11. Derivatives

Occidental uses a variety of derivative financial instruments and physical contracts, including those designated as cash flow hedges, to manage its exposure to commodity price fluctuations, transportation commitments and to fix margins on the future sale of stored volumes of oil and natural gas. Where Occidental buys product for its own consumption or sells its production to a defined customer, Occidental elects normal purchases and normal sales exclusions. Occidental usually applies cash flow hedge accounting treatment to derivative financial instruments to lock in margins on the forecast sales of its natural gas storage volumes, and at times for other strategies to lock in margins. Occidental also enters into derivative financial instruments for speculative or trading purposes; however, the results of any transactions are immaterial to the marketing portfolio.

The financial instruments not designated as hedges will impact Occidental's earnings through mark-to-market until the offsetting future physical commodity is delivered. For GAAP purposes, any physical inventory is carried at lower of cost or market on the balance sheet. A substantial majority of Occidental's physical derivative contracts are index-based and carry no mark-to-market value in earnings. Net gains and losses associated with derivative instruments not designated as hedging instruments are recognized currently in net sales. Net gains and losses attributable to derivative instruments subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings.

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 credit risk by selecting counterparties that it believes to be financially strong, by entering into netting arrangements with counterparties and by requiring collateral or other credit risk mitigants, as appropriate. Occidental actively evaluates the creditworthiness of its counterparties, assigns appropriate credit limits and monitors credit exposures against those assigned limits. 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 over-the-counter 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, 2018, and December 31, 2017.

Cash-Flow Hedges

Occidental’s marketing operations store natural gas purchased from third parties at Occidental’s leased storage facilities. Derivative instruments are used to fix margins on the future sales of the stored volumes. As of June 30, 2018, Occidental did not have any cash-flow hedges. As of December 31, 2017, Occidental had approximately 7 billion cubic feet (Bcf) of natural gas held in storage, and had cash-flow hedges for the forecast sales, to be settled by physical delivery, of approximately 7 Bcf of stored natural gas.

Derivatives Not Designated as Hedging Instruments

Forward unrealized instruments that are derivatives not designated as hedging instruments are required to be recorded on the income statement and balance sheet at fair value. The fair value represents an unrealized gain or loss between executed sales prices and market prices at the end of the period. The fair value does not reflect the realized or cash value of the instrument. Substantially all of the fair value of Occidental's derivative instruments not designated as hedges are used to manage its exposure to commodity price fluctuations and settle within three months at a weighted average sales price of $70.90 and $2.53 for crude oil and natural gas, respectively at June 30, 2018. The remaining fair value of derivative instruments not designated as hedges was immaterial. The weighted average sales price was $57.38 and $2.73 for crude oil and natural gas, respectively, at December 31, 2017.

The following table summarizes the amounts reported in net sales related to the outstanding commodity derivatives not designated as hedging instruments as of June 30, 2018 and December 31, 2017.


(in millions, except Long/(Short) volumes)	2018		2017
Unrealized gain (loss) on derivatives not designated as hedges
Crude Oil Commodity Contracts	$	(73)	$	(47)
Natural Gas Commodity Contracts	$	—	$	1
Outstanding net volumes on derivatives not designated as hedges
Crude Oil Commodity Contracts
Volume (MMBL)		45		61
Natural Gas Commodity Contracts
Volume (Bcf)		(57)		(47)

Fair Value of Derivatives

The following table presents the gross and net fair values of Occidental’s outstanding derivatives as of June 30, 2018, and December 31, 2017 (in millions):


As of June 30, 2018		Fair Value Measurements Using								Total Fair
(in millions)	Balance Sheet Location	Level 1		Level 2		Level 3		Netting (b)		Value
Assets:
Derivatives not designated as hedging instruments (a)
	Other current assets		933		655		—		(1,027)		561
Commodity contracts	Long-term receivables and other assets, net		40		4		—		(41)		3
Liabilities:
Derivatives not designated as hedging instruments (a)
	Accrued liabilities		979		682		—		(1,027)		634
Commodity contracts	Deferred credits and other liabilities		40		3		—		(41)		2


As of December 31, 2017		Fair Value Measurements Using								Total Fair
(in millions)	Balance Sheet Location	Level 1		Level 2		Level 3		Netting (b)		Value
Assets:
Cash-flow hedges (a)
Commodity contracts	Other current assets		—		3		—		—		3
Derivatives not designated as hedging instruments (a)
	Other current assets		485		227		—		(517)		195
Commodity contracts	Long-term receivables and other assets, net		1		2		—		(1)		2
Liabilities:
Derivatives not designated as hedging instruments (a)
	Accrued liabilities		535		222		—		(517)		240
Commodity contracts	Deferred credits and other liabilities		1		3		—		(1)		3

(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 condensed balance sheets.

(b)

These amounts do not include collateral. As of June 30, 2018, collateral received of $4 million has been netted against derivative assets and collateral paid of $40 million has been netted against derivative liabilities. As of December 31, 2017, no collateral received has been netted against derivative assets and collateral paid of $54 million has been netted against derivative liabilities. Select clearinghouse and brokers require Occidental to post an initial margin deposit. Collateral deposited by Occidental, mainly for initial margin, of $73 million and $53 million as of June 30, 2018 and December 31, 2017, respectively, has not been reflected in these derivative fair value tables. This collateral is included in other current assets in the consolidated condensed balance sheets.