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DERIVATIVES
12 Months Ended
Dec. 31, 2015
Derivatives  
Derivatives

 

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 obtain the average prices for the relevant production month and to improve realized prices for oil and gas.  Occidental only occasionally hedges its oil and gas production, and, when it does so, the volumes are usually insignificant.

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

 

Cash-Flow Hedges

Occidental’s marketing and trading operations, from time to time, 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 2017.  As of December 31, 2015, Occidental had approximately 13 billion cubic feet of natural gas held in storage,  and had cash-flow hedges for the forecasted sales, to be settled by physical delivery, of approximately 14 billion cubic feet of stored natural gas.  As of December 31, 2014, Occidental did not have any cash-flow hedges.

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 years ended December 31, 2015 and 2014:

 

 

 

After-tax

 

As of December 31, (in millions)

 

2015

 

 

2014

 

 

 

 

 

 

 

 

Unrealized gains (losses) recognized in AOCI

 

$

5

 

 

$

(5

)

Losses reclassified to income

 

$

 

 

$

8

 

 

 

 

 

 

 

 

 

 

 

The amount of the ineffective portion of cash-flow hedges was immaterial for the years ended December 31, 2015 and 2014.

 

Derivatives Not Designated as Hedging Instruments

The following table summarizes Occidental’s net volumes of outstanding commodity derivatives contracts not designated as hedging instruments, including both financial and physical derivative contracts as of December 31, 2015 and 2014:

 

 

 

Net Outstanding Position

Long / (Short)

Commodity

 

2015

 

 

2014

 

Oil (million barrels)

 

83

 

 

(9

)

Natural gas (billion cubic feet)

 

(58

)

 

(32

)

CO2 (billion cubic feet)

 

603

 

 

621

 

 

 

 

 

 

 

 

 

The volumes in the table above exclude contracts tied to index prices, for which the fair value, if any, is minimal at any point in time.  These excluded contracts do not expose Occidental to price risk because the contract prices fluctuate with index prices.

Occidental fulfills its short positions through its own production or by third-party purchase contracts.  Subsequent to December 31, 2015, 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 $213 million net loss and $71 million net loss from derivatives not designated as hedging instruments were recognized in net sales for the years ended December 31, 2015 and 2014, respectively.

 

Fair Value of Derivatives

The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of December 31, 2015 and 2014:

 

(in millions)

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

Asset Derivatives

Balance Sheet Location

 

Fair
Value

 

 

Liability Derivatives

Balance Sheet Location

 

Fair
Value

 

Cash-flow hedges (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

9

 

 

Accrued liabilities

 

$

1

 

 

Long-term receivables and other assets, net

 

 

 

Deferred credits and other liabilities

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9

 

 

 

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

626

 

 

Accrued liabilities

 

$

672

 

 

Long-term receivables and other assets, net

 

9

 

 

Deferred credits and other liabilities

 

275

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

635

 

 

 

 

947

 

 

 

 

 

 

 

 

 

 

 

 

Total gross fair value

 

 

 

644

 

 

 

 

948

 

Less: counterparty netting and cash collateral (b) (d)

 

 

 

(535

)

 

 

 

(525

)

 

 

 

 

 

 

 

 

 

 

 

Total net fair value of derivatives

 

 

 

$

109

 

 

 

 

$

423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Asset Derivatives

Balance Sheet Location

 

Fair Value

 

 

Liability Derivatives

Balance Sheet Location

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Cash-flow hedges (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

 

 

Accrued liabilities

 

$

 

 

Long-term receivables and other assets, net

 

 

 

Deferred credits and other liabilities

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

828

 

 

Accrued liabilities

 

$

886

 

 

Long-term receivables and other assets, net

 

11

 

 

Deferred credits and other liabilities

 

110

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

839

 

 

 

 

996

 

 

 

 

 

 

 

 

 

 

 

 

Total gross fair value

 

 

 

839

 

 

 

 

996

 

Less: counterparty netting and cash collateral (c) (d)

 

 

 

(742

)

 

 

 

(756

)

 

 

 

 

 

 

 

 

 

 

 

Total net fair value of derivatives

 

 

 

$

97

 

 

 

 

$

240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Fair values are presented at gross amounts, including when the derivatives are subject to master netting arrangements and presented on a net basis in the consolidated balance sheets.

(b)

As of December 31, 2015, collateral received of $14 million has been netted against derivative assets and collateral paid of $4 million has been netted against derivative liabilities.

(c)

As of December 31, 2014, collateral received of zero has been netted against derivative assets and collateral paid of $8 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 $3 million and $44 million as of December 31, 2015 and 2014, respectively, deposited by Occidental, has not been reflected in these derivative fair value tables.  This collateral is included in other current assets in the consolidated balance sheets.

 

See Note 15 for fair value measurement disclosures on derivatives.

 

Credit Risk

The majority of Occidental’s counterparty credit risk is related to the physical delivery of energy commodities to its customers and their inability to meet their settlement commitments. Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by entering into master netting arrangements with counterparties and by requiring collateral, as appropriate. Occidental actively reviews the creditworthiness of its counterparties and monitors credit exposures against assigned credit limits by adjusting credit limits to reflect counterparty risk, if necessary. Occidental also enters into future contracts through regulated exchanges with select clearinghouses and brokers, which are subject to minimal credit risk as a significant portion of these transactions settle on a daily margin basis.

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. 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, 2015 and 2014.

 

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.  As of December 31, 2015, the fair value of foreign currency derivatives used in the trading operations was immaterial.  The effect of exchange rates on transactions in foreign currencies is included in periodic income.