DERIVATIVES

12 Months Ended

Dec. 31, 2011

DERIVATIVES

DERIVATIVES

NOTE 7      DERIVATIVES

Objective & Strategy

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

Refer to Note 1 for Occidental’s accounting policy on derivatives.

Cash-Flow Hedges

Throughout 2011 and 2010, Occidental held a series of collar agreements that qualified as cash-flow hedges for the sale of approximately 3 percent and 2 percent, respectively, of its oil production.  These agreements were for existing domestic production and terminated as of December 31, 2011.  The collar agreements hedged the sale of 12,000 barrels per day at a weighted-average strike price that ranged from $32.92 to $46.35.

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

Natural Gas Swaps	Daily Volume (cubic feet)		Average Price
January 2012 - March 2012 (a)		50 million		$	6.07

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

Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s North American leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These derivative agreements continue through January 2013.  As of December 31, 2011 and 2010, Occidental had approximately 25 billion cubic feet and 28 billion cubic feet of natural gas held in storage, respectively.  As of December 31, 2011 and 2010, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 35 billion cubic feet and 24 billion cubic feet of natural gas held in storage, respectively.

The following table presents the pre-tax gains and losses recognized in, and reclassified from, AOCI and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the years ended December 31, 2011 and 2010 (in millions):

	2011		2010
Commodity Contracts — cash-flow hedges
Unrealized gains recognized in AOCI	$	20	$	55
Losses reclassified into income	$	154	$	123
Gains recognized in income - ineffective portion	$	1	$	2

The following table summarizes net after-tax derivative activity recorded in AOCI for the years ended December 31, 2011 and 2010 (in millions):

	2011			2010
Beginning Balance - AOCI	$	(111	)	$	(227	)
Unrealized gains recognized in AOCI	14			37
Losses reclassified into income	98			79
Ending Balance - AOCI	$	1		$	(111	)

During the next twelve months, Occidental expects that approximately $14 million of net after-tax derivative gains included in AOCI will be reclassified into income based on their valuation as of December 31, 2011.

Derivatives Not Designated as Hedging Instruments

Occidental’s third-party marketing and trading activities focus on purchasing oil, NGLs and gas for resale from partners, producers and third parties whose oil and gas supply is located near its midstream and marketing assets, such as pipelines, processing plants and storage facilities.  These purchases allow Occidental to aggregate volumes to maximize prices received for Occidental’s production.  The third-party marketing and trading purchase and sales contracts generally approximate each other with respect to aggregate volumes and terms.  In addition, Occidental’s Phibro trading unit’s strategy is to profit from market price changes using derivatives not designated as hedging instruments.

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

	Volumes
Commodity	2011	2010
Sales contracts related to Occidental’s production
Oil (million barrels)	9	8
Third-party marketing and trading activities
Purchase contracts
Oil (million barrels)	109	136
Natural gas (billion cubic feet)	481	833
Precious metals (million troy ounces)	4	13
Sales contracts
Oil (million barrels)	109	144
Natural gas (billion cubic feet)	723	1,156
Precious metals (million troy ounces)	1	1

In addition, Occidental’s Phibro trading unit has certain other commodity trading contracts, including agricultural products, metals and electricity, as well as foreign exchange contracts, but these were not material to Occidental as of December 31, 2011 and 2010.

Occidental has oil sales contracts representing a small portion of Occidental’s domestic oil production.  Additionally, for third-party marketing and trading activities, a substantial portion of the sales contracts that exist at the end of a reporting period are typically fulfilled by offsetting purchase contracts that have substantially identical terms entered into within a short time.  For a substantial portion of the sales commitments not satisfied by such contracts as of December 31, 2011, Occidental entered into offsetting contracts after December 31, 2011.  Occidental believes it has the ability to fulfill any remaining portion through its equity production or through additional third-party purchases.

Approximately $1 million and $293 million of gains from derivatives not designated as hedging instruments were recognized in net sales for the years ended December 31, 2011 and 2010, respectively.

Fair Value of Derivatives

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

December 31, 2011	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
	Marketing and trading assets and other	$	41		Accrued liabilities	$	5
Commodity contracts	Long-term receivables and other assets, net	3			Deferred credits and other liabilities	—
		$	44			$	5
Derivatives not designated as hedging instruments (a)
	Marketing and trading assets and other	$	835		Accrued liabilities	$	887
Commodity contracts	Long-term receivables and other assets, net	71			Deferred credits and other liabilities	71
		906				958
Total gross fair value		950				963
Less: counterparty netting and cash collateral (b)		(755		)		(779		)
Total net fair value of derivatives		$	195			$	184

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

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

(b)As of December 31, 2011, collateral received of $39 million has been netted against derivative assets and collateral paid of $63 million has been netted against derivative liabilities.

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

See Note 15 for fair value measurement disclosures on derivatives.

Credit Risk

A substantial portion of Occidental’s derivative transaction volume is executed through exchange-traded contracts, which are subject to nominal credit risk as a significant portion of these transactions are executed on a daily margin basis.  Collateral of $173 million and $154 million deposited by Occidental for such contracts with clearing houses and brokers, which has not been reflected in the derivative fair value tables, is included in the marketing and trading assets and other balance as of December 31, 2011 and 2010, respectively.

Occidental executes the rest of its derivative transactions in the OTC market.  Occidental is subject to counterparty credit risk to the extent the counterparty to the derivatives is unable to meet its settlement commitments.  Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by spreading the credit risk among many such counterparties, by entering into master netting arrangements with the counterparties and by requiring collateral, as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments to reflect counterparty risk, if necessary.

Certain of Occidental’s OTC derivative instruments contain credit-risk-contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each would need to post.  As of December 31, 2011 and 2010, Occidental had a net liability of $58 million and $234 million, respectively, for which the amount of collateral posted was $27 million and $10 million, respectively.  Occidental believes that if it had received a one-notch reduction in its credit ratings, it would not have resulted in a material change in its collateral-posting requirements as of December 31, 2011 and 2010.

Foreign Currency Risk

Occidental’s foreign operations have currency risk.  Occidental manages its exposure primarily by balancing monetary assets and liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes.  Most international oil sales are denominated in United States dollars.  Additionally, all of Occidental’s consolidated foreign oil and gas subsidiaries have the United States dollar as the functional currency.