Derivatives

9 Months Ended

Sep. 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, including cash-flow hedges and derivatives instruments not designated as hedging instruments, to improve realized prices for its oil and gas.  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.  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.

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 September 30, 2012, and December 31, 2011, Occidental had approximately 20 billion cubic feet and 25 billion cubic feet of natural gas held in storage, respectively.  As of September 30, 2012, and December 31, 2011, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 25 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 nine months ended September 30, 2012 and 2011 (in millions):

	Periods Ended September 30
	Three Months						Nine Months
Commodity Contracts — cash-flow hedges	2012			2011			2012			2011
Unrealized gains (losses) recognized in AOCI	$	(3	)	$	37		$	17		$	31
Losses (gains) reclassified to income	$	—		$	39		$	(38	)	$	115
Losses recognized in income — ineffective portion	$	—		$	(1	)	$	—		$	(1	)

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

	Periods Ended September 30
	Three Months						Nine Months
	2012			2011			2012			2011
Beginning balance — AOCI	$	(11	)	$	(66	)	$	1		$	(111	)
Unrealized gains (losses) recognized in AOCI	(2		)	24			10			20
Losses (gains) reclassified to income	—			25			(24		)	74
Ending balance — AOCI	$	(13	)	$	(17	)	$	(13	)	$	(17	)

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 September 30, 2012, will be reclassified into income.

Derivatives Not Designated as Hedging Instruments

The table below summarizes Occidental’s net volumes resulting from outstanding commodity derivative contracts not designated as hedging instruments, including both financial and physical derivative contracts.

	Net Outstanding Position
	Long / (Short)
Commodity	September 30, 2012		December 31, 2011
Oil (million barrels)	(4	)	(9	)
Natural gas (billion cubic feet)	(178	)	(242	)
Precious metals (million troy ounces)	1		3

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 September 30, 2012, and December 31, 2011.

Typically, a substantial portion of short positions is fulfilled by purchase contracts with substantially identical terms entered into within a short time.  For a substantial portion of the short positions not satisfied by such contracts as of September 30, 2012, Occidental entered into offsetting contracts after September 30, 2012.  Occidental believes it has the ability to fulfill the remaining portion through its equity production or additional third-party purchases.

Approximately $78 million and $20 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended September 30, 2012 and 2011, respectively. Approximately $42 million and $124 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the nine months ended September 30, 2012 and 2011, respectively.

Fair Value of Derivatives

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

September 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	$	3		Accrued liabilities	$	3
Derivatives not designated as hedging instruments (a)
	Marketing and trading assets and other	556			Accrued liabilities	626
Commodity contracts	Long-term receivables and other assets, net	30			Deferred credits and other liabilities	27
		586				653
Total gross fair value		589				656
Less: counterparty netting and cash collateral (b)		(432		)		(515		)
Total net fair value of derivatives		$	157			$	141

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 (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 September 30, 2012, collateral received of $17 million has been netted against derivative assets and collateral paid of  $100 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 is settled on a daily margin basis with select clearinghouses and brokers.  Collateral of $131 million and $173 million deposited by Occidental for such contracts, which has not been reflected in the derivative fair value tables, is included in the marketing and trading assets and other balance as of September 30, 2012, and December 31, 2011, 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 September 30, 2012, and December 31, 2011, Occidental had a net liability of $25 million and $58 million, respectively, which are net of collateral posted of $59 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 September 30, 2012, and December 31, 2011.