Occidental Petroleum 2006 Annual Report Download - page 64
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NOTE 6 LEASE COMMITMENTS
The present value of minimum capital lease payments, net of the current portion, totaled $25 million at both December 31, 2006 and 2005.
These amounts are included in other liabilities.
Operating and capital lease agreements, which include leases for manufacturing facilities, office space, railcars and tanks, frequently include
renewal and/or purchase options and require Occidental to pay for utilities, taxes, insurance and maintenance expense.
At December 31, 2006, future net minimum lease payments for capital and operating leases (excluding oil and gas and other mineral leases,
utilities, taxes, insurance and maintenance expense) were the following:
Rental expense for operating leases, net of sublease rental income, was $199 million in 2006, $141 million in 2005 and $120 million in 2004.
Rental expense was net of sublease income of $7 million in both 2006 and 2005 and $8 million in 2004.
NOTE 7 DERIVATIVE ACTIVITIES
Occidental's market risk exposures relate mainly to commodity prices and, to a lesser extent, interest rates and foreign currency exchange
rates. Occidental has entered into derivative instrument transactions to reduce these price and rate fluctuations. A derivative is an instrument
that, among other characteristics, derives its value from changes in 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.
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 have been 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. Occidental's use of derivatives in marketing and trading activities primarily relates to managing cash flows
from third-party purchases, which includes Occidental’s periodic gas storage activities.
Production Hedges
In 2005, Occidental entered into a series of fixed price swaps and costless collar agreements that qualify as cash-flow hedges for the sale of a
portion of its crude oil production. Additionally, Occidental acquired oil and gas fixed price and basis swaps with the Vintage acquisition. These
hedges continue to the end of 2011. The 2006 volume that was hedged was less than four percent of Occidental’s 2006 crude oil and natural gas
production.
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