Derivatives

6 Months Ended

Jun. 30, 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 a variety of derivative instruments 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 through March 31, 2013.  As of June 30, 2012, and December 31, 2011, Occidental had approximately 17 billion cubic feet and 25 billion cubic feet of natural gas held in storage, respectively.  As of June 30, 2012, and December 31, 2011, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 23 billion cubic feet and 35 billion cubic feet of this stored natural gas, 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 and six months ended June 30, 2012 and 2011 (in millions):

	Periods ended June 30
	Three Months					Six Months
Commodity Contracts — cash-flow hedges	2012			2011		2012			2011
Unrealized gains (losses) recognized in AOCI	$	(2	)	$	34	$	20		$	(6	)
Losses (gains) reclassified into income	$	6		$	54	$	(39	)	$	76
Gains recognized in income — ineffective portion	$	—		$	1	$	—		$	—

The following table summarizes net after-tax derivative activity recorded in AOCI for the three and six months ended June 30, 2012 and 2011 (in millions):

	Periods ended June 30
	Three Months						Six Months
	2012			2011			2012			2011
Beginning balance — AOCI	$	(13	)	$	(122	)	$	1		$	(111	)
Unrealized gains (losses) recognized in AOCI	(2		)	21			12			(4		)
Losses (gains) reclassified to income	4			35			(24		)	49
Ending balance — AOCI	$	(11	)	$	(66	)	$	(11	)	$	(66	)

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 June 30, 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 commodity derivatives contracts not designated as hedging instruments as of June 30, 2012, and December 31, 2011:

	Volumes
Commodity	2012	2011
Sales contracts related to Occidental’s production
Oil (million barrels)	14	9
Third-party marketing and trading activities
Purchase contracts
Oil (million barrels)	158	109
Natural gas (billion cubic feet)	342	481
Precious metals (million troy ounces)	1	4
Sales contracts
Oil (million barrels)	152	109
Natural gas (billion cubic feet)	451	723
Precious metals (million troy ounces)	—	1

In addition, Occidental typically has certain other commodity trading contracts, such as agricultural products, power and other metals as well as foreign exchange contracts.  These contracts were not material to Occidental as of June 30, 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 June 30, 2012, Occidental entered into offsetting contracts after June 30, 2012.  Occidental believes it has the ability to fulfill any remaining portion through its equity production or through additional third-party purchases.

Approximately $86 million of losses and $77 million of gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended June 30, 2012 and 2011, respectively. Approximately $35 million of losses and $106 million of gains from derivatives not designated as hedging instruments were recognized in net sales for the six months ended June 30, 2012 and 2011, respectively.

Fair Value of Derivatives

The following table presents the gross fair value of Occidental’s outstanding derivatives as of June 30, 2012, and December 31, 2011 (in millions):

June 30, 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	$	4		Accrued liabilities	$	1
Derivatives not designated as hedging instruments (a)
Commodity contracts	Marketing and trading assets and other	1,369			Accrued liabilities	1,465
	Long-term receivables and other assets, net	56			Deferred credits and other liabilities	54
		1,425				1,519
Total gross fair value		1,429				1,520
Less: counterparty netting and cash collateral (b)		(1,197		)		(1,272		)
Total net fair value of derivatives		$	232			$	248

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
Total gross fair value		906			958
		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 June 30, 2012, collateral received of $66 million has been netted against derivative assets and collateral paid of $141 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 $51 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 June 30, 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 June 30, 2012 and December 31, 2011, Occidental had a net liability of $32 million and $58 million, respectively, which are net of collateral posted of $73 million and $27 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 June 30, 2012, and December 31, 2011.