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 cash-flow hedge treatment and management elects and documents such treatment. Otherwise, any fair value gains or losses are recognized in earnings in the current period.

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.

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 is $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.

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, 2014. As of June 30, 2013 and December 31, 2012, Occidental had approximately 13 billion cubic feet and 20 billion cubic feet of natural gas held in storage, respectively. As of June 30, 2013 and December 31, 2012, Occidental had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 15 billion cubic feet and 20 billion cubic feet of natural gas, respectively.

The following table presents the after-tax gains and losses recognized in, and reclassified to income from, Accumulated Other Comprehensive Income (AOCI) for derivative instruments classified as cash-flow hedges for the three and six months ended June 30, 2013 and 2012 (in millions):

	Periods ended June 30
	Three months						Six Months
	2013			2012			2013			2012
Beginning Balance — AOCI	$	(17	)	$	(13	)	$	(7	)	$	1
Unrealized gains (losses) recognized in AOCI	7			(2		)	1			12
Losses reclassified to income	1			4			(3		)	(24		)
Ending Balance — AOCI	$	(9	)	$	(11	)	$	(9	)	$	(11	)

Occidental expects to reclassify an insignificant amount, based on the valuation as of June 30, 2013, of net after-tax derivative losses from AOCI into income during the next 12 months. 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 three months ended June 30, 2013 and 2012.

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 June 30, 2013 and December 31, 2012.

	Net Outstanding Position
	Long / (Short)
Commodity	2013		2012
Oil (million barrels)	(23	)	(17	)
Natural gas (billion cubic feet)	(80	)	(217	)
Precious metals (million troy ounces)	1		1

A large majority of the volumes in the table above include contracts tied to index prices, for which there is no fair value. These contracts do not expose Occidental to changes in commodity prices.

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, 2013 and December 31, 2012.

Occidental fulfills its short positions through its own production or by third-party purchase contracts. Subsequent to June 30, 2013, Occidental entered into purchase contracts for a substantial portion of the outstanding positions at quarter-end and has production capacity and the ability to enter into additional purchase contracts sufficient to satisfy the remaining positions.

Approximately $75 million and $88 million of net losses from derivatives not designated as hedging instruments were recognized in net sales for the three months ended June 30, 2013 and 2012, respectively. Approximately $16 million and $36 million of net losses from derivatives not designated as hedging instruments were recognized in net sales for the six months ended June 30, 2013 and 2012, respectively.

Fair Value of Derivatives

The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of June 30, 2013 and December 31, 2012 (in millions):

June 30, 2013	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
Commodity contracts	Other current assets	$	5		Accrued liabilities	$	1
	Long-term receivables and other assets, net	—			Deferred credits and other liabilities	—
		5				1
Derivatives not designated as hedging instruments (a)
Commodity contracts	Other current assets	544			Accrued liabilities	573
	Long-term receivables and other assets, net	23			Deferred credits and other liabilities	19
		567				592
Total gross fair value		572				593
Less: counterparty netting and cash collateral (b) (d)		(476		)		(529		)
Total net fair value of derivatives		$	96			$	64

December 31, 2012	Asset Derivatives Balance Sheet Location	Fair Value			Liability Derivatives Balance Sheet Location	Fair Value
Cash-flow hedges (a)
Commodity contracts	Other current assets	$	11		Accrued liabilities	$	1
	Long-term receivables and other assets, net	—			Deferred credits and other liabilities	1
		11				2
Derivatives not designated as hedging instruments (a)
Commodity contracts	Other current assets	386			Accrued liabilities	479
	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 (c) (d)		(301		)		(371		)
Total net fair value of derivatives		$	118			$	126

(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, 2013, collateral received of $37 million has been netted against derivative assets and collateral paid of $90 million has been netted against derivative liabilities.

(c) 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.

(d) Select clearinghouses and brokers require Occidental to post an initial margin deposit. Collateral, mainly for initial margin, of $94 million and $116 million deposited by Occidental, has not been reflected in these derivative fair value tables, but is included in the other current assets balance as of June 30, 2013 and December 31, 2012, respectively.

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 minimal credit risk as a significant portion of these transactions is settled on a daily margin basis with select clearinghouses and brokers. 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 June 30, 2013 and December 31, 2012, Occidental had a net liability of $25 million and $34 million, respectively, which are net of collateral posted of $12 million and $64 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, 2013 and December 31, 2012.