
13.	PRICE RISK MANAGEMENT ACTIVITIES

General

We are exposed to market risks related to the volatility in the price of commodities, interest rates, and foreign currency exchange rates. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, interest rate swaps, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 12), as summarized below under “Fair Values of Derivative Instruments.” In addition, the effect of these derivative instruments on our income is summarized below under “Effect of Derivative Instruments on Income and Other Comprehensive Income.”

When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading derivative. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded into income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedges (derivative instruments not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative instruments are reflected in operating activities in our statements of cash flows for all periods presented.

We are also exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory programs. To manage this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase and sale exception and do not record these contracts at their fair values.

Risk Management Activities by Type of Risk

Commodity Price Risk

We are exposed to market risks related to the volatility in the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on a daily basis by a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

For risk management purposes, we use fair value hedges, cash flow hedges, and economic hedges. In addition to the use of derivative instruments to manage commodity price risk, we also enter into certain commodity derivative instruments for trading purposes. Our objective for entering into each type of hedge or trading derivative is described below.


•	Fair Value Hedges – Fair value hedges are used to hedge price volatility in certain refining inventories and firm commitments to purchase inventories. The level of activity for our fair value hedges is based on the level of our operating inventories, and generally represents the amount by which our inventories differ from our previous year-end LIFO inventory levels.

As of June 30, 2013, we had the following outstanding commodity derivative instruments that were entered into to hedge crude oil and refined product inventories and commodity derivative instruments related to the physical purchase of crude oil and refined products at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).



		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2013
Crude oil and refined products:
Futures – long		8,062
Futures – short		10,954
Physical contracts - long		2,892


•	Cash Flow Hedges – Cash flow hedges are used to hedge price volatility in certain forecasted feedstock and refined product purchases, refined product sales, and natural gas purchases. The objective of our cash flow hedges is to lock in the price of forecasted feedstock, refined product, or natural gas purchases or refined product sales at existing market prices that we deem favorable.

As of June 30, 2013, we had the following outstanding commodity derivative instruments that were entered into to hedge forecasted purchases or sales of crude oil and refined products. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).



		Notional Contract Volumes by Year of Maturity
Derivative Instrument		2013
Crude oil and refined products:
Futures – long		7,938
Futures – short		5,527
Physical contracts – short		2,411

•

Economic Hedges – Economic hedges represent commodity derivative instruments that are not designated as fair value or cash flow hedges and are used to manage price volatility in certain (i) refinery feedstock, refined product, and corn inventories, (ii) forecasted refinery feedstock, refined product, and corn purchases, and refined product sales, and (iii) fixed-price corn purchase contracts. Our objective for entering into economic hedges is consistent with the objectives discussed above for fair value hedges and cash flow hedges. However, the economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would allow us to achieve “hedge deferral accounting.”

As of June 30, 2013, we had the following outstanding commodity derivative instruments that were used as economic hedges and commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units, corn contracts that are presented in thousands of bushels, and soybean oil contracts that are presented in thousands of pounds).



	Notional Contract Volumes by Year of Maturity
Derivative Instrument	2013	2014
Crude oil and refined products:
Swaps – long	3,510	—
Swaps – short	2,585	—
Futures – long	39,316	58
Futures – short	53,514	—
Natural gas:
Options – long	10,750	—
Corn:
Futures – long	28,405	5
Futures – short	49,030	1,180
Physical contracts – long	21,678	1,215
Soybean oil:
Futures – long	5,220	—
Futures – short	27,900	—


•	Trading Derivatives – Our objective for entering into commodity and other derivative instruments for trading purposes is to take advantage of existing market conditions related to future results of operations and cash flows.

As of June 30, 2013, we had the following outstanding commodity and other derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units, corn contracts that are presented in thousands of bushels, and RINs contracts that are presented in thousands of gallons).



	Notional Contract Volumes by Year of Maturity
Derivative Instrument	2013	2014
Crude oil and refined products:
Swaps – long	26,255	21,135
Swaps – short	26,255	21,135
Futures – long	99,886	37,527
Futures – short	99,311	37,927
Options – long	26,321	—
Options – short	25,256	—
Natural gas:
Futures – long	1,700	—
Futures – short	750	—
Options – long	1,700	—
Corn:
Swaps – long	145	—
Swaps – short	145	—
Futures – long	5,620	—
Futures – short	5,620	—
Other:
RINs fixed-price contracts – short	25,000	—

Interest Rate Risk

Our primary market risk exposure for changes in interest rates relates to our debt obligations. We manage our exposure to changing interest rates through the use of a combination of fixed-rate and floating-rate debt. In addition, at times we have used interest rate swap agreements to manage our fixed to floating interest rate position by converting certain fixed-rate debt to floating-rate debt. We had no interest rate derivative instruments outstanding as of June 30, 2013 or December 31, 2012, or during the three and six months ended June 30, 2013 and 2012.

Foreign Currency Risk

We are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated in currencies other than the local (functional) currencies of those operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes, and therefore they are classified as economic hedges. As of June 30, 2013, we had commitments to purchase $581 million of U.S. dollars. These commitments matured on or before July 31, 2013, resulting in an immaterial loss in the third quarter of 2013.

Compliance Program Price Risk

We are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental and regulatory programs. The most significant programs impacting our operations are those that require us to blend biofuels into the products we produce, and we are subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage of biofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we are obligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we are unable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility in the market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. Due to rising RINs prices in the U.S. during the six months ended June 30, 2013, we purchased a portion of our expected RINs obligation for 2013. The cost of meeting our obligations under these compliance programs was $137 million and $59 million for the three months ended June 30, 2013 and 2012, respectively, and $267 million and $126 million for the six months ended June 30, 2013 and 2012, respectively. These amounts are reflected in cost of sales.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of June 30, 2013 and December 31, 2012 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 12 for additional information related to the fair values of our derivative instruments.

As indicated in Note 12, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.



	Balance Sheet Location	June 30, 2013
	Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	49	$	53

Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	966	$	942
Swaps	Receivables, net	16		11
Swaps	Prepaid expenses and other	2		1
Swaps	Accrued expenses	5		11
Options	Receivables, net	4		6
Options	Prepaid expenses and other	1		—
Options	Accrued expenses	—		1
Physical purchase contracts	Inventories	5		11
RINs fixed-price contracts	Prepaid expenses and other	—		22
Foreign currency contracts	Receivables, net	10		—
Total		$	1,009	$	1,005
Total derivatives		$	1,058	$	1,058



	Balance Sheet Location	December 31, 2012
	Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	77	$	64
Swaps	Receivables, net	15		13
Swaps	Prepaid expenses and other	2		2
Total		$	94	$	79

Derivatives not designated as hedging instruments
Commodity contracts:
Futures	Receivables, net	$	1,066	$	1,073
Swaps	Receivables, net	9		6
Swaps	Accrued expenses	32		46
Options	Receivables, net	1		4
Options	Accrued expenses	1		—
Physical purchase contracts	Inventories	11		—
Foreign currency contracts	Receivables, net	1		—
Foreign currency contracts	Accrued expenses	—		1
Total		$	1,121	$	1,130
Total derivatives		$	1,215	$	1,209

Market and Counterparty Risk

Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by a risk control group to ensure compliance with our stated risk management policy. Concentrations of customers in the refining industry may impact our overall exposure to counterparty risk because these customers may be similarly affected by changes in economic or other conditions. In addition, financial services companies are the counterparties in certain of our price risk management activities, and such financial services companies may be adversely affected by periods of uncertainty and illiquidity in the credit and capital markets.

There were no material amounts due from counterparties in the refining or financial services industry as of June 30, 2013 or December 31, 2012. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.

Effect of Derivative Instruments on Income and Other Comprehensive Income

The following tables provide information about the gain or loss recognized in income and other comprehensive income on our derivative instruments and the line items in the financial statements in which such gains and losses are reflected (in millions).



Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivatives	2013			2012			2013			2012
Commodity contracts:
Gain (loss) recognized in income on derivatives	Cost of sales	$	(20	)	$	87		$	(21	)	$	(180	)
Gain (loss) recognized in income on hedged item	Cost of sales	22			(91		)	22			137
Gain (loss) recognized in income on derivatives (ineffective portion)	Cost of sales	2			(4		)	1			(43		)

For fair value hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and six months ended June 30, 2013 and 2012. There were no amounts recognized in income for hedged firm commitments that no longer qualified as fair value hedges during the three or six months ended June 30, 2013. We recognized a gain of $28 million in income for hedged firm commitments that no longer qualified as fair value hedges during the three and six months ended June 30, 2012.



Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivatives	2013			2012			2013			2012
Commodity contracts:
Gain (loss) recognized in OCI on derivatives (effective portion)		$	(10	)	$	(31	)	$	(9	)	$	16
Gain (loss) reclassified from accumulated OCI into income (effective portion)	Cost of sales	(8		)	(12		)	(5		)	36
Gain (loss) recognized in income on derivatives (ineffective portion)	Cost of sales	(2		)	31			(3		)	26

For cash flow hedges, no component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness for the three and six months ended June 30, 2013 and 2012. For the three and six months ended June 30, 2013, cash flow hedges primarily related to forward sales of gasoline and distillates, and associated forward purchases of crude oil, with $2 million of cumulative after-tax losses on cash flow hedges remaining in accumulated other comprehensive income. We estimate that $3 million of the deferred loss as of June 30, 2013 will be reclassified into cost of sales over the next 12 months as a result of hedged transactions that are forecasted to occur. For the three and six months ended June 30, 2013 and 2012, there were no amounts reclassified from accumulated other comprehensive income into income as a result of the discontinuance of cash flow hedge accounting.



Derivatives Designated as Economic Hedges and Other Derivative Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended June 30,				Six Months Ended June 30,
	Location of Gain (Loss) Recognized in Income on Derivatives	2013		2012		2013		2012
Commodity contracts	Cost of sales	$	246	$	574	$	281	$	423
Foreign currency contracts	Cost of sales	11		1		36		(22		)
Total		$	257	$	575	$	317	$	401



Trading Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended June 30,					Six Months Ended June 30,
Trading Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	2013			2012		2013			2012
Commodity contracts	Cost of sales	$	3		$	8	$	5		$	4
RINs fixed-price contracts	Cost of sales	(7		)	—		(20		)	—
Total		$	(4	)	$	8	$	(15	)	$	4