Occidental Petroleum Corp (OXY) SEC Annual Report (10-K) for 2010

There has been recent political instability and civil unrest in Bahrain, Libya and Yemen.  The effect, if any, of these developments on Occidental's operations is unknown at this time, but is not expected to be material.

Occidental's share repurchase activities for the year ended December 31, 2010 were as follows:

Performance Graph

The following graph compares the yearly percentage change in Occidental's cumulative total return on its common stock with the cumulative total return of the Standard & Poor's 500 Stock Index (S&P 500) and with that of Occidental's peer groups over the five-year period ended on December 31, 2010.  The graph assumes that $100 was invested in Occidental common stock, in the stock of the companies in the S&P 500 and in separate portfolios of each of the peer group companies' common stock weighted by their relative market values each year and that all dividends were reinvested.

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Item 6    Selected Financial Data

Note :  Argentine operations have been reflected as held for sale for all periods.

Item 7 and 7A

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

Strategy

General

In this report, "Occidental" refers to Occidental Petroleum Corporation (OPC), and/or one or more entities in which it owns a majority voting interest (subsidiaries).  Occidental's principal businesses consist of three industry segments operated by OPC's subsidiaries and affiliates.  The oil and gas segment explores for, develops, produces and markets crude oil, including natural gas liquids (NGLs) and condensate (together with NGLs, "liquids"), as well as natural gas.  The chemical segment (OxyChem) manufactures and markets basic chemicals, vinyls and other chemicals.  The midstream, marketing and other segment (midstream and marketing) gathers, treats, processes, transports, stores, purchases and markets crude oil, liquids, natural gas, carbon dioxide (CO 2 ) and power.  It also trades around its assets, including pipelines and storage capacity, and trades oil and gas, other commodities and commodity-related securities.  Unless otherwise indicated hereafter, discussion of oil or oil and liquids refers to crude oil, NGLs and condensate.  In addition, discussions of oil and gas production or volumes, in general, refer to sales volumes unless the context requires or it is indicated otherwise.

Occidental aims to generate superior total returns to stockholders using the following strategies:

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Occidental prefers to own large, long-lived "legacy" oil and gas assets, like those in California and the Permian Basin, that tend to have enhanced secondary and tertiary recovery opportunities and economies of scale that lead to cost-effective production in a safe and environmentally sound manner.  Management expects such assets to contribute substantially to earnings and cash flow after invested capital.

At Occidental, maintaining financial discipline means investing capital in projects that management expects will generate above-cost-of-capital returns through their life cycle.  Occidental expects to use most of any excess cash flow after capital expenditures to enhance stockholders' returns through dividend increases and acquisition opportunities.

The chemical business is not managed with a growth strategy but to generate cash flow exceeding its normal capital expenditure requirements.  Capital is employed to operate the chemical business in a safe and environmentally sound way, to sustain production capacity and to focus on projects designed to improve the competitiveness of these assets.  Acquisitions may be pursued when they are expected to enhance the existing core chlor-alkali and polyvinyl chloride (PVC) businesses or take advantage of other specific opportunities.

The midstream and marketing segment is managed to generate returns on capital invested in excess of Occidental's cost of capital.   In marketing its own production and third party purchases, Occidental attempts to maximize realized prices and margins and limit credit risk exposure.  In commodities and commodity-related securities trading, Occidental seeks to generate gains using net long positions.   Capital is employed to operate segment assets in a safe and environmentally sound way, to sustain or, where appropriate, increase operational capacity and to improve the competitiveness of Occidental's assets.

Oil and Gas

Segment Earnings

($ millions)

The oil and gas business seeks to increase its oil and gas production profitably and add new reserves at a pace ahead of production while minimizing costs incurred for finding and development.  The oil and gas business implements this strategy within the limits of the overall corporate strategy primarily by:

Over the past several years, Occidental has strengthened its asset base within its core areas.  Occidental has invested in, and disposed of, assets with the goal of raising the average performance and potential of its assets.

In December 2010, Occidental executed an agreement with a subsidiary of China Petrochemical Corporation (Sinopec) to sell its Argentine oil and gas operations for after-tax proceeds of approximately $2.6 billion.  The sale closed in February 2011.

In January 2011, Occidental completed the acquisition of gas producing properties in South Texas for approximately $1.8 billion.  In December 2010, Occidental acquired approximately 174,000 net contiguous acres of oil producing and prospective properties in North Dakota, which also offer significant further development opportunity, for approximately $1.4 billion.

In 2010, Occidental also acquired various domestic oil and gas interests that complement its existing portfolio of assets for approximately $2.8 billion.  These assets are in operated, producing and non-producing properties in the Permian Basin, mid-continent region and California.

The acquisitions mentioned above collectively are expected to offset the Argentine production.

In addition, Occidental continues to deploy significant capital to its core operations in the Permian Basin, California and mid-continent region to increase production from these assets.

Internationally, Occidental announced in January 2011 that it had reached an agreement-in-principle for a 40-percent participating interest in the Shah Field development project in Abu Dhabi, partnering with the Abu Dhabi National Oil Company.  In January of 2010, Occidental and its partners signed a technical service contract with the South Oil Company of Iraq to develop the Zubair Field in Iraq.  In April 2009, Occidental and its partners signed a Development and Production Sharing

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Agreement (DPSA) with the National Oil and Gas Authority of Bahrain for further development of the Bahrain Field.  The DPSA became effective in December 2009.  In addition, Occidental has continued to make capital expenditures and investments in existing projects in the Middle East/North Africa and expects continued production growth in the Mukhaizna project in Oman.

Chemical

Segment Earnings

($ millions)

OxyChem's strategy is to be a low-cost producer in order to maximize its cash flow generation.  OxyChem concentrates on the chlorovinyls chain beginning with chlorine, which is co-produced with caustic soda, both of which are marketed to third parties.  In addition, chlorine, together with ethylene, is converted through a series of intermediate products into polyvinyl chloride (PVC).  OxyChem's focus on chlorovinyls permits it to maximize the benefits of integration and allows it to take advantage of economies of scale.

Midstream, Marketing and Other

Segment Earnings

($ millions)

The midstream and marketing segment is managed to generate returns on capital invested in excess of Occidental's cost of capital.  In order to generate these returns, the segment provides low cost services to other segments as well as to third parties and operates gas plants, oil, gas and CO 2 pipeline systems and storage facilities.  In addition, the marketing and trading group markets Occidental's and third-party oil and gas, trades around the midstream and marketing segment assets and engages in commodities and commodity-related securities trading.

In December 2010, Occidental purchased additional interests in the General Partner of Plains All-American Pipeline, L.P. (Plains Pipeline), and now owns approximately 35 percent of the General Partner.  In December 2010, Occidental also completed its acquisition of the remaining 50-percent joint venture interest in Elk Hills Power, LLC (EHP), a limited liability company that operates a gas-fired power-generation plant in California, bringing Occidental's total ownership to 100 percent.

Key Performance Indicators

General

Occidental seeks to ensure that it meets its strategic goals by continuously measuring its success in maintaining below-average debt levels, delivering returns in excess of its cost of capital and achieving top-quartile performance compared to its peers in:

Over the years, Occidental has delivered high levels of return.  Occidental increased stockholder's equity by 11 percent for 2010 and 42 percent for the three-year period from 2008 to 2010 while continuing to deliver above cost of capital returns.  During the three-year period from 2008 to 2010, Occidental increased its dividend rate by 52 percent while its stock price increased by 27 percent.

Debt Structure

Occidental's year-end 2010 total debt-to-capitalization ratio was 14 percent.  Occidental issued $2.6 billion of senior unsecured notes in the fourth quarter of 2010.

Occidental's long-term senior unsecured debt was rated A by Fitch Ratings, Standard and Poor's Ratings and DBRS.  Occidental's long-term unsecured debt was rated A2 by Moody's Investors Service.  A security rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating.

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Oil and Gas Segment

Business Environment

Oil and gas prices are the major variables that drive the industry's short and intermediate term financial performance.  Average oil prices were higher in 2010 than 2009.  West Texas Intermediate (WTI) was $91.38 and $79.36 per barrel as of December 31, 2010 and 2009, respectively.  The average daily WTI market price for 2010 was $79.53 per barrel compared with $61.80 per barrel in 2009.  Occidental's realized price for crude oil for its continuing operations as a percentage of average WTI prices was approximately 95 percent and 93 percent for 2010 and 2009, respectively.

The average daily New York Mercantile Exchange (NYMEX) domestic natural gas price in 2010 increased approximately 7 percent from 2009.  For 2010, the price averaged $4.49 per thousand cubic feet (Mcf) compared with $4.20 per Mcf for 2009, and was $4.41 per Mcf as of December 31, 2010.

Prices and differentials can vary significantly, even on a short-term basis, making it impossible to predict realized prices with a reliable degree of certainty.

Business Review

All sales, production and reserves volumes are net to Occidental and include amounts attributable to noncontrolling interests, where applicable, unless otherwise specified.

Worldwide Sales Volumes

(thousands BOE/day)

Production-Sharing Contracts (PSC)

Occidental conducts its operations in Bahrain, Iraq, Libya, Oman, Yemen and Qatar, including Dolphin, under PSCs or similar contracts.  Under such contracts, Occidental receives a share of production and reserves to recover its costs and an additional share for profit.  In addition, Occidental's share of production and reserves from operations in Long Beach, California and certain contracts in Colombia are subject to contractual arrangements similar to a PSC.  These contracts do not transfer any right of ownership to Occidental and reserves reported from these arrangements are based on Occidental's economic interest as defined in the contracts.  Occidental's share of production and reserves from these contracts decreases when product prices rise and increases when prices decline.  Overall, Occidental's net economic benefit from these contracts is greater when product prices are higher.

United States

Permian

Occidental's Permian production is diversified across a large number of producing areas in the Permian Basin.  The Permian Basin extends throughout southwest Texas and southeast New Mexico and is one of the largest and most active oil basins in the United States, with the entire basin accounting for approximately 18 percent of the total United States crude oil production.  Occidental is the largest producer of crude oil in the Permian Basin with an approximate 16-percent net share of the total production.  Occidental also produces and processes natural gas and NGLs in the Permian Basin.

Starting in 2010, Permian Basin non-associated gas assets were included as part of the Midcontinent Gas operations.  As a result of this change, the Permian business unit's production shifted from 84 percent liquids and 16 percent gas, to 89 percent liquids and 11 percent, mostly associated, gas.

In the past several years, including 2010, Occidental increased its Permian interests through various acquisitions.

Occidental's interests in Permian offer additional development and exploitation potential.  During 2010, Occidental drilled approximately 190 wells on its operated properties and participated in additional wells drilled on third-party-operated properties.  Occidental conducted development activity on 11 CO 2 projects during 2010.  Occidental also focused on improving the performance of existing wells.  Occidental had an average of 80 well service units working in Permian during 2010 performing well maintenance and workovers.

Approximately 66 percent of Occidental's Permian oil production is from fields that actively employ the application of CO 2 flood technology, an enhanced oil recovery (EOR) technique.  This technique involves injecting CO 2 into oil reservoirs where it causes the oil to flow more freely into producing wells.  These CO 2 flood operations make Occidental a world leader in the application of this technology.

Occidental's policy regarding tertiary recovery is to capitalize costs when they support development of proved reserves and otherwise generally expense these costs.  In 2009, Occidental capitalized approximately 50 percent of the costs of CO 2 injected in Permian.  Over the years, as the CO 2 program matured, a smaller portion of the injected CO 2 resulted in the development of proved reserves.  Beginning in 2010, Occidental expensed 100 percent of the CO 2 injected, in order to better reflect the current nature of the CO 2 program.

Occidental's total share of Permian Basin oil and gas production was approximately 197,000 BOE per day in 2010, which included approximately 183,000 BOE per day from the Permian business unit.  At the end of 2010, Occidental's Permian properties had approximately 1.2 billion BOE in proved reserves.

California

Occidental's California operations consist of holdings in the Elk Hills area, the Wilmington Field in the Los Angeles basin and other interests in the Ventura, San Joaquin, Los Angeles and Sacramento basins.

Occidental's interests in the Elk Hills area include the Elk Hills oil and gas field in the southern portion of California's San Joaquin Valley, which it operates with an approximate 78-percent interest, along with other adjacent properties.  The Elk Hills Field is the largest producer of gas and NGLs in California.  During 2010, Occidental continued to perform infill drilling, field extensions and recompletions identified by advanced reservoir characterization techniques, resulting in approximately 240 new wells being drilled and approximately 190 wells being worked over.

During 2010, Occidental continued to produce from the Kern County discovery area announced last year and continued to develop the multi-pay zones.  Based on currently available data, Occidental believes that its estimates of gross reserves ranges for the area remain reasonable for the combined conventional and unconventional pay zones.

Occidental began construction of a new gas processing plant in the Elk Hills area in 2010, and plans to commence building a second such plant in the next two years.

Occidental also owns interests in California properties in the Ventura, San Joaquin and Sacramento basins, other than Elk Hills. The combined properties produce oil and gas from more than 50 fields.

Occidental holds approximately 1.6 million acres in California, the vast majority of which are net fee mineral interests.  A large portion of such interests has been acquired in the last few years.  As a result, Occidental has a large inventory of properties available for future development.

 Occidental's share of production and reserves from its operations in the Wilmington Field is subject to contractual arrangements similar to a PSC.

Occidental's total share of oil and gas production in California was approximately 139,000 BOE per day in 2010.  At the end of 2010, Occidental's properties in California had approximately 768 million BOE in proved reserves.

Midcontinent and Other Interests

In 2010, Occidental combined most of its gas production in the mid-continent region of the United States into a single business unit called Midcontinent Gas, in order to take advantage of common development methods and production optimization opportunities.  This business unit includes the Hugoton Field, the Piceance Basin and the bulk of the Permian Basin non-associated gas assets, which were included as part of the Permian business unit in 2009.  As a result, Midcontinent Gas' production is approximately 70 percent gas and 30 percent liquids.

The Midcontinent Gas properties are principally located in Texas, New Mexico, Colorado, Utah, Kansas and Oklahoma.  Occidental owns over 2.8 million net acres in the mid-continent region, which includes 1.4 million acres in a large concentration of gas reserves and production and royalty interests in the Hugoton area located in Kansas and Oklahoma and approximately 1.4 million acres, mainly in Texas, New Mexico, Colorado and Utah.

In January 2011, Occidental completed the acquisition of gas producing properties in South Texas.  Occidental also owns approximately 200,000 net acres of oil producing and prospective properties in North Dakota's Williston Basin, including acreage in the Bakken and Three Forks formations.  A substantial portion of this acreage was purchased in 2010.

Beginning in 2011, the new properties acquired during 2010 and 2011 located in South Texas and North Dakota will be grouped as part of Midcontinent and Other Interests.

In 2010, Midcontinent and Other Interests produced approximately 62,000 BOE per day, which included non-associated gas from the Permian Basin.  As of December 31, 2010, proved reserves for these operations totaled approximately 266 million BOE.

Other Developments

The recent acquisitions provide Occidental with a large inventory of development projects.  Management conducted a review of Occidental's portfolio of oil and gas assets in the fourth quarter of 2010 and concluded that certain projects had become uneconomical considering the natural gas price environment and that it would not pursue them.  As a result, Occidental recorded a pre-tax impairment charge of $275 million, predominately of gas properties in the Rocky Mountain region in 2010.

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Middle East/North Africa

Bahrain

In December 2009, Occidental and its partners began operating the Bahrain Field.  Occidental has a 48-percent interest in the joint venture.  Occidental expects gross gas production capacity to grow more than 35 percent from a current level of 1.6 billion cubic feet per day to over 2.1 billion cubic feet per day within five years.  Gross oil production from the Bahrain Field is expected to more than double to approximately 75,000 barrels per day within five years and grow to a peak level of more than 100,000 barrels per day thereafter.  Occidental's share of production from Bahrain during 2010 was approximately 169 million cubic feet (MMcf) of gas and 3,000 barrels of oil per day.

Iraq

In January 2010, Occidental and its partners signed a technical service contract (TSC) with the South Oil Company of Iraq to develop the Zubair Field. Occidental has a 23.44-percent interest in the TSC.  Under this TSC, Occidental is entitled to receive oil for cost recovery and remuneration fee, subject to achieving an initial gross production threshold.  Occidental and its partners plan to increase production from the initial gross oil production level of approximately 180,000 BOE per day to a contractually targeted production level of 1.2 million BOE per day by 2016 or earlier and maintain this level of production for seven years.  During 2010, Occidental and its partners achieved the initial gross production threshold.  As of year-end 2010, Occidental's share of production was approximately 12,000 BOE per day.

Libya

Occidental, under agreements with the Libyan National Oil Corporation (NOC), participates in exploration and production operations in the Sirte Basin.  In June 2008, Occidental and its partner signed new agreements with NOC to upgrade its existing contracts for up to 30 years.  Occidental's share of production from the Libya properties was approximately 13,000 BOE per day in 2010.

Oman

In Oman, Occidental is the operator of Block 9 and Block 27, with a 65-percent working interest in each, Block 53, with a 45-percent working interest, and Block 62, with a 48-percent working interest.

Occidental and its partners signed a 30-year PSC for the Mukhaizna Field (Block 53) with the Government of Oman in 2005.  In September 2005, Occidental assumed operations of the Mukhaizna Field.  By the end of 2010, Occidental had drilled over 1,020 new wells and continued implementation of a major pattern steam flood project.  As of year-end 2010, the exit rate of gross daily production was over 15 times higher than the production rate in September 2005, reaching nearly 120,000 BOE per day.  Occidental plans to steadily increase production through continued expansion of the steam flood project.

The term for Block 9 is through December 2015, with a potential 10-year extension.  The term for Block 27 is through September 2035.

Occidental has operations in Block 62 where it is pursuing development and exploration opportunities targeting gas and condensate resources.

Occidental's share of production from the Oman properties was approximately 69,000 BOE per day in 2010.

Qatar

Occidental operates three offshore projects in Qatar:  Idd El Shargi North Dome (ISND) and Idd El Shargi South Dome (ISSD), with a 100-percent working interest in each, and Al Rayyan (Block 12), with a 92.5-percent working interest.

In 2008, Occidental received approval from the Government of Qatar for the third phase of field development of the ISND Field focusing on continued development of mature reservoirs, while further delineating and developing less mature reservoirs.  Drilling under this phase was completed during 2010.  Occidental has proposed a fourth phase of development in ISND and field development plans for ISSD and Al Rayyan, which would include additional drilling through 2012.

Occidental also has an investment in Dolphin, which was acquired in 2002, consisting of two separate economic interests through which Occidental owns: (i) a 24.5-percent undivided interest in the assets and liabilities associated with a DPSA with the Government of Qatar to develop and produce natural gas and NGLs in Qatar's North Field through mid-2032, with a provision to request a 5-year extension; and (ii) a 24.5-percent interest in the stock of Dolphin Energy Limited (Dolphin Energy), which is discussed further in "Midstream, Marketing and Other Segment – Pipeline Transportation."

Occidental's share of production from all of its operations in Qatar was approximately 139,000 BOE per day in 2010.

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United Arab Emirates

Occidental announced in January 2011 that it had reached an agreement-in-principle for a 40-percent interest in the Shah Field high sulfur content gas development project in Abu Dhabi, partnering with the Abu Dhabi National Oil Company.  The project is anticipated to produce approximately 500 MMcf per day of natural gas, of which Occidental's net share will be approximately 200 MMcf per day.  In addition, the project is expected to produce approximately 50,000 barrels per day of liquids, of which Occidental's net share will be approximately 20,000 barrels per day.  Production from this field is expected to begin no earlier than 2014.  Capital expenditures are estimated to be in the range of $10 billion for the project with Oxy's share proportional to its ownership.

Occidental conducts a majority of its Middle East business development activities through its office in the United Arab Emirates, which also provides various support functions for Occidental's Middle East/North Africa oil and gas operations.

Yemen

Occidental owns contractual interests in three producing blocks in Yemen, including a 38-percent working interest in the Masila Field, which expires in December 2011, a 40.4-percent interest, including an 11.8-percent interest held in an unconsolidated entity, in the East Shabwa Field, and a 75-percent working interest in Block S-1, which Occidental operates.

Occidental's share of production from the Yemen properties was approximately 30,000 BOE per day in 2010, which included nearly 14,000 BOE per day from the Masila Field.

Latin America

Latin America 1.  Argentina 2.  Bolivia 3.  Colombia

Argentina

In December 2010, Occidental executed an agreement to sell its Argentine operations.  The sale closed in February 2011.

The Argentine operations consist of 23 concessions located in the San Jorge Basin in southern Argentina and the Cuyo and Neuquén Basins in western Argentina. Occidental operated 19 of the concessions with a 100-percent working interest.  In 2010, Occidental obtained a ten-year extension for its hydrocarbon concessions in the Santa Cruz province of Argentina, which extended the concessions through a range of dates from 2025 to 2027.  During 2010, Occidental drilled approximately 120 new development wells and performed a number of recompletions and well repairs.  Occidental's share of production from the Argentine properties was approximately 43,000 BOE per day in 2010.

Bolivia

Occidental holds working interests in four blocks located in the Tarija, Chuquisaca and Santa Cruz regions of Bolivia.

Colombia

Occidental is the operator under four contracts within the Llanos Norte Basin: the Cravo Norte, Rondón, Cosecha, and Chipirón Association Contracts.  Occidental's working interests under these four contracts are 39 percent, 44 percent, 53 percent and 61 percent, respectively.  Occidental also holds a 48-percent working interest in the La Cira-Infantas Field, which is located in the Middle-Magdalena Basin.  Occidental's share of 2010 production from its Colombia operations was approximately 32,000 BOE per day.

Proved Reserves

For further information regarding Occidental's proved reserves, see "Supplemental Oil and Gas Information" following the "Financial Statements."

Occidental had proved reserves at year-end 2010 of 3,363 million BOE, as compared with the year-end 2009 amount of 3,230 million BOE.  Proved reserves at year-end 2010 consisted of 74 percent oil and liquids and 26 percent natural gas.  Proved developed reserves represented approximately 75 percent of Occidental's total proved reserves at year-end 2010 compared to 77 percent at year-end 2009.

Proved Reserve Additions

Occidental's total proved reserve additions from all sources were 409 million BOE in 2010.  The total additions were as follows:

Occidental's ability to add reserves, other than purchases, depends on the success of improved recovery, extension and discovery projects, each of which depend on reservoir characteristics, technology improvements, oil and natural gas prices, as well as capital and operating costs.  Many of these factors are outside of management's control, and will affect whether or not these historical sources of proved reserve additions continue at similar levels.

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Revisions of Previous Estimates

In 2010, revisions of previous estimates provided a net 1 million BOE reduction to reserves.  Revisions included a net positive price-related increase for domestic oil and gas reserves, offset by a negative effect from PSCs mostly in the Middle East/North Africa as well as technical revisions, which were not material.

Oil price changes affect proved reserves recorded by Occidental.  For example, when oil prices increase, less oil volume is required to recover costs under PSCs, which results in a reduction of Occidental's share of proved reserves.  Conversely, when oil prices drop, Occidental's share of proved reserves increases for these PSCs.  Oil and natural gas price changes also tend to affect the economic lives of proved reserves, primarily in domestic properties, in a manner offsetting the PSC reserve volume changes.  Apart from the effects of product prices, Occidental believes its approach to interpreting technical data regarding proved oil and gas reserves makes it more likely that future proved reserve revisions will be positive rather than negative.

Improved Recovery

In 2010, Occidental added proved reserves of 259 million BOE from improved recovery through its EOR activities.  Generally, the improved recovery additions in 2010 were associated with the continued development of mature properties in California, Permian, Argentina and Oman.  These properties are generally characterized by the deployment of secondary and tertiary development projects, largely employing application of waterflood (secondary), steamflood (tertiary) or CO 2 (secondary or tertiary) injection.  These development projects are often applied through existing wells, though additional drilling may be required to fully optimize the development configuration.  Waterflooding is the technique of injecting water into the formation to displace the oil to the offsetting oil production wells.  Steamflooding is the technique of injecting steam into the formation to lower oil viscosity so that it flows more freely into producing wells.  This process is applied in areas where the oil is too viscous to be effectively moved with water.  CO 2 flooding involves injecting CO 2 into oil reservoirs where it causes the oil to flow more freely into producing wells.

Extensions and Discoveries

Occidental also obtained reserve additions from extensions and discoveries, which are dependent on successful exploration and exploitation programs.  In 2010, extensions and discoveries added 7 million BOE.

Purchases and Divestitures of Proved Reserves

Occidental continues to add reserves through acquisitions when properties are available at prices it deems reasonable.  As market conditions change, the available supply of properties may increase or decrease accordingly.  In 2010, Occidental added 144 million BOE through purchases of proved reserves largely consisting of several domestic acquisitions in the Permian and Williston Basins and the Zubair Field in Iraq.

Proved Undeveloped Reserves

In 2010, Occidental had proved undeveloped reserves additions of 287 million BOE from improved recovery, extensions and discoveries and purchases.  Of the total additions, 202 million BOE represented additions from improved recovery, primarily in California, Permian, Argentina, Oman, Bahrain and Qatar.   Occidental added 81 million BOE through purchases of proved undeveloped reserves domestically in the Permian and Williston Basins and the Zubair Field in Iraq. These proved undeveloped reserve additions were offset by reserves transfers of 135 million BOE to the proved developed category as a result of the 2010 development programs.  Occidental incurred approximately $1.4 billion in 2010 to convert proved undeveloped reserves to proved developed reserves.  California, Permian, Argentina, Bahrain, Oman and Qatar accounted for approximately 86 percent of the reserves transfers from proved undeveloped to proved developed in 2010.  Proved undeveloped reserve additions will require incurrence of additional future development costs.

Reserves Evaluation and Review Process

Occidental's estimates of proved reserves and associated future net cash flows as of December 31, 2010 were made by Occidental's technical personnel and are the responsibility of management.  The current Senior Director of Worldwide Reserves and Reservoir Engineering is responsible for overseeing the preparation of reserve estimates, including the internal audit and review of Occidental's oil and gas reserves data.  The Senior Director has over 29 years of experience in the upstream sector of the exploration and production business, and has held various assignments in North America, Asia and Europe.  He is a three-time past Chair of the Society of Petroleum Engineers Oil and Gas Reserves Committee.  He is an American Association of Petroleum Geologists (AAPG) Certified Petroleum Geologist and the current Chair of the AAPG Committee on Resource Evaluation.  He is a member of the Society of Petroleum Evaluation Engineers, the Colorado School of Mines Potential Gas Committee and the UNECE Expert Group on Resource Classification.  He is also an active member of the Joint Committee on Reserves Evaluator Training (JCORET).  The Senior Director has Bachelor of Science and Master of Science degrees in geology from Emory University in Atlanta.

Occidental has a Corporate Reserves Review Committee (Reserves Committee) consisting of senior corporate officers, to monitor, review and approve Occidental's oil and gas reserves.  The Reserves Committee reports to the Audit Committee of Occidental's Board of Directors during the year.  Since 2003, Occidental has retained Ryder Scott Company, L.P. (Ryder Scott), independent petroleum engineering consultants, to review its annual oil and gas reserve estimation processes.

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In 2010, Ryder Scott conducted a process review of Occidental's methods and analytical procedures utilized by Occidental's engineering and geological staff for estimating the proved reserves volumes, preparing the economic evaluations and determining the reserves classifications as of December 31, 2010, in accordance with the U.S. Securities and Exchange Commission (SEC) regulatory standards.  Ryder Scott reviewed the specific application of such methods and procedures for selected oil and gas properties considered to be a valid representation of Occidental's total proved reserves portfolio.  In 2010, Ryder Scott reviewed approximately 20 percent of Occidental's proved oil and gas reserves.  Since being engaged in 2003, Ryder Scott has reviewed the specific application of Occidental's reserve estimation methods and procedures for approximately 74 percent of Occidental's proved oil and gas reserves.  Management retains Ryder Scott to provide objective third-party input on its methods and procedures and to gather industry information applicable to Occidental's reserve estimation and reporting process.  Ryder Scott has not been engaged to render an opinion as to the reasonableness of reserves quantities reported by Occidental.  Occidental has filed Ryder Scott's independent report as an exhibit to this Form 10-K.

Based on its reviews, including the data, technical processes and interpretations presented by Occidental, Ryder Scott has concluded that the overall procedures and methodologies Occidental utilized in estimating the proved reserves volumes for the reviewed properties are appropriate for the purpose thereof, and comply with current SEC regulations.

Industry Outlook

The petroleum industry is highly competitive and subject to significant volatility due to numerous current and anticipated market conditions.  WTI generally increased throughout 2010, settling at $91.38 per barrel as of December 31, 2010.

Oil prices will continue to be affected by global demand, which is generally a function of global economic conditions, as well as the actions of OPEC, other significant producers and governments.  These factors make it impossible to predict the future direction of oil prices reliably.  Occidental continues to adjust to economic conditions by adjusting capital expenditures in line with current economic conditions with the goal of keeping returns well above its cost of capital.

While local supply and demand fundamentals, as well as government regulations and availability of transportation capacity from producing areas, are decisive factors affecting domestic natural gas prices and local differentials over the long term, futures prices can be volatile, making it impossible to forecast prices reliably.

Chemical Segment

Business Environment

The chemical segment earnings increased in 2010 as the world economies began recovering from the global economic downturn.  Expanding U.S. and international economies resulted in increased demand for chlorine, caustic soda, PVC and vinyl chloride monomer (VCM).  Margins in the U.S. were pressured by higher feedstock costs, but the feedstock costs in North America were favorable compared to Europe and Asia, resulting in strong demand for U.S.-produced products in export markets.  Occidental's vinyls exports in 2010 were 125 percent higher compared to 2009.

Business Review

Basic Chemicals

During 2010, demand and pricing for basic chemical products improved as U.S. and international manufacturing sectors recovered from the global economic downturn.  Despite the continued weakness within the U.S. housing sector, industry chlorine demand improved by 12 percent compared to 2009, as downstream chlorine derivatives remained competitive in the export markets as a result of feedstock cost advantages in natural gas and ethylene.  Improvements in the pulp, alumina and general manufacturing sectors aided caustic soda demand, which increased by 14 percent compared to 2009.  Chlorine prices were strong at the beginning of 2010 and remained fairly steady throughout the year.  Caustic soda pricing increased throughout the year as the global supply and demand balance tightened due to caustic soda demand rising at a faster rate than chlorine, various plant operating problems occurring in the U.S. and Europe, and the Chinese government's enforcement of controls on electricity consumption.

Vinyls

Year-over-year domestic demand fell 10 percent due to the continuation of low demand from the housing and commercial construction markets, offset by an 85-percent increase in industry export volumes compared with 2009 due to the continued cost advantage of U.S.-based feedstocks.  Overall, 2010 operating rates reflect an 11-percent increase over 2009.  Margins for PVC increased compared to 2009 as price increases outpaced increases in both ethylene and chlorine costs.

Industry Outlook

Future performance will depend on the recovery of domestic housing and construction markets, continued global economic recovery, and the cost competitiveness of U.S. feedstock and energy pricing compared to global markets.

Basic Chemicals

Higher domestic demand and margins for basic chemicals products in 2011 are expected to correlate with overall economic improvement in the U.S. as the housing, automotive and durable goods sectors further rebound from 2009.  Margins are anticipated to continue to improve as pricing for chlorine and caustic soda is expected to remain strong and U.S. feedstock pricing to remain favorable compared to other global markets.

Vinyls

Operating rates in 2011 are expected to increase from 2010 levels as export volumes remain strong throughout the year and domestic demand increases modestly.  The U.S.-based feedstock cost advantage over other vinyls-producing regions is expected to continue.

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Midstream, Marketing and Other Segment

Business Environment

Midstream and marketing segment earnings are affected by the volumes of oil and gas it processes as well as the margins it obtains on throughput at its processing plants and transportation pipelines.  The marketing and trading businesses earn margins from trading oil, gas and other commodities, marketing the oil and gas segment's products and storage activity.  Generally, the midstream and marketing segment earns higher margins in high or increasing price environments.

The midstream and marketing segment earnings increase in 2010 compared to 2009 reflected higher margins in the marketing and trading and gas processing businesses and increased earnings in the pipeline business.

Business Review

Oil and Gas Marketing and Trading

The marketing and trading group markets substantially all of Occidental's oil and gas production, trades around the midstream and marketing segment assets and engages in commodities and commodity-related securities trading.  Occidental's third-party marketing and trading activities focus on purchasing crude oil and natural gas for resale from partners, producers and third parties whose oil and gas supply is located near midstream and marketing assets, such as pipelines, processing plants and storage facilities, that are owned or leased by Occidental.  These purchases allow Occidental to aggregate volumes to maximize prices received for Occidental's production.  In addition, Occidental's Phibro trading unit uses derivative instruments, including forwards, futures, swaps and options, some of which may be for physical delivery, in its strategy to profit from market price changes.  Marketing and trading earnings are affected primarily by commodity price changes and margins in oil and gas transportation and storage programs.  In 2010, the marketing and trading group earnings improved due to higher trading income.

Gas Processing Plants and CO 2 Fields and Facilities

Occidental processes its and third-party domestic wet gas to extract NGLs and other gas by-products, including CO 2 , and delivers dry gas to pipelines.  Margins result from the difference between inlet costs of wet gas and market prices for NGLs.

In 2008, Occidental signed an agreement for a third party to construct a gas processing plant that will provide CO 2 for Occidental's EOR projects in the Permian Basin.  Occidental will own and operate the new facility, of which a portion became operational in 2010 with the remaining portions expected to be completed in 2012.  Occidental has secured transportation agreements to move CO 2 extracted at the facility to its Permian Basin production areas.

Occidental's 2010 earnings from these operations improved due to higher gas processing margins.

Pipeline Transportation

Margin and cash flow from pipeline transportation operations mainly reflect volumes shipped.  Dolphin Energy owns and operates a 230-mile-long, 48-inch natural gas pipeline (Dolphin Pipeline), which transports dry natural gas from Qatar to the UAE.  Through its 24.5-percent interest in Dolphin Energy, the Dolphin Pipeline investment contributes significantly to Occidental's pipeline transportation results.  Production of natural gas and NGLs under the DPSA from Qatar's North Field began during mid-2007 and, since mid-2008, production has been at full capacity of the Dolphin plant.  The Dolphin Pipeline has a capacity to transport up to 3.2 Bcf of natural gas per day and currently transports approximately 2.2 Bcf per day.  Demand for natural gas in the UAE and Oman has grown and Dolphin Energy's customers have requested additional gas supplies.  To help fulfill this growing demand, Dolphin Energy will continue to pursue an agreement to secure an additional supply of gas from Qatar.

Occidental owns an oil-gathering, common carrier pipeline and storage system with approximately 2,700 miles of pipelines from southeast New Mexico across the Permian Basin of southwest Texas to Cushing, Oklahoma.  The system has a current throughput capacity of about 365,000 barrels per day and 5.8 million barrels of active storage capability as well as 69 truck unloading facilities at various points along the system which allow for additional volumes to be delivered into the pipeline.

In 2010, Occidental purchased additional interests in Plains Pipeline. Occidental's 2010 pipeline transportation earnings improved due to volume and pricing increases from the Dolphin Pipeline investment and increased transportation revenue from domestic pipeline operations.

Power Generation Facilities

Earnings from power generation facilities are derived from the sales of steam and power to affiliates and third parties.  Occidental's 2010 earnings from these facilities increased due to higher margins between the selling prices of steam and the cost of gas used in their production.  On December 31, 2010, Occidental completed its acquisition of the remaining 50-percent joint-venture interest in EHP, a limited liability company that operates a gas-fired, power-generation plant in California, bringing Occidental's total ownership to 100 percent.

Industry Outlook

The pipeline transportation and power generation businesses are expected to remain relatively stable.  The gas processing plant operations, which generate most of their income by separating and marketing liquids from wet gas, could have volatile results depending on NGL prices, which cannot be predicted.  Generally, higher NGL prices result in higher profitability.  The trading and marketing business is inherently volatile.  Based on its framework of controls and risk management systems, Occidental does not expect the volatility of these operations to be significant to the company as a whole.

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Segment Results of Operations

Net income and income from continuing operations represent amounts attributable to common stock.

Segment earnings generally exclude income taxes, interest income, interest expense, environmental remediation expenses, unallocated corporate expenses and discontinued operations, but include gains and losses from dispositions of segment assets and income from the segments' equity investments.  Seasonality is not a primary driver of changes in Occidental's consolidated quarterly earnings during the year.

The following table sets forth the sales and earnings of each operating segment and corporate items:

Oil and Gas

The following tables set forth the sales volumes and production of oil and liquids and natural gas per day for each of the three years in the period ended December 31, 2010.  The differences between the sales volumes and production per day are generally due to the timing of shipments at Occidental's international locations where product is loaded onto tankers.

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Oil and gas segment earnings in 2010 were $7.2 billion compared to $5.1 billion in 2009.  The increase reflected higher average worldwide crude oil and domestic natural gas prices and higher volumes, partially offset by higher operating expenses, partly resulting from fully expensing CO 2 , higher field support and workover expenses and higher depreciation, depletion and amortization (DD&A) rates.

Daily oil and gas production volumes, including Argentina, were 753,000 BOE for 2010, compared with 718,000 BOE for the 2009 period.  The 5 percent volume increase was mainly due to the new production in Bahrain and higher production in the Mukhaizna field in Oman, and gas production from domestic assets, which were partially offset by a decline in Colombia.  Production was negatively impacted in the Middle East/North Africa, Long Beach and Colombia resulting from higher year-over-year average oil prices affecting PSCs by 16,000 BOE per day. Daily sales volumes from continuing operations, were 705,000 BOE in the twelve months of 2010, compared with 678,000 BOE for 2009.

Oil and gas segment earnings in 2009 were $5.1 billion compared to $11.2 billion in 2008.  The decrease in segment earnings reflected lower average crude oil and natural gas prices, partially offset by increased oil and gas production, lower operating costs and lower production and ad valorem taxes.

Daily oil and gas production volumes, including Argentina, were 718,000 BOE for 2009, compared with 683,000 BOE for the 2008 period.  The 5 percent volume increase reflected increases from California, Midcontinent Gas and the Mukhaizna field in Oman as well as higher volumes resulting from lower year-over-year average oil prices affecting PSCs.  Daily sales volumes from continuing operations, were 678,000 BOE in the twelve months of 2009, compared with 645,000 BOE for 2008.

Oil and gas segment earnings in 2010 included a pre-tax charge of $275 million for asset impairments, predominately of gas properties in the Rocky Mountain region.  Oil and gas segment earnings in 2009 included an $8 million pre-tax charge for the termination of rig contracts.  Oil and gas segment earnings in 2008 included a pre-tax charge of $123 million for asset impairments and a pre-tax charge of $46 million for termination of rig contracts.

Average production costs for 2010 on continuing operations, excluding taxes other than on income, were $10.19 per BOE, compared to $8.95 for 2009.  The increase resulted from higher field support operations, workover and maintenance costs, as well as higher CO 2 costs, due to the change to expensing 100 percent of injected CO 2 beginning in 2010.

Chemical

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Chemical segment earnings were $438 million in 2010, compared to $389 million in 2009.  The increase in 2010 reflected improved market conditions, particularly for exports, driven by favorable feedstock costs in North America compared to Europe and Asia.  Vinyls exports in 2010 were 125 percent higher compared to 2009.

Chemical segment earnings were $389 million in 2009 compared to $669 million in 2008.  The decrease in 2009 results reflected lower volumes and prices for chlorine, caustic soda, PVC and VCM due to the economic slowdown, partially offset by lower feedstock and energy costs.  The 2008 earnings were also affected by a $90 million charge for plant closure and impairments.

Midstream, Marketing and Other

Midstream and marketing segment earnings in 2010 were $472 million, compared to $235 million in 2009.  The 2010 results reflected higher margins in the marketing and trading and gas processing businesses and increased earnings in the pipeline business.

Midstream and marketing segment earnings in 2009 were $235 million, compared to $520 million in 2008.  The 2009 results reflected lower marketing income and lower margins in gas processing.

Significant Items Affecting Earnings

The following table sets forth, for the years ended December 31, 2010, 2009 and 2008, significant transactions and events affecting Occidental's earnings that vary widely and unpredictably in nature, timing and amount:

Significant Items Affecting Earnings

Taxes

Deferred tax liabilities, net of deferred tax assets of $1.8 billion, were $3.1 billion at December 31, 2010.  The current portion of the deferred tax assets of $330 million is included in prepaid expenses and other.  The deferred tax assets, net of allowances, are expected to be realized through future operating income and reversal of temporary differences.

Worldwide Effective Tax Rate

The following table sets forth the calculation of the worldwide effective tax rate for income from continuing operations:

Occidental's 2010 worldwide tax rate was 40 percent, which was comparable to 2009 and 2008.  The 2010 deferred income tax expense included an $80 million benefit related to foreign tax credit carryforwards.  The 2009 and 2008 income tax expense included tax benefits of $87 million and $148 million, respectively, resulting from relinquishments of exploration properties.

Consolidated Results of Operations

Changes in the following components of Occidental's results of operations are discussed below:

Selected Revenue and Other Income Items

The increase in net sales in 2010, compared to 2009, was primarily due to higher oil, gas and chemical product prices and volumes.  Price and volume increases in the oil and gas segment represented approximately 71 percent of the overall increase, chemical volume and price increases represented 19 percent and midstream and marketing represented the remaining increase.

The decrease in net sales in 2009, compared to 2008, was due to lower oil and gas and chemical product prices, partially offset by higher volumes.  Of the price-related decrease in sales, approximately 90 percent was associated with oil and gas.

The decrease in interest, dividends and other income in 2009, compared to 2008, reflected lower interest income due to lower cash balances and interest rates.

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Selected Expense Items

Cost of sales increased in 2010, compared to 2009, due to higher oil and gas production costs, partly resulting from the effects of fully expensing CO 2 costs in 2010, as well as higher field operating, workover and maintenance costs and volumes; and higher chemical volumes, energy and feedstock costs.

Cost of sales decreased in 2009, compared to 2008, mainly due to lower chemicals volumes and lower feedstock and energy costs, which collectively represented approximately 73 percent of the decrease.  The remaining portion of the decrease was due to lower oil and gas and midstream and marketing operating costs.

Selling, general and administrative and other operating expenses increased in 2010, compared to 2009, due to higher compensation costs, in particular, equity compensation expense due to higher stock prices in 2010.

Selling, general and administrative and other operating expenses increased in 2009, compared to 2008, due to lower foreign exchange gains, increased severance expense and idling fees for rigs.

DD&A increased in 2010, compared to 2009, due to higher DD&A rates and volumes, including a full year of operations in Bahrain.

DD&A increased in 2009, compared to 2008, due to higher DD&A rates and higher volumes from Oman and the U.S.  The 2008 amount also included a charge of $42 million for domestic asset impairments.

Taxes other than on income increased in 2010, compared to 2009, due to higher production taxes for Permian and Midcontinent Gas resulting from higher realized domestic oil and natural gas prices and higher ad valorem taxes in Permian resulting from increased property values.

Taxes, other than on income, decreased mainly due to lower production taxes in Permian and Midcontinent Gas resulting from lower prices in 2009, compared to 2008, and lower ad valorem taxes due to decreased property values in 2009, compared to 2008.

Exploration expense in 2010 was comparable to 2009. Exploration expense decreased in 2009, compared to 2008, due to lower international exploration activities, partially offset by a higher success rate in California exploration activities.

Charges for impairments in 2010 predominately related to gas properties in the Rocky Mountain region.

Charges for impairments in 2008 related to undeveloped acreage in Yemen and chemical plant closure and impairments.

Interest and debt expense, net decreased in 2010, compared to 2009, due to lower average interest rates during 2010.  The additional debt raised in December 2010 had a minimal impact on overall interest expense.

Interest and debt expense, net increased in 2009, compared to 2008, due to higher debt levels during 2009 compared to 2008, partially offset by lower interest rates.

Selected Other Items

Provision for domestic and foreign income taxes increased in 2010, compared to 2009, due to higher income before taxes in 2010.  The worldwide effective tax rate in 2010 was comparable to 2009.  The 2010 income tax expense included an $80 million benefit related to foreign tax credit carryforwards.

Provision for domestic and foreign income taxes decreased in 2009, compared to 2008, due to lower income before taxes in 2009.  The worldwide effective tax rate in 2009 was comparable to 2008.

Discontinued operations, net, primarily reflected the after-tax losses in the Argentine operations held for sale.  The amounts included after-tax impairment charges of $111 million for producing properties and $309 million for undeveloped acreage in 2009 and 2008, respectively.

Net income attributable to noncontrolling interest increased in 2010, compared to 2009, due to higher income in Colombia, resulting from higher realized oil prices.

Net income attributable to noncontrolling interest decreased in 2009, compared to 2008, due to lower net income in Colombia resulting from lower oil prices.

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Consolidated Analysis of Financial Position

The changes in the following components of Occidental's balance sheet are discussed below:

Selected Balance Sheet Components

Assets

See "Liquidity and Capital Resources - Cash Flow Analysis" for discussion about the change in cash and cash equivalents.

The increase in trade receivables, net was due to higher oil prices and higher oil and gas volumes in the fourth quarter of 2010, compared to the fourth quarter of 2009.  The decrease in marketing and trading assets and other was mainly due to a decrease in trading securities and marketing activity.  The increase in prepaid expenses and other was mainly due to acquisition-related deposits.

Investments in unconsolidated entities increased mainly due to the purchase of additional interests in Plains Pipeline, partially offset by Occidental's acquisition of the remaining 50-percent joint-venture interest in EHP, bringing Occidental's total ownership in EHP to 100 percent.  EHP was consolidated in Occidental's balance sheet as of December 31, 2010.

The increase in PP&E, net was due to capital expenditures and the acquisitions of oil and gas properties, partially offset by DD&A and asset impairments.

Liabilities and Stockholders' Equity

The increase in the accounts payable balance reflected higher oil prices and volumes in the marketing and trading operations and higher capital expenditures during the fourth quarter of 2010 compared to the fourth quarter of 2009.

The increase in long-term debt, net was due to the issuance of $2.6 billion of senior unsecured notes.

The increase in deferred and other domestic and foreign income taxes was due to deferred tax charges incurred in 2010 and deferred taxes resulting from acquisitions.  The increase in deferred credits and other liabilities was mainly due to the long-term portion of scheduled payments related to acquisitions and deferred compensation.  The increase in stockholder's equity reflected net income for 2010, partially offset by dividend payments.

Liquidity and Capital Resources

At December 31, 2010, Occidental had approximately $2.6 billion in cash on hand.  Income and cash flows are largely dependent on oil and gas prices and sales volumes.  Occidental believes that cash on hand, cash generated from operations and cash from pending divestitures will be sufficient to fund its planned acquisitions, as well as operating needs and planned capital expenditures, dividends and any debt payments.

Occidental has a $1.5 billion bank credit facility (Credit Facility) through September 2012, which adjusts to $1.4 billion in September 2011.  The Credit Facility provides for the termination of the loan commitments and requires immediate repayment of any outstanding amounts if certain events of default occur or if Occidental files for bankruptcy.  Up to $350 million of the Credit Facility is available in the form of letters of credit.  Occidental did not draw down any amounts under the Credit Facility during 2010.  Available but unused committed bank credit facilities totaled approximately $1.5 billion at December 31, 2010.

Occidental has a shelf registration statement that facilitates issuing senior debt securities.  In December 2010, Occidental issued $2.6 billion of debt under this shelf, which comprised $600 million of 1.45-percent senior unsecured notes due 2013, $700 million of 2.50-percent senior unsecured notes due 2016 and $1.3 billion of 4.10-percent senior unsecured notes due 2021.  Occidental received net proceeds of approximately $2.6 billion.  Interest on the notes will be payable semi-annually in arrears in June and December of each year for the 1.45-percent notes and February and August of each year for both the 2.50-percent notes and 4.10-percent notes.

In February 2011, Occidental initiated redemption of all of its $1.0 billion 7-percent senior notes due 2013 and all of its $368 million 6.75-percent senior notes due 2012.  The redemption prices of the 7-percent and 6.75-percent senior notes will be calculated based on make-whole spreads of 50 basis points and 35 basis points, respectively, above the applicable Treasury rates.  Occidental will record a charge upon redemption, which is expected to be in the first quarter of 2011.

Occidental, from time to time, may access and has accessed debt markets for long-term and short-term funding for general corporate purposes, including acquisitions.  At this time, Occidental does not anticipate any additional material needs for such funding.

None of Occidental's committed bank credit facilities contain material adverse change clauses or debt ratings triggers that could restrict Occidental's ability to borrow under these facilities.  Occidental's credit facilities and debt agreements do not contain ratings triggers that could terminate bank commitments or accelerate debt in the event of a ratings downgrade.  Borrowings under the Credit Facility bear interest at various benchmark rates, including LIBOR, plus a margin based on Occidental's senior debt ratings.  Additionally, Occidental paid an annual facility fee of 0.05 percent in 2010 on the total

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commitment amount, which was based on Occidental's senior debt ratings.

As of December 31, 2010, under the most restrictive covenants of its financing agreements, Occidental had substantial capacity for additional unsecured borrowings, the payment of cash dividends and other distributions on, or acquisitions of, Occidental stock.

Cash Flow Analysis

The most important sources of the increase in operating cash flow in 2010, compared to 2009, were higher worldwide crude oil and domestic natural gas prices and volumes.  In 2010, compared to 2009, Occidental's global realized crude oil and U.S. natural gas prices for continuing operations each increased by 31 percent.  In 2010, Occidental's U.S. gas production represented approximately 59 percent of its worldwide natural gas production.  Occidental's 2010 oil and gas sales volumes from continuing operations increased, compared to 2009, mainly due to the new production from Bahrain and higher production in the Mukhaizna field in Oman and higher domestic gas production, partially offset by a decline in Colombia.  Increases in field support and energy costs in 2010, compared to 2009, partially offset the increases in prices and volumes.

Other cost elements, such as certain labor costs and overhead, are not significant drivers of changes in cash flow because they are relatively stable within a narrow range over the short to intermediate term.  Changes in these costs had a much smaller effect on cash flow than oil and gas prices and volumes.

The increase in operating cash flows in 2010, compared to 2009, also reflected higher chemical product prices for PVC, VCM, ethylene dichloride (EDC) and chlorine, which resulted in higher margins.  In addition, all chemical product volumes increased in 2010, compared to 2009, due to improved market conditions, particularly for exports.  The 2010 operating cash flows also reflected higher margins in the marketing and trading and gas processing businesses and increased earnings in the pipeline business.

The most important sources of the decrease in operating cash flow in 2009, compared to 2008, were lower average oil and natural gas prices, which were partially offset by increased oil and gas production volumes.  In 2009, compared to 2008, Occidental's global realized crude oil prices for continuing operations decreased by 38 percent and realized natural gas prices for continuing operations decreased by 57 percent in the U.S., where approximately 67 percent of Occidental's natural gas was produced.  Oil accounted for approximately 77 percent of Occidental's 2009 production.  Occidental's oil and gas sales volumes increased by 6 percent in 2009, compared to 2008, due to increased production in California, Midcontinent Gas, Latin America and Oman.  Decreases in oil and gas production costs, purchased goods and services, energy costs and production and ad valorem taxes in 2009, compared to 2008, partially offset the effect of decreases in realized oil and natural gas prices in 2009.

The lower operating cash flows in 2009, compared to 2008, also reflected lower chemical product volumes as well as lower product prices, especially for caustic soda, PVC and VCM, which resulted in lower margins.   The 2009 operating cash flows also reflected lower marketing income and lower margins in the gas processing business of the midstream and marketing segment.

In general, the overall impact of the chemical and midstream and marketing segments' margins was less significant than the changes in oil and gas prices because the chemical and midstream and marketing segments' earnings and cash flows are significantly smaller than those for the oil and gas segment.

Other non-cash charges to income from continuing operations in 2010, 2009 and 2008 included stock incentive plan amortization, deferred compensation and asset retirement obligation accruals.  The 2010 amount included a $275 million charge for asset impairments, predominately of gas properties in the Rocky Mountain region.  The 2009 amount included an $8 million charge for the termination of rig contracts.  The 2008 amount included a charge of $81 million for asset impairments of undeveloped acreage in Yemen, a $46 million charge for termination of rig contracts and a $90 million charge for chemical plant closure and impairments.

Operating cash flows for discontinued operations included after-tax charges of $111 million for asset impairments of certain Argentine producing properties in 2009 and $309 million for asset impairments of unproved acreage in Argentina in 2008.

Occidental's capital spending for 2011 is expected to be about $6.1 billion excluding the Shah Field development project, and will be focused on increasing oil and gas production and ensuring Occidental's returns remain well above its cost of capital given current oil and gas prices and the cost environment.

The estimated increase in capital expenditures in 2011 from $3.9 billion in 2010 will be allocated to the oil and gas segment.  Of the $6.1 billion of estimated 2011 capital spending, the Middle East/North Africa will receive approximately 27 percent, California will receive 20 percent, Permian will receive 14 percent and Midcontinent and Other Interests will receive 14 percent.

The 2010 other investing activities, net amount included $4.9 billion in cash payments for the acquisitions of businesses and assets, including acquisitions of various interests in domestic oil and gas properties, in operated, producing and non-producing properties in the Permian Basin, mid-continent region and California, for approximately $2.5 billion, properties in North Dakota for approximately $1.4 billion, additional interests in Plains Pipeline for approximately $430 million and the remaining 50-percent interest in EHP for approximately $175 million, as well as foreign contract payments of approximately $225 million.

The 2009 other investing activities, net amount included $1.7 billion in cash payments for the

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acquisitions of businesses and assets, including acquisitions of various oil and gas properties in California and the Permian Basin for approximately $610 million, interests in Phibro for approximately $370 million, additional interests in Plains Pipeline for approximately $330 million and various other acquisitions totaling approximately $320 million.  The 2009 amount also included foreign signing bonuses of approximately $190 million, the bulk of which was scheduled under the 2008 Libya agreements.

The 2008 other investing activities, net amount included cash payments for the acquisitions of oil and gas interests from Plains Exploration & Production Company for $2.7 billion, an interest in Joslyn Oil Sands Project in Northern Alberta, Canada for approximately $500 million, interests in Plains Pipeline for approximately $330 million and approximately $700 million of various other acquisitions.  The 2008 amount also included the first payment of the signature bonus under the Libya agreements of $450 million.

Investing activities for discontinued operations included capital expenditures of $310 million, $336 million and $538 million in 2010, 2009 and 2008, respectively.

Commitments at December 31, 2010, for major fixed and determinable capital expenditures during 2011 and thereafter were approximately $1.2 billion.  Occidental expects to fund these commitments and capital expenditures with cash from operations.

The 2010 amount included net proceeds of approximately $2.6 billion from the December 2010 issuance of senior unsecured notes.  The 2010 amount also included financing cash flow use of $311 million to retire other long-term debt.

The 2009 amount included net proceeds of $740 million from the issuance of 4.125-percent senior unsecured notes due 2016 and Occidental's payment of $600 million of debt associated with Dolphin Energy.

The 2008 amount included the net proceeds of $985 million from the issuance of $1 billion of 7-percent senior unsecured notes due 2013.  The 2008 amount also included $1.5 billion of cash paid for repurchases of 19.8 million shares of Occidental's common stock at an average price of $76.33 per share.

Occidental also paid common stock dividends of $1.2 billion in 2010, $1.1 billion in 2009 and $940 million in 2008.

Off-Balance-Sheet Arrangements

In the course of its business activities, Occidental pursues a number of projects and transactions to meet its core business objectives.  Occidental also makes commitments on behalf of unconsolidated entities.  Some of these projects, transactions and commitments (off-balance-sheet arrangements) are not reflected on Occidental's balance sheets, as a result of the application of generally accepted accounting principles (GAAP) to their specific terms.  The following is a description of the business purpose and nature of these off-balance-sheet arrangements.

Dolphin

See "Oil and Gas Segment - Business Review - Qatar" for further information about Dolphin.

In July 2009, Dolphin Energy refinanced its debt on a limited-recourse basis.  Occidental provided guarantees limited to certain political and other events.  At December 31, 2010, the notional amount of the guarantees was approximately $300 million, which represented a substantial majority of Occidental's total guarantees.  The fair value of these guarantees was immaterial.

Leases

Occidental has entered into various operating lease agreements, mainly for transportation equipment, power plants, machinery, terminals, storage facilities, land and office space.  Occidental leases assets when leasing offers greater operating flexibility.  Lease payments are generally expensed as cost of sales.  For more information, see "Contractual Obligations."

Guarantees

Occidental has guaranteed certain equity investees' debt and has entered into various other guarantees including performance bonds, letters of credit, indemnities, commitments and other forms of guarantees provided by Occidental to third parties, mainly to provide assurance that OPC or its subsidiaries and affiliates will meet their various obligations (guarantees).  At December 31, 2010, Occidental's guarantees were not material and a substantial majority of these amounts were represented by the Dolphin guarantees discussed above.

Contractual Obligations

The table below summarizes and cross-references certain contractual obligations that are reflected in the Consolidated Balance Sheets as of December 31, 2010 and/or disclosed in the accompanying Notes.

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Lawsuits, Claims, Commitments, Contingencies and Related Matters

OPC or certain of its subsidiaries are named, in the normal course of business, in lawsuits, claims and other legal proceedings that seek, among other things, compensation for alleged personal injury, breach of contract, property damage, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.  OPC or certain of its subsidiaries also have been named in proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar federal, state, local and foreign environmental laws.  These environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties and injunctive relief; however, Occidental is usually one of many companies in these proceedings and has to date been successful in sharing response costs with other financially sound companies.  The ultimate amount of losses and the timing of any such losses that Occidental may incur resulting from currently outstanding lawsuits, claims and proceedings cannot be determined reliably at this time.  Occidental accrues reserves for all of these matters when it is probable that a liability has been incurred and the liability can be reasonably estimated.  The amount of reserve balances as of December 31, 2010 and 2009 were not material to Occidental's consolidated balance sheets.  Occidental also evaluates the amount of reasonably possible additional losses that it could incur as a result of the matters mentioned above.  Occidental has disclosed its range of reasonably possible losses for sites where it is a participant in environmental remediation.  Occidental believes that other reasonably possible additional losses that it could incur in excess of reserves accrued on the balance sheet would not be material to its consolidated financial position or results of operations.  Environmental matters are further discussed under the caption "Environmental Liabilities and Expenditures" below.

During the course of its operations, Occidental is subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions.  While the audits of corporate tax returns for taxable years through 2008 have concluded for U.S. federal income tax purposes, the 2009 and 2010 taxable years are currently under review by the U.S. Internal Revenue Service pursuant to its Compliance Assurance Program.  Taxable years from 2000 through the current year remain subject to examination by foreign and state government tax authorities in certain jurisdictions.  In certain of these jurisdictions, tax authorities are in various stages of auditing Occidental's income taxes.  During the course of tax audits, disputes have arisen and other disputes may arise as to facts and matters of law.  Occidental believes that the resolution of outstanding tax matters would not have a material adverse effect on its consolidated financial position or results of operations.

Occidental has entered into agreements providing for future payments to secure terminal and pipeline capacity, drilling rigs and services, electrical power, steam and certain chemical raw materials.  Occidental has certain other commitments under contracts, guarantees and joint ventures, including purchase commitments for goods and services at market-related prices and certain other contingent liabilities.  At December 31, 2010, commitments for major fixed and determinable capital expenditures during 2011 and thereafter were approximately $1.2 billion.

Occidental has indemnified various parties against specified liabilities that those parties might incur in the future in connection with purchases and other transactions that they have entered into with Occidental.  These indemnities usually are contingent upon the other party incurring liabilities that reach specified thresholds.  As of December 31, 2010, Occidental is not aware of circumstances that it believes would reasonably be expected to lead to future indemnity claims against it in connection with these transactions that would result in payments materially in excess of reserves.

Environmental Liabilities and Expenditures

Occidental's operations are subject to stringent federal, state, local and foreign laws and regulations relating to improving or maintaining environmental quality.  Occidental's environmental compliance costs have generally increased over time and could continue to rise in the future.  Occidental factors environmental expenditures for its operations into its business planning process as an integral part of producing quality products responsive to market demand.

Environmental Remediation

The laws that require or address environmental remediation, including CERCLA and similar federal, state, local and foreign laws, may apply retroactively and regardless of fault, the legality of the original activities or the current ownership or control of sites.  OPC or certain of its subsidiaries participate in or actively monitor a range of remedial activities and government or private proceedings under these laws with respect to alleged past practices at operating, closed and third-party sites.  Remedial activities may include one or more of the following:  investigation involving sampling, modeling, risk assessment or monitoring; cleanup measures including removal, treatment or disposal; or operation and maintenance of remedial systems.  The environmental proceedings seek funding or performance of remediation and, in some cases, compensation for alleged property damage, punitive damages, civil penalties, injunctive relief and government oversight costs.

As of December 31, 2010, Occidental participated in or monitored remedial activities or proceedings at 170 sites.  The following table presents Occidental's environmental remediation reserves as of December 31, 2010, 2009 and 2008, grouped as environmental remediation sites listed or proposed for listing by the U.S. Environmental Protection Agency on the CERCLA National Priorities List (NPL sites) and three categories of non-NPL sites - third-party sites, Occidental-operated sites and closed or non-operated Occidental sites.

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As of December 31, 2010, Occidental's environmental reserves exceeded $10 million each at 13 of the 170 sites described above, and 122 of the sites had reserves from zero to $1 million each.

As of December 31, 2010, two landfills in western New York owned by Occidental accounted for 71 percent of its reserves associated with NPL sites.  Maxus Energy Corporation has retained the liability and indemnified Occidental for 15 of the remaining NPL sites.

As of December 31, 2010, Maxus has also retained the liability and indemnified Occidental for 17 of the 83 third-party sites.  Two of the remaining 66 third-party sites - a former copper mining and smelting operation in Tennessee and an active refinery in Louisiana where Occidental reimburses the current owner and operator for certain remedial activities - accounted for 50 percent of Occidental's reserves associated with these sites.

Five sites - chemical plants in Kansas, Louisiana and New York and two groups of oil and gas properties in the southwestern United States - accounted for 74 percent of the reserves associated with the Occidental-operated sites.  Four other sites - former chemical plants in Delaware, Tennessee and Washington and a closed coal mine in Pennsylvania - accounted for 67 percent of the reserves associated with closed or non-operated Occidental sites.

The following table shows environmental reserve activity for the past three years:

Occidental expects to expend funds corresponding to approximately half of the current environmental reserves over the next four years and the balance over the subsequent ten or more years.  Occidental believes its range of reasonably possible additional loss beyond those liabilities recorded for environmental remediation at the sites described above could be up to $385 million.  See "Critical Accounting Policies and Estimates -Environmental Liabilities and Expenditures" for additional information.

Occidental's environmental costs for continuing operations, some of which include estimates, are shown below for each segment for the years ended December 31:

Operating expenses are incurred on a continual basis.  Capital expenditures relate to longer-lived improvements in currently operating properties.  Remediation expenses relate to existing conditions from past operations.

Occidental presently estimates capital expenditures for environmental compliance of approximately $125 million for 2011.

Foreign Investments

Many of Occidental's assets are located outside of North America.  At December 31, 2010, the carrying value of Occidental's assets in countries outside North America aggregated approximately $12.1 billion, or approximately 23 percent of Occidental's total assets at that date.  Of such assets, approximately $7.5 billion are located in the Middle East/North Africa and approximately $4.6 billion are located in Latin America, including $2.9 billion held for sale.  For the year ended December 31, 2010, net sales outside North America totaled $6.8 billion, or approximately 36 percent of total net sales.

Critical Accounting Policies and Estimates

The process of preparing financial statements in accordance with GAAP requires the management of Occidental to make informed estimates and judgments regarding certain items and transactions.  Changes in facts and circumstances or discovery of new information may result in revised estimates and judgments, and actual results may differ from these estimates.  Occidental considers the following to be its most critical accounting policies and estimates that involve management's judgment.  There has been no material change to these policies over the past three years.  The selection and development of these critical accounting policies and estimates have been discussed with the Audit Committee of the Board of Directors.

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Oil and Gas Properties

The carrying value of Occidental's property, plant and equipment (PP&E) represents the cost incurred to acquire the PP&E, including any capitalized interest, net of accumulated depreciation, depletion and amortization (DD&A) and net of any impairment charges.  For business acquisitions, PP&E cost is based on fair values at the acquisition date.  Interest costs incurred in connection with qualifying capital expenditures are capitalized and amortized over the lives of the related assets.

Occidental uses the successful efforts method to account for its oil and gas properties.  Under this method, costs of acquiring properties, costs of drilling successful exploration wells and development costs are capitalized.  The costs of exploratory wells are initially capitalized pending a determination of whether proved reserves have been found.  If proved reserves have been found, the costs of exploratory wells remain capitalized.  Otherwise, the costs of the related exploratory wells are charged to expense.  In some cases, a determination of proved reserves cannot be made at the completion of drilling, requiring additional testing and evaluation of the wells.  Occidental's practice is to expense the costs of such exploratory wells if a determination of proved reserves has not been made within a 12-month period after drilling is complete.

Annual lease rentals and geological, geophysical and seismic costs are expensed as incurred.

Proved oil and gas reserves (as defined in the Securities and Exchange Commission's Regulation S-X, Rule 4-10(a)) are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible-from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations-prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.  Occidental has no proved oil and gas reserves for which the determination of commercial viability is subject to the completion of major additional capital expenditures.  Depreciation and depletion of oil and gas producing properties is determined by the unit of production method.

Several factors could change Occidental's proved oil and gas reserves.  For example, Occidental receives a share of production from PSCs to recover its costs and generally an additional share for profit.  Occidental's share of production and reserves from these contracts decreases when oil prices rise and increases when oil prices decline.  Overall, Occidental's net economic benefit from these contracts is greater at higher oil prices.  In other cases, particularly with long-lived properties, lower product prices may lead to a situation where production of proved reserves becomes uneconomical.  In such properties, higher product prices typically result in additional reserves becoming economical.  Estimation of future production and development costs is also subject to change partially due to factors beyond Occidental's control, such as energy costs and inflation or deflation of oil field service costs.  These factors, in turn, could lead to changes in the quantity of proved reserves.  Additional factors that could result in a change of proved reserves include production decline rates differing from those estimated when the proved reserves were initially recorded.  In 2010, revisions of previous estimates provided a net 1 million BOE reduction to proved reserves, which amounted to less than 1 percent of Occidental's total reserves as of December 31, 2010.

The most significant financial statement impact of a change in Occidental's oil and gas reserves would be on the DD&A rate, which is determined using the unit-of-production method.  Leasehold acquisition costs are amortized over total proved reserves, while capitalized development and successful exploration costs are amortized over proved developed reserves.  For example, a 5-percent increase or decrease in the amount of oil and gas reserves would change the DD&A rate by approximately $0.50 per barrel, which would increase or decrease pre-tax income by $128 million annually at current production rates.  The change in the DD&A rate over the past three years due to revisions of previous proved reserve estimates has been immaterial.

A portion of the carrying value of Occidental's oil and gas properties is attributable to unproved properties.  At December 31, 2010, the net capitalized costs attributable to unproved properties were $3.7 billion.  The unproved amounts are not subject to DD&A or impairment until a determination is made as to the existence of proved reserves.  As exploration and development work progresses, if reserves on these properties are proved, capitalized costs attributable to the properties will be subject to depreciation and depletion.  If the exploration and development work were to be unsuccessful, or management's plans changed with respect to these properties, as a result of economic, operating or contractual conditions, the capitalized costs of the related properties would be expensed in the period in which the determination was made.  The timing of any writedowns of these unproved properties, if warranted, depends upon management's plans, the nature, timing and extent of future exploration and development activities and their results.  Occidental believes its current plans and exploration and development efforts will allow it to realize its unproved property balance.

Additionally, Occidental performs impairment tests with respect to its proved properties generally when prices decline other than temporarily, reserve estimates change significantly or other significant events occur that may impact its ability to realize the recorded asset amounts.  Impairment tests incorporate a number of assumptions involving expectations of future cash flows, which can change significantly over time.  These assumptions include estimates of future product prices, which Occidental bases on forward price curves and, where applicable, contractual prices, estimates of oil and gas reserves and estimates of future expected operating and development costs.    Fluctuations in commodities prices and production and development costs could cause management's plans to change with respect to unproved properties and could cause the carrying values of proved properties to be unrealizable.  Such circumstances could result in impairments in the carrying values of proved or unproved properties or both.  Any impairment loss would be calculated as the excess of the asset's net book value over its estimated fair value.

The recent acquisitions provide Occidental with a large inventory of projects.  Management conducted a

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review of Occidental's portfolio of oil and gas assets in the fourth quarter of 2010 and concluded that certain projects had become uneconomical considering the natural gas price environment and that it would not pursue them.  As a result, Occidental recorded a pre-tax impairment charge of $275 million, predominately of gas properties in the Rocky Mountain region in 2010.

Chemical Assets

Occidental's chemical plants are depreciated using either the unit-of-production or straight-line method, based upon the estimated useful lives of the facilities.  The estimated useful lives of Occidental's chemical assets, which range from three years to 50 years, are also used for impairment tests.  The estimated useful lives used for the chemical facilities are based on the assumption that Occidental will provide an appropriate level of annual expenditures to ensure productive capacity is sustained.  Without these continued expenditures, the useful lives of these plants could decrease significantly.  Other factors that could change the estimated useful lives of Occidental's chemical plants include sustained higher or lower product prices, which are particularly affected by both domestic and foreign competition, demand, feedstock costs, energy prices, environmental regulations and technological changes.

Occidental performs impairment tests on its chemical assets whenever events or changes in circumstances lead to a reduction in the estimated useful lives or estimated future cash flows that would indicate that the carrying amount may not be recoverable, or when management's plans change with respect to those assets.  Any impairment loss would be calculated as the excess of the asset's net book value over its estimated fair value.

Occidental's net PP&E for the chemical segment is approximately $2.6 billion and its depreciation expense for 2011 is expected to be approximately $300 million.  The most significant financial statement impact of a decrease in the estimated useful lives of Occidental's chemical plants would be on depreciation expense.  For example, a reduction in the remaining useful lives of one year would increase depreciation and reduce pre-tax earnings by approximately $35 million per year.

Midstream, Marketing and Other Assets

Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty.  Occidental applies hedge accounting when transactions meet specified criteria for such treatment and management elects to do so.  If a derivative does not qualify or is not designated and documented as a cash-flow hedge, any fair value gains or losses are recognized in earnings in the current period.  For cash-flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) with an offsetting adjustment to the basis of the item being hedged.  Realized gains or losses from cash-flow hedges, and any ineffectiveness, are recorded as a component of net sales in the consolidated statements of income. Ineffectiveness is primarily created by a basis difference between the hedged item and the hedging instrument due to location, quality or grade of the physical commodity transactions.  Gains and losses from derivative instruments are reported net in the consolidated statements of income. There were no fair value hedges as of and for the year ended December 31, 2010.

A hedge is regarded as highly effective and qualifies for hedge accounting if, at inception and throughout its life, it is expected that changes in the fair value or cash flows of the hedged item are almost fully offset by the changes in the fair value or changes in cash flows of the hedging instrument and actual effectiveness is within a range of 80 to 125 percent.  In the case of hedging a forecasted transaction, the transaction must be probable and must present an exposure to variations in cash flows that could ultimately affect reported net income or loss.  Occidental discontinues hedge accounting when it determines that a derivative has ceased to be highly effective as a hedge; when the derivative expires, or is sold, terminated, or exercised; when the hedged item matures or is sold or repaid; or when a forecasted transaction is no longer deemed probable.

Occidental's midstream and marketing PP&E is depreciated over the estimated useful lives of the assets, using either the unit-of-production or straight-line method.  Occidental performs impairment tests on its midstream and marketing assets whenever events or changes in circumstances lead to a reduction in the estimated useful lives or estimated future cash flows that would indicate that the carrying amount may not be recoverable, or when management's plans change with respect to those assets.  Any impairment loss would be calculated as the excess of the asset's net book value over its estimated fair value.

Fair Value Measurements

Occidental has categorized its assets and liabilities that are measured at fair value, based on the priority of the inputs to the valuation techniques, in a three-level fair value hierarchy: Level 1 – using quoted prices in active markets for identical assets or liabilities; Level 2 – using observable inputs other than quoted prices; and Level 3 – using unobservable inputs.  Transfers between levels, if any, are recognized at the end of each reporting period.

Fair Values - Recurring

Occidental primarily applies the market approach for recurring fair value measurements, maximizes its use of observable inputs and minimizes its use of unobservable inputs.  Occidental utilizes the mid-point price between bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value.  In addition to using market data, Occidental makes assumptions in valuing its assets and liabilities, including assumptions about the risks inherent in the inputs to the valuation technique.  For assets and liabilities carried at fair value, Occidental measures fair value using the following methods:

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Occidental generally uses an income approach to measure fair value when there is not a market observable price for an identical or similar asset or liability.  This approach utilizes management's best assumptions regarding expectations of projected cash flows, and discounts the expected cash flows using a commensurate risk-adjusted discount rate.

Environmental Liabilities and Expenditures

Environmental expenditures that relate to current operations are expensed or capitalized as appropriate.  Occidental records environmental reserves for estimated remediation costs that relate to existing conditions from past operations when environmental remediation efforts are probable and the costs can be reasonably estimated.  In determining the reserves and the range of reasonably possible additional loss, Occidental refers to currently available information, including relevant past experience, remedial objectives, available technologies, applicable laws and regulations and cost-sharing arrangements.  Occidental bases environmental reserves on management's estimate of the most likely cost to be incurred, using the most cost-effective technology reasonably expected to achieve the remedial objective.  Occidental periodically reviews reserves and adjusts them as new information becomes available.  Occidental records environmental reserves on a discounted basis only when the aggregate amount and the timing of cash payments are reliably determinable at the time the reserves are established.  The reserve methodology with respect to discounting for a specific site is not modified once it has been established.  Occidental generally records reimbursements or recoveries of environmental remediation costs in income when received, or when receipt of recovery is highly probable.  As of December 31, 2010, 2009 and 2008, Occidental has not accrued any reimbursements or recoveries.

Many factors could affect Occidental's future remediation costs and result in adjustments to its environmental reserves and range of reasonably possible additional loss.  The most significant are:  (1) cost estimates for remedial activities may be inaccurate; (2) the length of time, type or amount of remediation necessary to achieve the remedial objective may change due to factors such as site conditions, the ability to identify and control contaminant sources or the discovery of additional contamination; (3) the regulatory agency may ultimately reject or modify Occidental's proposed remedial plan; (4) improved or alternative remediation technologies may change remediation costs; and (5) laws and regulations may impose more or less stringent remediation requirements or affect cost sharing or allocation of liability.

Certain sites involve multiple parties with various cost-sharing arrangements, which fall into the following three categories:  (1) environmental proceedings that result in a negotiated or prescribed allocation of remediation costs among Occidental and other alleged potentially responsible parties; (2) oil and gas ventures in which each participant pays its proportionate share of remediation costs reflecting its working interest; or (3) contractual arrangements, typically relating to purchases and sales of properties, in which the parties to the transaction agree to methods of allocating remediation costs.  In these circumstances, Occidental evaluates the financial viability of other parties with whom it is alleged to be jointly liable, the degree of their commitment to participate and the consequences to Occidental of their failure to participate when estimating Occidental's ultimate share of liability.  Occidental records reserves at its expected net cost of remedial activities and, based on these factors, believes that it will not be required to assume a share of liability of such other potentially responsible parties in an amount materially above amounts reserved.

In addition to the costs of investigations and cleanup measures, which often take in excess of ten years at NPL sites, Occidental's reserves include management's estimates of the costs to operate and maintain remedial systems.  If remedial systems are modified over time in response to significant changes in site-specific data, laws, regulations, technologies or engineering estimates, Occidental reviews and adjusts its reserves accordingly.

If Occidental adjusts the environmental reserve balance based on the factors described above, the amount of the increase or decrease would be recognized in earnings.  For example, if the reserve balance were reduced by 10 percent, Occidental would record a pre-tax gain of $37 million.  If the reserve balance were increased by 10 percent, Occidental would record an additional remediation expense of $37 million.

Other Loss Contingencies

Occidental is involved with numerous lawsuits, claims, proceedings and audits in the normal course of its operations.  Occidental records a loss contingency for these matters when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated.  In addition, Occidental discloses, in aggregate, its exposure to loss in excess of the amount recorded on the balance sheet for these matters if it is reasonably possible that an additional material loss may be incurred.  Occidental reviews its loss contingencies on an ongoing basis.

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Loss contingencies are based on judgments made by management with respect to the likely outcome of these matters and are adjusted as appropriate.  Management's judgments could change based on new information, changes in laws or regulations, changes in management's plans or intentions and the outcome of legal proceedings, settlements or other factors.  See "Lawsuits, Claims, Commitments, Contingencies and Related Matters" for additional information.

Significant Accounting and Disclosure Changes

Listed below are significant recently adopted accounting and disclosure changes.

Fair Value Measurements

Beginning in the quarter ended March 31, 2010, Occidental enhanced its fair value measurement disclosures as a result of adopting new disclosure requirements issued by the Financial Accounting Standards Board (FASB) in January 2010. The new rules require interim and year-end disclosures of: (i) fair value measurements by classes of assets and liabilities; (ii) valuation techniques and inputs used for Level 2 or 3 fair value measurements; and (iii) significant transfers into and out of Level 1 and 2 measurements and the reasons for the transfers.