Occidental Petroleum 2008 Annual Report Download - page 65

Download and view the complete annual report

Please find page 65 of the 2008 Occidental Petroleum annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

Rental expense for operating leases, net of sublease rental income, was $178 million in 2008, $196 million in 2007 and $199
million in 2006. Rental expense was net of sublease income of $7 million in 2008, 2007 and 2006, respectively.
NOTE 7 DERIVATIVE ACTIVITIES
Occidental is exposed to risk that is inherent with changing commodity prices. In order to mitigate price risk, Occidental, from time to
time, enters into derivative transactions. 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 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 on a small portion of its production. Occidental enters into low-risk marketing and
trading activities through its separate marketing organization, which operates under established policy controls and procedures. Occidental's
marketing and trading operations utilize a combination of futures, forwards, options and swaps to mitigate the price risk associated with
various physical transactions.
Production Hedges
Occidental holds a series of collar agreements that qualify as cash-flow hedges for the sale of a small portion of its crude oil production.
These agreements continue to the end of 2011. The 2008 volume that was hedged was less than 3 percent of Occidental’s 2008 crude oil
production.
Fair Value of Marketing and Trading Derivative Contracts
The following tables show the changes in the net fair value of Occidental’s marketing and trading derivative contracts, a portion of
which are hedges, during 2008 and 2007.
In millions 2008 2007
Fair value of contracts outstanding at beginning of year – unrealized losses $(576)$(355)
Losses on contracts realized or otherwise settled during the year 101 106
Changes in fair value attributable to changes in valuation techniques and assumptions (1) —
Gains (losses) or other changes in fair values (a) 337 (327)
Fair value of contracts outstanding at end of year – unrealized losses $(139)$(576)
(a) Primarily relates to price changes on existing production hedges.
INTEREST RATE RISK
Occidental’s exposure to changes in interest rates relates primarily to its long-term debt obligations, and is not expected to be material.
CREDIT RISK
Occidental’s energy contracts are spread among several counterparties. Creditworthiness is reviewed before doing business with a
new counterparty and on an ongoing basis. Occidental monitors aggregated counterparty exposure relative to credit limits. Credit exposure for
each customer is monitored for outstanding balances, current month activity, and forward mark-to-market exposure. Losses associated with
credit risk have been immaterial for all years presented.
FOREIGN CURRENCY RISK
Occidental’s foreign operations have currency risk. Occidental manages its exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes. Most international crude oil
sales are denominated in U.S. dollars. Additionally, all of Occidental’s consolidated foreign oil and gas subsidiaries have the U.S. dollar as
the functional currency. As of December 31, 2008 and 2007, Occidental had not entered into any foreign currency derivative instruments.
The effect of exchange rates on transactions in foreign currencies is included in periodic income.
51
DERIVATIVE AND FAIR VALUE DISCLOSURES