Derivative and Financial Instruments

9 Months Ended

Sep. 30, 2017

Derivative and Financial Instruments [Abstract]

Note 13—Derivative and Financial Instruments

Derivative 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
	September 30		December 31
	2017		2016
Assets
Prepaid expenses and other current assets	$	170	268
Other assets		32	44
Liabilities
Other accruals		167	300
Other liabilities and deferred credits		23	34

The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:

	Millions of Dollars
	Three Months Ended			Nine Months Ended
	September 30			September 30
	2017		2016	2017	2016

Sales and other operating revenues	$	17	11	120	(155)
Other income		(1)	1	(1)	(1)
Purchased commodities		(19)	7	(88)	136

The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts:

	Open Position
	Long/(Short)
	September 30		December 31
	2017		2016
Commodity
Natural gas and power (billions of cubic feet equivalent)
Fixed price		(33)	(31)
Basis		42	2

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
	September 30		December 31
	2017		2016
Assets
Prepaid expenses and other current assets	$	1	1
Liabilities
Other accruals		-	168

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
	Three Months Ended			Nine Months Ended
	September 30			September 30
	2017		2016	2017	2016

Foreign currency transaction (gains) losses	$	(1)	35	2	218

We had the following net notional position of outstanding foreign currency exchange derivatives:

		In Millions
		Notional Currency
	September 30		December 31
		2017	2016

Sell U.S. dollar, buy other currencies*	USD	26	13
Buy U.S. dollar, sell other currencies**	USD	-	25
Buy British pound, sell other currencies***	GBP	3	1,069
Sell British pound, buy Norwegian krone	GBP	-	51
*Primarily Canadian dollar.
**Primarily British pound.
***Primarily Euro and Canadian dollar.

Financial Instruments

We invest excess cash in 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 in which we currently invest include:

Time deposits: Interest bearing deposits placed with approved financial institutions.
Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank or government agency purchased at a discount to mature 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; otherwise, these financial instruments are included in the “Short-term investments” line on our consolidated balance sheet.

	Millions of Dollars
	Carrying Amount
	Cash and Cash Equivalents			Short-Term Investments
	September 30		December 31	September 30	December 31
	2017		2016	2017	2016

Cash	$	925	623	-	-
Time deposits
Remaining maturities from 1 to 90 days		5,462	2,987	1,103	39
Remaining maturities from 91 to 180 days		-	-	74	11
Commercial paper
Remaining maturities from 1 to 90 days		524	-	1,320	-
Remaining maturities from 91 to 180 days		-	-	199	-
	$	6,911	3,610	2,696	50

Credit Risk

Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, short-term investments, over-the-counter (OTC) derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, government 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 to 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 credit-risk-related contingent features that were in a liability position on September 30, 2017 and December 31, 2016, was $39 million and $42 million, respectively. For these instruments, no collateral was posted as of September 30, 2017 or December 31, 2016. If our credit rating had been downgraded below investment grade on September 30, 2017, we would be required to post $39 million of additional collateral, either with cash or letters of credit.