Derivatives

3 Months Ended

Mar. 31, 2012

Derivatives

Derivatives

10.          Derivatives

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

Through its marketing and trading activities and within its established policy controls and procedures, Occidental uses derivative instruments, including a combination of short-term futures, forwards, options and swaps, to improve realized prices for its 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.

Cash-Flow Hedges

Through December 31, 2011, Occidental held a series of collar agreements for 12,000 barrels of oil per day of its existing domestic production that qualified as cash-flow hedges at a weighted-average strike price that ranged from $32.92 to $46.35.

In 2009, Occidental entered into financial swap agreements related to the sale of a portion of its existing natural gas production from the Rocky Mountain region of the United States that qualified as cash-flow hedges and terminated as of March 31, 2012.  These swap agreements hedged the sale of 50 million cubic feet of natural gas per day at an average strike price of $6.07.

Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s North American leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These agreements continue through March 2013.  As of March 31, 2012 and December 31, 2011, Occidental had approximately 13 billion cubic feet and 25 billion cubic feet of natural gas held in storage, respectively.  As of March 31, 2012 and December 31, 2011, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 16 billion cubic feet and 35 billion cubic feet of this natural gas held in storage, respectively.

The following table presents the pre-tax gains and losses recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash-flow hedges for the three months ended March 31, 2012 and 2011 (in millions):

Commodity Contracts – cash flow hedges	2012				2011
Unrealized gains (losses) recognized in AOCI		$	22			$	(40	)
(Gains) losses reclassified into income		$	(45	)		$	22
Losses recognized in income – ineffective portion		$	—			$	(1	)

The following table summarizes net after-tax derivative activity recorded in AOCI for the three months ended March 31, 2012 and 2011 (in millions):

	2012				2011
Beginning balance – AOCI		$	1			$	(111	)
Unrealized gains (losses) recognized in AOCI		14				(25		)
(Gains) losses reclassified to income		(28		)		14
Ending balance – AOCI		$	(13	)		$	(122	)

Occidental expects that during the next twelve months an insignificant amount of net after-tax derivative losses included in AOCI, based on their valuation as of March 31, 2012, will be reclassified into income.

Derivatives Not Designated as Hedging Instruments

Occidental’s third-party marketing and trading activities focus on purchasing oil, natural gas liquids (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 March 31, 2012 and December 31, 2011:

	Volumes
Commodity	2012		2011
Sales contracts related to Occidental’s production
Oil (million barrels)		12		9
Third-party marketing and trading activities
Purchase contracts
Oil (million barrels)		252		109
Natural gas (billion cubic feet)		444		481
Precious metals (million troy ounces)		1		4
Sales contracts
Oil (million barrels)		251		109
Natural gas (billion cubic feet)		632		723
Precious metals (million troy ounces)		—		1

In addition, Occidental’s Phibro trading unit has certain other commodity trading contracts, including agricultural products and other metals, as well as foreign exchange contracts, but these were not material to Occidental as of March 31, 2012 and December 31, 2011.

For third-party marketing and trading activities, a substantial portion of sales contracts are typically fulfilled by purchase contracts with substantially identical terms entered into within a short time.  For a substantial portion of the sales commitments not satisfied by such contracts as of March 31, 2012, Occidental entered into offsetting contracts after March 31, 2012.  Occidental believes it has the ability to fulfill any remaining portion through its equity production or through additional third-party purchases.

Approximately $51 million and $29 million of gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended March 31, 2012 and 2011, respectively.

Fair Value of Derivatives

The following table presents the gross fair value of Occidental’s outstanding derivatives as of March 31, 2012 and December 31, 2011 (in millions):

March 31, 2012	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
Commodity contracts	Marketing and trading assets and other	$	6		Accrued liabilities	$	6
Derivatives not designated as hedging instruments (a)
Commodity contracts	Marketing and trading assets and other	1,398			Accrued liabilities	1,443
	Long-term receivables and other assets, net	70			Deferred credits and other liabilities	71
		1,468				1,514
Total gross fair value		1,474				1,520
Less: counterparty netting and cash collateral (b)		(1,234		)		(1,331		)
Total net fair value of derivatives		$	240			$	189

December 31, 2011	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
Commodity contracts	Marketing and trading assets and other	$	41		Accrued liabilities	$	5
	Long-term receivables and other assets, net	3			Deferred credits and other liabilities	—
		44				5
Derivatives not designated as hedging instruments (a)
Commodity contracts	Marketing and trading assets and other	835			Accrued liabilities	887
	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 (c)		(758		)		(782		)
Total net fair value of derivatives		$	192			$	181

(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 March 31, 2012, collateral received of $42 million has been netted against derivative assets and collateral paid of $139 million has been netted against derivative liabilities.

(c)As of December 31, 2011, collateral received of $42 million has been netted against derivative assets and collateral paid of $66 million has been netted against derivative liabilities.

See Note 9 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 $175 million and $173 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 March 31, 2012 and December 31, 2011, respectively.

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

Certain of Occidental’s OTC derivative instruments contain credit-risk-contingent features, primarily tied to credit ratings for Occidental or its counterparties, which may affect the amount of collateral that each would need to post.  As of March 31, 2012 and December 31, 2011, Occidental had a net liability of $22 million and $58 million, respectively, which are net of collateral posted of $76 million and $27 million, respectively.  Occidental believes that if it had received a one-notch reduction in its credit rating, it would not have resulted in a material change in its collateral-posting requirements as of March 31, 2012 and December 31, 2011.