NOTE 1            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

In this report, “Occidental” or “the Company” refers to Occidental Petroleum Corporation, a Delaware corporation, (OPC), and/or one or more entities in which it owns a majority voting interest (subsidiaries).  Occidental is a multinational organization whose subsidiaries and affiliates operate in the oil and gas, chemical and midstream, marketing and other segments.  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 a nd markets crude oil, liquids, natural gas, carbon dioxide (CO2) 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.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (GAAP) and include the accounts of OPC, its subsidiaries and its undivided interests in oil and gas exploration and production ventures.  Occidental’s proportionate share of oil and gas exploration and production ventures, in which it has a direct working interest, is accounted for by reporting its proportionate share of assets, liabilities, revenues, costs and cash flows within the relevant lines on the balance sheets, income statements and cash flow statements.

Certain financial statements, notes and supplementary data for prior years have been reclassified to conform to the 2010 presentation.

INVESTMENTS IN UNCONSOLIDATED ENTITIES

Investments in unconsolidated entities represent equity-method investments, including advances.  Amounts representing Occidental’s percentage interest in the underlying net assets of affiliates (excluding undivided interests in oil and gas exploration and production ventures) in which it does not have a majority voting interest, but as to which it exercises significant influence, are accounted for under the equity method.  Occidental reviews equity-method investments for impairment whenever events or changes in circumstances indicate that an other-than-temporary decline in value may have occurred.  The amount of impairment, if any, is based on quoted market prices, where available, or other valuation techniques, including discounted cash flows.

REVENUE RECOGNITION

Revenue is recognized from oil and gas production when title has passed to the customer, which occurs when the product is shipped.  In international locations where oil is shipped by tanker, title passes when the tanker is loaded or product is received by the customer, depending on the shipping terms.  This process occasionally causes a difference between actual production in a reporting period and sales volumes that have been recognized as revenue.

Revenue from marketing and trading activities is recognized on net settled transactions upon completion of contract terms, and for physical deliveries upon title transfer.  For unsettled transactions, contracts are recorded at fair value in net sales.  Revenue from all marketing and trading activities is reported on a net basis.

Revenue from chemical product sales is recognized when the product is shipped and title has passed to the customer.  Certain incentive programs may provide for payments or credits to be made to customers based on the volume of product purchased over a defined period.  Total customer incentive payments over a given period are estimated and recorded as a reduction to revenue ratably over the contract period.  Such estimates are evaluated and revised as warranted.

Occidental records revenue net of any taxes, such as sales taxes, that are assessed by governmental authorities on Occidental’s customers.

RISKS AND UNCERTAINTIES

The process of preparing consolidated financial statements in conformity with GAAP requires Occidental’s management to make informed estimates and judgments regarding certain types of financial statement balances.  Such estimates primarily relate to unsettled transactions and events as of the date of the consolidated financial statements.  Changes in facts and circumstances or discovery of new information relating to such transactions and events may result in revised estimates and judgments, and upon settlement actual results may differ from these estimates, but generally not by material amounts.  Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of Occidental’s financial position and results of operations.

Occidental establishes a valuation allowance against net operating losses and other deferred tax assets to the extent it believes future benefit from these assets will not be realized in the statutory carryforward periods.  Realization of deferred tax assets, including any net operating loss carryforwards, is dependent upon Occidental generating sufficient future taxable income in jurisdictions where such assets originate and reversal of temporary differences.

The accompanying consolidated financial statements include assets of approximately $12.1 billion as of December 31, 2010, and net sales of approximately $6.8 billion for the year ended December 31, 2010, relating to Occidental’s operations in countries outside North America.  Occidental operates some of its oil and gas business in countries that occasionally have experienced political instability, armed conflict, terrorism, insurgency, civil unrest, security problems, labor unrest, OPEC production restrictions, equipment import restrictions and sanctions that prevent continued operations, all of which increase Occidental’s risk of loss or delayed or restricted production or may result in other adverse consequences.  Occidental attempts to conduct its financial affairs so as to mitigate its exposure against such risks and wou ld seek compensation in the event of nationalization.

Since Occidental’s major products are commodities, significant changes in the prices of oil and gas and chemical products may have a significant impact on Occidental’s results of operations for any particular year.

Also, see “Property, Plant and Equipment” below.

CASH AND CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments that are readily convertible to cash.  Cash equivalents totaled approximately $2.5 billion and $1.2 billion at December 31, 2010 and 2009, respectively.

INVESTMENTS

Available-for-sale securities are recorded at fair value with any unrealized gains or losses included in accumulated other comprehensive income/loss (AOCI).  Trading securities are recorded at fair value with unrealized and realized gains or losses included in net sales.

INVENTORIES

Materials and supplies are valued at the lower of weighted-average cost or market and are reviewed periodically for obsolescence.  Oil and natural gas inventories are valued at the lower of cost or market.

For the chemical segment, Occidental’s inventories are valued at the lower of cost or market.  For most of its domestic inventories, other than materials and supplies, the chemical segment uses the last-in, first-out (LIFO) method as it better matches current costs and current revenue.  For other countries, Occidental uses the first-in, first-out method (if the costs of goods are specifically identifiable) or the average-cost method (if the costs of goods are not specifically identifiable).

PROPERTY, PLANT AND EQUIPMENT

Oil and Gas

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.

The following table summarizes the activity of capitalized exploratory well costs for continuing operations for the years ended December 31:

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 deple tion of oil and gas producing properties is determined by 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.

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 carryin g 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.

Chemical

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, d emand, 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.

Midstream and Marketing

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:

·                  Trading securities — Quoted prices in active markets exist and are used to provide fair values for these instruments.  These securities are classified as Level 1.

·                  Commodity derivatives — Occidental values exchange-cleared commodity derivatives using closing prices provided by the exchange as of the balance sheet date.  These derivatives are classified as Level 1.  Over-the-Counter (OTC) financial commodity contracts, options and physical commodity forward purchase and sale contracts are generally valued using quotations provided by brokers or industry-standard models that consider various inputs, including quoted forward prices for commodities, time value, volatility factors, credit risk and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable prices at which transactions are executed in the marketplace.  Occidental classifies these measurements as Level 2.

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.

ACCRUED LIABILITIES—CURRENT

Accrued liabilities include accrued payroll, commissions and related expenses of $470 million and $635 million at December 31, 2010 and 2009, respectively.

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 review s 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 alloca tion 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 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) National Priorities List (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.

ASSET RETIREMENT OBLIGATIONS

In the period in which a determination is made that a legal obligation exists to dismantle the asset and reclaim or remediate the property at the end of its useful life, and the cost of the obligation becomes reasonably estimable, Occidental recognizes the fair value of such asset retirement obligation.  The liability amounts are based on future retirement cost estimates and incorporate many assumptions such as time to abandonment, technological changes, future inflation rates and the adjusted risk-free rate of interest.  When the liability is initially recorded, Occidental capitalizes the cost by increasing the related PP&E balances.  If the estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and PP&E.  Over time, the liability is increased and ex pense is recognized for accretion, and the initial capitalized cost is depreciated over the useful life of the asset.  No market risk premium has been included in Occidental’s liability since no reliable estimate can be made at this time.

Occidental has identified conditional asset retirement obligations at a certain number of its facilities that are related mainly to plant decommissioning.  Occidental believes that there is an indeterminate settlement date for these asset retirement obligations because the range of time over which Occidental may settle these obligations is unknown or cannot be estimated.  Therefore, Occidental cannot reasonably estimate the fair value of these liabilities.  Occidental will recognize these conditional asset retirement obligations in the periods in which sufficient information becomes available to reasonably estimate their fair values.

The following table summarizes the activity of the asset retirement obligation, of which $762 million and $619 million is included in deferred credits and other liabilities - other, with the remaining current portion in accrued liabilities at December 31, 2010 and 2009, respectively.