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 obtain 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, the volumes are usually insignificant.

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 June 30, 2016, Occidental had approximately 6 billion cubic feet of natural gas held in storage, and had cash-flow hedges for the forecast sale, to be settled by physical delivery, of approximately 6 billion cubic feet of stored natural gas. 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 forecast sale, to be settled by physical delivery, of approximately 14 billion cubic feet of stored natural gas. The following table summarizes Occidental’s other comprehensive income related to derivatives for the three and six months ended June 30, 2016 and June 30, 2015:

	After-tax
	Three months ended June 30					Six months ended June 30
	2016			2015		2016			2015
Unrealized losses on derivatives	$	(2	)	$	—	$	(14	)	$	—
Reclassification to income of realized loss on derivatives	$	—		$	—	$	7		$	—

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 June 30, 2016 and December 31, 2015:

	Net Outstanding Position
	Long / (Short)
Commodity	2016		2015
Oil (million barrels)	149		83
Natural gas (billion cubic feet)	(71	)	(58	)
Carbon dioxide (billion cubic feet)	571		603

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 short positions through its own production or by third-party purchase contracts. Subsequent to June 30, 2016, Occidental entered into purchase contracts for a substantial portion of the short positions outstanding at quarter end and has sufficient production capacity and the ability to enter into additional purchase contracts to satisfy the remaining positions.

Approximately $38 million and $45 million of net gains from derivatives not designated as hedging instruments were recognized in net sales for the three months ended June 30, 2016 and 2015, respectively. Approximately $26 million of net gains and $44 million of net losses from derivatives not designated as hedging instruments were recognized in net sales for the six months ended June 30, 2016 and 2015, respectively.

Fair Value of Derivatives

The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of June 30, 2016 and December 31, 2015 (in millions):

	Asset Derivatives	Fair		Liability Derivatives	Fair
June 30, 2016	Balance Sheet Location	Value		Balance Sheet Location	Value
Cash-flow hedges(a)
Commodity contracts	Other current assets	$	—	Accrued liabilities	$	4

Derivatives not designated as hedging instruments (a)
Commodity contracts	Other current assets	117		Accrued liabilities	190
Commodity contracts	Long-term receivables and other assets, net	8		Deferred credits and other liabilities	227
		125			417
Total gross fair value		125			421
Less: counterparty netting and cash collateral (b,d)		(85)			(101)
Total net fair value of derivatives		$	40		$	320

	Asset Derivatives	Fair		Liability Derivatives	Fair
December 31, 2015	Balance Sheet Location	Value		Balance Sheet Location	Value
Cash-flow hedges(a)
Commodity contracts	Other current assets	$	9	Accrued liabilities	$	1

Derivatives not designated as hedging instruments (a)
Commodity contracts	Other current assets	626		Accrued liabilities	672
Commodity contracts	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 (c,d)		(535)			(525)
Total net fair value of derivatives		$	109		$	423

(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 June 30, 2016, collateral received of zero has been netted against the derivative assets, and collateral paid of $15 million has been netted against derivative liabilities.

(c)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.

(d)Select clearinghouses and brokers require Occidental to post an initial margin deposit. Collateral, mainly for initial margin, of $44 million and $3 million deposited by Occidental has not been reflected in these derivative fair value tables as of June 30, 2016 and December 31, 2015, respectively. This collateral is included in other current assets in the consolidated balance sheets as of June 30, 2016 and December 31, 2015, respectively.

See Note 9, Fair Value Measurements, 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 June 30, 2016 and December 31, 2015.

. Derivatives