Derivative and Financial Instruments

12 Months Ended

Dec. 31, 2015

Derivative and Financial Instruments [Abstract]

Derivative and Financial Instruments

Note 14—Derivative and Financial Instruments

We use futures, forwards, swaps and options in various markets to meet our customer needs and capture market opportunities. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and natural gas liquids.

Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented on a net basis. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the normal purchase normal sale exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.

The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:
	Millions of Dollars
	2015		2014
Assets
Prepaid expenses and other current assets	$	768	4,500
Other assets		60	157
Liabilities
Other accruals		754	4,426
Other liabilities and deferred credits		46	144

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:
	Millions of Dollars
	2015		2014	2013
Sales and other operating revenues	$	231	523	(160)
Other income		2	1	4
Purchased commodities		(201)	(458)	139

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts:
		Open Position
		Long/(Short)
		2015		2014
Commodity
Natural gas and power (billions of cubic feet equivalent)
	Fixed price		(14)	(11)
	Basis		(17)	18

Foreign Currency Exchange Derivatives

We have foreign currency exchange rate risk resulting from international operations. Our foreign currency exchange derivative activity primarily relates to managing our cash-related and foreign currency exchange rate exposures, such as firm commitments for capital programs or local currency tax payments, dividends, and cash returns from net investments in foreign affiliates. We do not elect hedge accounting on our foreign currency exchange derivatives.

The following table presents the gross fair values of our foreign currency exchange derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet:
	Millions of Dollars
	2015		2014
Assets
Prepaid expenses and other current assets	$	47	1
Liabilities
Other accruals		8	1

The (gains) losses from foreign currency exchange derivatives incurred, and the line item where they appear
on our consolidated income statement were:
	Millions of Dollars
		2015	2014	2013
Foreign currency transaction (gains) losses	$	(33)	3	4

We had the following net notional position of outstanding foreign currency exchange derivatives:
	In Millions
	Notional Currency
	2015		2014
Foreign Currency Exchange Derivatives
Sell U.S. dollar, buy other currencies*	USD	347	7
Buy U.S. dollar, sell other currencies**	USD	20	44
Buy British pound, sell other currencies***	GBP	567	20
*Primarily Canadian dollar, Norwegian krone and British pound.
**Primarily Canadian dollar and Norwegian krone.
***Primarily Canadian dollar and euro.

Financial Instruments

We have certain financial instruments with maturities based on our cash forecasts for the various currency pools we manage. The maturities of these investments may from time to time extend beyond 90 days. The types of financial instruments include:

• Time deposits: Interest bearing deposits placed with approved financial institutions.
• Money market funds: Short-term securities representing high-quality liquid debt and monetary instruments.
• Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank, or government agency purchased at a discount, maturing at par.

These financial instruments appear in the “Cash and cash equivalents” line of our consolidated balance sheet if the maturities at the time we made the investments were 90 days or less. At December 31, we held the following financial instruments:

	Millions of Dollars
	Carrying Amount
	Cash and Cash Equivalents
	2015		2014
Cash	$	528	946
Money market funds		-	50
Time deposits
Remaining maturities from 1 to 90 days		1,840	3,726
Commercial paper
Remaining maturities from 1 to 90 days		-	340
	$	2,368	5,062

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, over-the-counter (OTC) derivative contracts and trade receivables. Our cash equivalents are placed in high-quality commercial paper, money market funds, government debt securities and time deposits with major international banks and financial institutions.

The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements.

Our trade receivables result primarily from our petroleum operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We do not generally require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments, and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due us.

Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral, such as transactions administered through the New York Mercantile Exchange.

The aggregate fair value of all derivative instruments with such creditrisk-related contingent features that were in a liability position on December 31, 2015and December 31, 2014, was $158million and $150million, respectively. For these instruments, $2million of collateral was posted as of December 31, 2015, and no collateral was posted as of December 31, 2014. If our credit rating had been lowered one level from its “A” rating (per Standard and Poor’s) on December 31, 2015, we would be required to post noadditional collateral to our counterparties. If we had been downgraded below investment grade, we would be required to post $156million of additional collateral, either with cash or letters of credit.