Occidental Petroleum 2001 Annual Report Download - page 53

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Balance at December 31, 2001
================================================ ========
Derivative financial instrument assets
Current $ 116
Non-current 120
--------
$ 236
========
Derivative financial instrument liabilities
Current $ 102
Non-current 119
--------
$ 221
================================================ ========
COMMODITY PRICE DERIVATIVES
GENERAL
With respect to derivatives used in its oil and gas marketing operations,
Occidental used a combination of futures, options and swaps to offset various
open price positions.
The fair value recorded for derivative instruments is based on quoted
market prices, dealer quotes or synthetic price curves established from quoted
prices (adjusted for time, location and quality differentials).
43
CASH-FLOW COMMODITY HEDGES
Occidental used cash-flow hedges for the sale of crude oil and natural gas
in 2001, with the objective of mitigating price risk arising from fluctuating
values for these commodities. Crude oil hedges were executed for Occidental's
West Texas production. Its strategy to achieve these objectives included a
combination of purchased put options and written call options resulting in no
net premium received for crude oil hedging. Purchased put options were used for
natural gas hedging and were executed for the Mid-continent production area to
establish a minimum sales price for its production. Occidental used no
fair-value hedges for crude oil or natural gas production during 2001.
Occidental's cash-flow-hedging instruments, which consist of natural gas
put option contracts, are highly effective. During 2001, net gains of $0.6
million were recorded to OCI relating to changes in current cash-flow hedges and
net losses of $7.6 million were reclassified from OCI into earnings as a
reduction to net sales revenue, as the forecasted transactions actually
occurred. The fair value at December 31, 2001 of derivative financial
instruments that have been designated and have qualified as cash-flow-hedging
instruments was $0.2 million. The gain was recorded as an increase to OCI and
will be reclassified into earnings during 2002 when the forecasted transactions
actually occur.
MARKETING AND TRADING OPERATIONS
The fair value at December 31, 2001 of derivative instruments used in
marketing and trading operations is a net gain of $9 million. Gains of $24
million were recorded in earnings due to the change in fair value of these
financial derivative instruments during 2001. Offsetting the value of these
instruments are related physical positions with a fair value of $2 million loss
at December 31, 2001. Gains of $15 million were recorded in earnings due to the
change in the fair value of related physical positions during 2001. The net
positions mostly expire in 2002. Additionally, a long-term sales contract volume
commitment is 38,100 MMBtu per day through October 2010. The approximate $39
million net gain from the change in fair value during 2001 of derivative
instruments used in marketing and trading operations was reflected in the income
statement. The $39 million net gain represents a reversal of negative
mark-to-market adjustments resulting from the adoption of SFAS No. 133, as
amended.
At December 31, 2001, total assets and liabilities include $108 million and
$101 million for the fair value of derivative instruments used in marketing and
trading operations.
Prior to the physical settlement of any energy contract held for trading
purposes, favorable or unfavorable price movement is reported in the income