1.       General

In these unaudited consolidated condensed financial statements, “Occidental” means Occidental Petroleum Corporation, a Delaware corporation (OPC), and/or one or more entities in which it owns a majority voting interest (subsidiaries). Occidental has made its disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, and condensed or omitted, as permitted by the Securities and Exchange Commission’s rules and regulations, certain information and disclosures normally included in consolidated financial statements and the notes.  The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Occidental’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of Occidental’s management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present Occidental’s consolidated financial position as of June 30, 2009, and the consolidated statements of income and cash flows for the three and six months ended June 30, 2009 and 2008, as applicable. The income and cash flows for the periods ended June 30, 2009 and 2008, are not necessarily indicative of the income or cash flows to be expected for the full year.

Except as noted in Note 14, Occidental’s management has evaluated events from July 1, 2009 through August 6, 2009 and has noted no events occurring during that period which should be recognized or disclosed in these financial statements in accordance with generally accepted accounting principles.

2.                     Asset Acquisitions, Dispositions and Other Transactions

In May 2009, Occidental issued $750 million of 4.125-percent senior unsecured notes, receiving $740 million of net proceeds.  Interest on the notes will be payable semi-annually in arrears on June 1 and December 1 of each year.  The notes will mature on June 1, 2016.

In April 2009, Occidental and its partner signed a Development and Production Sharing Agreement (DPSA) with the National Oil and Gas Authority of Bahrain for further development of the Bahrain Field.  Under this agreement, a Joint Operating Company will be formed to serve as operator for the project under the DPSA.

3.                     Accounting Changes

In May 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 165, which provides new disclosure requirements for the Company’s evaluation of subsequent events.  This statement is effective for periods ending after June 15, 2009. Occidental adopted this statement in the quarter ended June 30, 2009 and included appropriate disclosures.

In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and APB 28-1, which provides new disclosure requirements for the fair value of financial instruments in interim periods when it is practicable to estimate.  This FSP is effective for interim and annual periods ending after June 15, 2009.  Occidental adopted this FSP in the quarter ended June 30, 2009 and included appropriate disclosures.

In June 2008, the FASB issued FSP EITF 03-6-1.  This FSP concluded that instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing basic earnings per share (EPS) under the two-class method.  This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, with prior period retrospective application.  Occidental adopted this FSP on January 1, 2009, which had no material impact on Occidental’s financial statements.

In March 2008, the FASB issued SFAS No. 161, which provides new disclosure requirements for an entity’s derivative and hedging activities. This statement is effective for periods beginning after November 15, 2008.  Occidental adopted this statement on January 1, 2009 and included appropriate disclosures.

In February 2008, the FASB issued FSP FAS 157-2, which deferred the effective date for applying the fair value measurement and disclosure framework of SFAS No. 157 to non-financial assets and liabilities that are recorded at fair value on a non-recurring basis until periods beginning after November 15, 2008.  Occidental adopted this deferred portion of SFAS No. 157 on January 1, 2009, on a prospective basis, which had no material impact on Occidental’s financial statements upon adoption.

In December 2007, the FASB issued SFAS No. 141(R).  This statement provides new accounting guidance and disclosure requirements for business combinations, and is effective for business combinations which occur starting with the first fiscal year beginning on or after December 15, 2008.   In April 2009, the FASB issued FSP FAS 141(R)-1, effective beginning the first quarter of 2009, which amends and clarifies certain provisions of SFAS 141(R), including the initial recognition and measurement criteria, subsequent measurement and accounting, and disclosure of preacquisition contingencies in business combinations. Occidental adopted SFAS 141(R) and FSP FAS 141(R)-1 in the first quarter of 2009, which had no material impact on Occidental’s financial statements upon adoption.

In December 2007, the FASB issued SFAS No. 160.  This statement provides new accounting guidance and disclosure and presentation requirements for noncontrolling interests in a subsidiary.  SFAS No. 160 is effective for the first fiscal year beginning on or after December 15, 2008.  Occidental adopted this statement on January 1, 2009, applying it prospectively upon adoption, except for the presentation and disclosure requirements which were applied retrospectively to all periods presented, which in each case had no material impact on Occidental’s financial statements upon adoption.

4.       Comprehensive Income

The following table presents Occidental’s comprehensive income for the three and six months ended June 30, 2009 and 2008 (in millions):

There were no other comprehensive income (loss) items related to noncontrolling interests for the three and six months ended June 30, 2009 and 2008.

5.       Supplemental Cash Flow Information

Income taxes paid (received) for the six months ended June 30, 2009 and 2008 were $(175) million and $966 million for U.S. taxes, respectively, and $691 million and $1.5 billion for foreign taxes, respectively.  Interest paid totaled approximately $81 million and $52 million for the six months ended June 30, 2009 and 2008, respectively.

6.       Inventories

A portion of inventories is valued under the LIFO method.  The valuation of LIFO inventory for interim periods is based on Occidental’s estimates of year-end inventory levels and costs.  Inventories as of June 30, 2009, and December 31, 2008, consisted of the following (in millions):

7.       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.

The laws that require or address environmental remediation, including the Comprehensive Environmental Response, Compensation, and Liability Act (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 involving 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 June 30, 2009, Occidental participated in or monitored remedial activities or proceedings at 167 sites.  The following table presents Occidental’s environmental remediation reserves as of June 30, 2009, the current portion of which is included in accrued liabilities ($68 million) and the remainder in deferred credits and other liabilities — other ($339 million).  The reserves are grouped in the following four categories of environmental remediation sites:  (1) sites listed or proposed for listing by the U.S. Environmental Protection Agency on the CERCLA National Priorities List (CERCLA NPL); (2) other third-party sites; (3) Occidental-operated sites; and (4) Occidental’s closed or non-operated sites.

As of June 30, 2009, Occidental’s environmental reserves exceeded $10 million at 13 of the 167 sites described above, and 114 of the sites had reserves from $0 to $1 million.  Occidental expects to expend funds corresponding to about 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 $400 million.  The status of Occidental’s involvement with the sites and related significant assumptions have not changed materially since December 31, 2008.  For management’s opinion with respect to environmental matters, refer to Note 8.

8.                     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 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.  With respect to all such lawsuits, claims and proceedings, including environmental proceedings, Occidental accrues reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated.

Lawsuits have been filed in Nicaragua against Occidental Chemical Corporation (OxyChem) and other companies that once manufactured or used a pesticide, dibromochloropropane (DBCP).  These lawsuits claim damages of several billion dollars for alleged personal injuries.  In the opinion of management, the claims against OxyChem are without merit because, among other things, the DBCP it manufactured was never sold or used in Nicaragua.  In order to preserve its jurisdictional defense, OxyChem elected not to make a substantive appearance in these cases.  Nicaraguan courts have entered judgments of approximately $900 million against four defendants, including OxyChem.  Under Nicaraguan law, the judgments would be shared equally among the defendants.  The plaintiffs attempted to enforce one judgment in Miami.  In January 2009, the federal district court in Miami granted summary judgment in favor of OxyChem and refused to enforce the judgment.  OxyChem has no assets in Nicaragua and, in the opinion of management, no such Nicaraguan judgment would be enforceable in the United States.

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 for taxable years through 2007 have concluded for U.S. federal income tax purposes, the 2008 taxable year as well as the current period are currently under audit by the U.S. Internal Revenue Service pursuant to its compliance assurance program.  Foreign government tax authorities are in various stages of auditing Occidental, and income taxes for taxable years from 2000 through 2008 remain subject to examination in certain jurisdictions.  During the course of such audits, disputes have arisen and other disputes may arise as to facts and matters of law.

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.  Currently, 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.

The ultimate amount of losses and the timing of any such losses that OPC and its subsidiaries may incur resulting from currently outstanding lawsuits, claims and proceedings, audits, commitments, contingencies and related matters cannot be determined reliably at this time.  If these matters were ultimately resolved unfavorably at amounts substantially exceeding Occidental’s reserves, an outcome not currently expected, it is possible that such outcome could have a material adverse effect upon Occidental’s consolidated financial position or results of operations.  However, after taking into account reserves, management does not expect the ultimate resolution of any of these matters to have a material adverse effect upon Occidental’s consolidated financial position or results of operations.

9.                     Retirement Plans and Postretirement Benefits

The following table sets forth the components of the net periodic benefit costs for Occidental’s defined benefit pension and postretirement benefit plans for the three and six months ended June 30, 2009 and 2008 (in millions):

Occidental contributed $3 million and $5 million to its defined benefit pension plans for the three and six months ended June 30, 2009, respectively, and expects to contribute an additional $5 million in the remainder of 2009.  Occidental contributed $1 million and $2 million to its defined benefit pension plans for the three and six months ended June 30, 2008, respectively.

10.               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 technique, into a three-level fair value hierarchy: Level 1 is the use of quoted prices in active markets for identical assets or liabilities; Level 2 is the use of other observable inputs other than quoted prices; and Level 3 is the use of unobservable inputs.  The following table provides fair value measurement information for such assets and liabilities that are measured on a recurring basis (in millions):

(a)   Derivative fair values are reported on a net basis to the extent a legal right of offset with a counterparty exists.

For the six months ended June 30, 2009, Occidental did not have any assets or liabilities measured at fair value on a non-recurring basis.

Occidental utilized the mid-point price between bid and ask prices for valuing the majority of its assets and liabilities measured and reported at fair value. Occidental utilizes market data and assumptions in pricing the assets or liabilities, including assumptions about risk and the risks inherent in the inputs to the valuation technique. Occidental primarily applies the market approach for recurring fair value measurements and utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Certain of Occidental’s derivative instruments are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions 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.

Cash and cash equivalents carrying amounts approximate fair value because of the short maturity of those instruments.  The carrying value of other on-balance-sheet financial instruments, other than fixed-rate debt, approximates fair value, and the cost, if any, to terminate off-balance-sheet financial instruments is not significant.  Occidental estimates the fair value of its long-term fixed-rate debt based on the quoted market prices for its debt instruments or on quoted market yields for similarly rated debt instruments, taking into account their maturities.  The estimated fair values of Occidental’s debt, at June 30, 2009 and December 31, 2008, were approximately $3.7 billion and $2.9 billion, respectively, compared to carrying values of $3.5 billion and $2.7 billion, respectively.

Occidental’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, trade receivables and energy derivative contracts.  Occidental’s cash and cash equivalents are spread among major international financial institutions.  Occidental’s trade receivables and energy derivative contracts are spread among various counterparties.  Creditworthiness is reviewed prior to conducting business with a new counterparty and on an ongoing basis.  Occidental monitors aggregate credit exposure for each counterparty relative to established credit limits.  Credit exposure to each counterparty is monitored for outstanding balances, current month activity, and forward mark-to-market exposures.  Losses associated with credit risk have been immaterial for all periods presented.

11.               Derivatives

As discussed in Note 3, Occidental adopted SFAS No. 161 on January 1, 2009.  Derivatives are carried at fair value and, when a legal right of offset with the same counterparty exists, Occidental records these derivatives on a net basis.  Occidental applies hedge accounting when transactions meet specified criteria for such treatment.  If a derivative does not qualify as a hedge or is not designated as a hedge, any fair value gains or losses are recognized in earnings in the current period.  If the derivative qualifies for cash flow hedge accounting and is designated and documented as a hedge, 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 items designated as 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 three and six months ended June 30, 2009.

Occidental is exposed to risk that is inherent in changing commodity prices.  In order to mitigate price risk, Occidental, from time to time, enters into derivative financial transactions.  Occidental periodically uses different types of derivative instruments to achieve the best prices for oil and gas.  Derivatives have been used by Occidental to reduce its exposure to price volatility on a small portion of its oil and gas production.  Occidental also enters into low-risk marketing and trading activities through its separate marketing and trading organization, which operates under established policy controls and procedures.  Occidental’s marketing and trading operations utilize a combination of futures, forwards, options and swaps to mitigate the price risk associated with various physical transactions.

A majority of Occidental’s derivative transactions are exchange-traded contracts, which are subject to nominal credit risk as a significant portion of these derivative transactions are executed on a daily margin basis.  Cash collateral of $149 million deposited by Occidental with clearing houses, which has not been applied against the derivative fair values, is included in the marketing and trading assets and other balance as of June 30, 2009.

In addition, Occidental executes a portion of its derivative transactions in the over-the-counter (OTC) market with various high-credit-quality counterparties.  Occidental is subject to counterparty credit risk to the extent the counterparty to the derivatives is unable to meet its settlement commitments.  Occidental manages this credit risk by selecting counterparties that it believes to be financially strong, by spreading the credit risk among many such counterparties, and by entering into master netting arrangements with the counterparties, as appropriate.  Occidental actively monitors the creditworthiness of each counterparty and records valuation adjustments against the derivative assets to reflect counterparty risk, if necessary.  Certain of Occidental’s OTC derivative instruments contain collateral thresholds.  If credit thresholds are exceeded or if Occidental’s or the counterparty’s credit rating is reduced by the major credit rating agencies, Occidental or the counterparty may be required to post collateral via available cash or letters of credit to satisfy the difference between the current exposure and the negotiated credit threshold.  As of June 30, 2009, Occidental had a liability of $326 million, which represents the fair value of derivative instruments with credit-risk-related contingent features.  As of June 30, 2009, Occidental was not required to post collateral for these derivative instruments.  Occidental believes that if it had received a one-notch reduction in its credit rating, it would not have resulted in a material change in its collateral-posting requirements as of June 30, 2009.

Cash Flow Hedges

Occidental holds a series of collar agreements that qualify as cash-flow hedges for the sale of approximately 3 percent of its crude oil production.  These agreements continue to the end of 2011.  The following table presents the daily notional amounts and weighted average strike prices of Occidental’s collar positions as of June 30, 2009.

Occidental’s marketing and trading operations store natural gas purchased from third parties at Occidental’s leased storage facilities.  Derivative instruments are used to fix margins on the future sales of the stored volumes.  These agreements continue through 2010.  As of June 30, 2009, Occidental has the following outstanding natural gas commodity contracts that were designated as cash flow hedges:

As of June 30, 2009, Occidental had approximately 22 billion cubic feet of natural gas, which it holds in storage.

The following table presents the pre-tax gain recognized in, and reclassified from, Accumulated Other Comprehensive Income (AOCI) and recognized in income (net sales), including any hedge ineffectiveness, for derivative instruments classified as cash flow hedges for the three and six months ended June 30, 2009 (in millions):

The following table summarizes net after-tax derivative activity recorded in AOCI for the three and six months ended June 30, 2009 and 2008 (in millions):