Occidental Petroleum 2002 Annual Report Download - page 60

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Occidental's market risk exposures relate primarily to commodity prices
and, to a lesser extent, interest rates and foreign currency exchange rates.
Occidental periodically enters into derivative instrument transactions to reduce
these price and rate fluctuations. A derivative is a financial instrument which
derives its value from another instrument or variable.
In general, the fair value recorded for derivative instruments is based on
quoted market prices, dealer quotes and the Black-Scholes or similar valuation
models.
COMMODITY PRICE DERIVATIVES
GENERAL
Occidental's results are sensitive to fluctuations in crude oil and natural
gas prices.
MARKETING AND TRADING OPERATIONS
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.
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 and Total
Source of Fair Value 2003 to 2005 to 2007 thereafter Fair 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
======================================================= ========== ========== ========== ========== ==========
44
The tables above include the fair value of physical positions and the fair
value of the related financial instruments for trading and marketing operations.
At December 31, 2002 and 2001, the physical positions were a net gain of $42
million and a net loss of $2 million, respectively. The value of the derivative
financial instruments that offset these physical positions are a net loss of $8