to variable-rate debt. The fair value of the swaps at termination resulted in a gain of approximately $20 million, which is being amortized into income over the remaining life of the previously hedged debt. The amount of interest expense recorded in the income statement was lower, as a result of the swaps and amortization of the deferred gain, by approximately $21 million, $56 million and $58 million for the years ended December 31, 2005, 2004 and 2003, respectively.

CREDIT RISK

FOREIGN CURRENCY RISK

DERIVATIVE AND FAIR VALUE DISCLOSURES

The following table shows derivative financial instruments included in the consolidated balance sheets:


Balance at December 31, (in millions)	2005		2004
Derivative financial instrument assets
Current	$	286	$	154
Non-current	178		73
	$	464	$	227
Derivative financial instrument liabilities
Current	$	387	$	132
Non-current	564		30
	$	951	$	162

The following table summarizes net after-tax derivative activity recorded in accumulated OCI (AOCI):


Balance at December 31, (in millions)	2005			2004
Beginning Balance	$	(17	)	$	(24	)
Gains (losses) from changes in current cash flow hedges		(289	)		24
Amount reclassified to income	(41		)	(17		)
Ending Balance	$	(347	)	$	(17	)

During the next twelve months, Occidental expects that approximately $75 million of net derivative after-tax losses included in AOCI, based on their valuation at December 31, 2005, will be reclassified into earnings. Hedge ineffectiveness did not have a material impact on earnings for the years ended December 31, 2005, 2004 and 2003.

NOTE 3 BUSINESS COMBINATIONS AND ASSET ACQUISITIONS AND DISPOSITIONS

2005

In 2005, Occidental announced the acquisition of Vintage Petroleum, Inc. (Vintage). In January 2006, Occidental completed the Vintage acquisition and paid $1.4 billion to former Vintage shareholders for the cash portion of the merger consideration and issued 28 million shares for the stock portion, which was valued at $2.1 billion. The value of Occidental’s shares was determined by the average share price for the five-day period beginning two days before the acquisition announcement. In addition, Occidental assumed Vintage’s debt, which had an estimated fair market value of $585 million at closing. Occidental intends to divest a portion of these assets.

In 2005, Occidental made several oil and gas producing property acquisitions in the Permian Basin for approximately $1.7 billion in cash. This was partially offset by cash proceeds totaling $171 million from dispositions of a portion of the acquired properties. No gain or loss was recorded for these dispositions.

On August 11, 2005, the Libyan authorities approved the terms of Occidental’s participation in the assets that it left in 1986, effective as of July 1, 2005. The agreement allows Occidental to return to its Libyan operations on generally the same terms in effect when activities were suspended. Those assets consist of three producing contracts in the Sirte Basin and four exploration blocks. Occidental paid approximately $133 million in re-entry bonuses and capital adjustment and work-in-progress payments and is required to pay $10 million per year while it continues to operate in Libya, as reimbursements for past development costs associated with the historical assets. In addition, Occidental has committed to spend $90 million over the next five years in the four exploration blocks. Currently, Occidental’s rights in the producing fields extend through 2009 and early 2010.

Separately, in early 2005, Occidental participated in the EPSA IV exploration bid round in Libya. Occidental successfully bid on nine of the 15 areas available. Occidental is the operator of five onshore areas and has a 90-percent exploration working interest. In addition, Occidental holds a 35-percent exploration working interest in four offshore areas. Woodside Petroleum Ltd. is the operator for the offshore areas. Occidental paid approximately $90 million in exploration lease bonuses for these nine new areas and committed to spend an additional $125 million over the next five years.

In July 2005, Occidental signed a new production-sharing contract (PSC) for the Mukhaizna oil field with the Government of the Sultanate of Oman. Under the terms of the new PSC, Occidental took over field operations on September 1, 2005, for a cost of $137 million. Occidental holds a 45-percent working interest.

2004

In January 2004, Occidental acquired a 1,300-mile oil pipeline and gathering system located in the Permian Basin for approximately $143 million in cash.

For strategic and economic reasons, Occidental exited the vinyl specialty resins business by closing the Pottstown, Pennsylvania manufacturing facility (Specialty Resins) effective January 5, 2005, and recorded an after-tax charge of $32 million as of December 31, 2004. Occidental's assets and liabilities related to Specialty Resins are classified as held for sale and as discontinued operations in the income statements for all periods presented. Specialty Resins' net sales included in discontinued operations were $27 million, $98 million and $86 million for 2005, 2004 and 2003, respectively, and net gains (losses) from discontinued operations were $6 million, $(38) million and $(6) million, respectively.

2003

In 2003, Occidental made several oil and gas acquisitions in the Permian Basin for approximately $317 million in cash and sold approximately $34 million of these assets shortly thereafter. No gain or loss was recorded on these sales.

NOTE 4 ACCOUNTING CHANGES

FUTURE ACCOUNTING CHANGES

EITF Issue No. 04-13