NOTE 7

DERIVATIVES

Objective & Strategy

Occidental uses a variety of derivative instruments, including cash-flow hedges and derivative instruments not designated as hedging instruments, to establish, as of the date of production, the price it receives and to improve realized prices for oil and gas. Occidental only occasionally hedges its oil and gas production and, when it does, the volumes are usually insignificant. 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.

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

Cash-Flow Hedges

Occidental entered into financial swap agreements in November 2012 for the sale of a portion of its natural gas production in California. These swap agreements hedge 50 million cubic feet of natural gas per day beginning in January 2013 through March 2014 and qualify as cash-flow hedges. The weighted-average strike price of these swaps was $4.30.

Through March 31, 2012, Occidental held financial swap agreements related to the sale of 50 million cubic feet per day of its existing natural gas production from the Rocky Mountain region of the United States that qualified as cash-flow hedges at a weighted-average strike price of $6.07.

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

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 December 31, 2012 and 2011, Occidental had approximately 20 billion cubic feet and 25 billion cubic feet of natural gas held in storage, respectively. As of December 31, 2012 and 2011, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 20 billion cubic feet and 35 billion cubic feet of this stored natural gas, respectively.

The following table presents the pre-tax and after-tax gains and losses recognized in, and reclassified to income from, AOCI, for derivative instruments classified as cash-flow hedges for the years ended December 31, 2012 and 2011 (in millions):

	After-tax						Pre-Tax
	2012			2011			2012			2011
Beginning Balance - AOCI	$	1		$	(111	)
Unrealized gains recognized in AOCI	16			14			$	25		$	20
(Gains) losses reclassified to income	(24		)	98			$	(38	)	$	154
Ending Balance - AOCI	$	(7	)	$	1

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 December 31, 2012, will be reclassified into income. The gains and losses reclassified to income were recognized in net sales, and the amount of the ineffective portion of cash-flow hedges was immaterial for the years ended December 31, 2012 and 2011.

Derivatives Not Designated as Hedging Instruments

The following table summarizes Occidental’s net volumes resulting from outstanding commodity derivatives contracts not designated as hedging instruments, including both financial and physical derivative contracts as of December 31, 2012 and 2011:

	Net Outstanding Position Long / (Short)
Commodity	2012		2011
Oil (million barrels)	(17	)	(9	)
Natural gas (billion cubic feet)	(217	)	(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 December 31, 2012 and 2011.

Occidental fulfills its short positions through its own production or by third-party purchase contracts. Subsequent to December 31, 2012, Occidental entered into purchase contracts for a substantial portion of the outstanding positions at year-end and has sufficient production capacity and the ability to enter into additional purchase contracts to satisfy the remaining positions.

Approximately $49 million and $94 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the years ended December 31, 2012 and 2011, respectively.

Fair Value of Derivatives

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

December 31, 2012	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
	Other current assets	$	11		Accrued liabilities	$	1
Commodity contracts	Long-term receivables and other assets, net	—			Deferred credits and other liabilities	1
		$	11			$	2
Derivatives not designated as hedging instruments (a)
	Other current assets	$	386		Accrued liabilities	$	479
Commodity contracts	Long-term receivables and other assets, net	22			Deferred credits and other liabilities	16
		408				495
Total gross fair value		419				497
Less: counterparty netting and cash collateral (b)		(301		)		(371		)
Total net fair value of derivatives		$	118			$	126

December 31, 2011	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
	Other current assets	$	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)
	Other current assets	$	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 December 31, 2012, collateral received of $25 million has been netted against derivative assets and collateral paid of $95 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 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 is settled on a daily margin basis with select clearinghouses and brokers. Collateral of $116 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 other current assets balance as of December 31, 2012 and 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 December 31, 2012 and 2011, Occidental had a net liability of $34 million and $58 million, respectively, which are net of collateral posted of $64 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 December 31, 2012 and 2011.

Foreign Currency Risk

Occidental’s foreign operations have limited currency risk. Occidental manages its exposure primarily by balancing monetary assets and liabilities and limiting cash positions in foreign currencies to levels necessary for operating purposes. A vast majority of 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.