Occidental Petroleum 2002 Annual Report Download - page 34

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Occidental periodically uses different types of derivative instruments to
achieve the best prices for oil and gas. Derivatives are also used by Occidental
to reduce its exposure to price volatility and mitigate fluctuations in
commodity-related cash flows. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates
under established policy controls and procedures. With respect to derivatives
used in its oil and gas marketing operations, Occidental utilizes a combination
of futures, forwards, options and swaps to offset various physical transactions.
Overall, Occidental usually remains unhedged to long-term oil and gas prices and
its use of derivatives in hedging activity remains at a low level.
In September 2002, Occidental unwound its natural gas delivery commitment
and corresponding natural gas price swap which were entered into in November
1998. Occidental recognized a pre-tax loss of $3 million related to these
transactions.
RISK MANAGEMENT
Occidental conducts its risk management activities for energy commodities
(which include buying, selling, marketing, trading, and hedging activities)
under the controls and governance of the Risk Management Policy. The Chief
Financial Officer and Risk Management Committee oversee these controls, which
are implemented and enforced by the Trading Control Officer. The Trading Control
Officer provides an independent and separate check on results of marketing and
trading activities. Controls for energy commodities include limits on credit,
limits on trading, segregation of duties, delegation of authority and a number
of other policy and procedural controls.
FAIR VALUE OF CONTRACTS
The following tables reconcile the changes in the fair value of
Occidental's marketing and trading contracts during 2002 and 2001 and segregate
the open contracts at December 31, 2002 by maturity periods.
in millions 2002 2001
=========================================================== ======== ========
Fair value of contracts outstanding at beginning of year $ 7 $ (66)
Gains on contracts realized or otherwise settled during the
year (1) (30)
Changes in fair value attributable to changes in valuation
techniques and assumptions -- --
Other changes in fair values 28 103
-------- --------
Fair value of contracts outstanding at end of year $ 34 $ 7
=========================================================== ======== ========
Maturity Periods
------------------------------------------------------------------
2004 2006 2008 Total
Source of to to and Fair
Fair Value 2003 2005 2007 thereafter Value
================ ========== ========== ========== ========== ==========
Prices actively
quoted $ (12) $ 6 $ 2 $ 2 $ (2)
Prices provided
by other
external
sources 35 7 (8) 2 36
Prices based on
models and
other valuation
methods (5) 5 -- -- --
---------- ---------- ---------- ---------- ----------
TOTAL $ 18 $ 18 $ (6) $ 4 $ 34