Derivative Instruments (Notes)

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedges, Assets [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

The timing, direction and overall change in refined product prices versus crude oil prices impacts profit margins and has a significant impact on our earnings and cash flows. Consequently, we use non-trading derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of feedstocks, products and energy supplies to or from the Company's refineries, terminals, retail operations and customers. We also use non-trading derivative instruments to manage price risks associated with inventories above or below our target levels. To achieve our objectives, we use derivative instruments such as options, Futures Contracts, OTC Swap Contracts, OTC Option Contracts, and Forward Contracts, all generally with maturity dates of less than one year. We believe that there is minimal credit risk with respect to our counterparties.

We may use our excess storage capacity in Panama to take advantage of contango markets when the future price of crude oil is higher than the current spot price. We use commodity derivatives to manage price risk and hedge crude oil held in connection with these arbitrage opportunities.

We are exposed to exchange rate fluctuations on our purchases of Canadian crude oil. We enter into forward contracts of Canadian dollars to manage monthly exchange rate fluctuations.

The accounting for changes in the fair value of a commodity derivative depends on whether the derivative has been designated in a hedging relationship and whether we have elected the normal purchases and normal sales exception. The accounting for the change in fair value can be summarized as follows:

Derivative Treatment	Accounting Method
Normal purchases and normal sales exception	Accrual accounting
Designated in qualifying hedging relationship	Hedge accounting
All other derivatives	Mark-to-market accounting

The primary derivative instruments that we use have the following characteristics. Option contracts provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Futures Contracts include a requirement to buy or sell the commodity at a fixed price in the future. OTC Swap Contracts, OTC Option Contracts and Forward Contracts require cash settlement for the commodity based on the difference between a fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral if our liability position exceeds specified thresholds. At December 31, 2011, we had no cash collateral outstanding related to our OTC Swap Contracts.

The following table presents the fair value (in millions) of our derivative instruments as of December 31, 2011 and December 31, 2010. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with or received from brokers. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements. As a result, the asset and liability amounts below will not agree with the amounts presented in our consolidated balance sheet.

		Derivative Assets						Derivative Liabilities
	Balance Sheet Location	December 31, 2011			December 31, 2010			December 31, 2011			December 31, 2010
Mark-to-Market Derivatives (a):
Commodity Futures Contracts	Other Current Assets	$	95		$	88		$	136		$	96
Commodity OTC Swap Contracts	Receivables	1			1			—			—
Commodity OTC Swap Contracts	Accounts Payable	2			2			3			2
Commodity Forward Contracts	Receivables	4			2			—			—
Commodity Forward Contracts	Accounts Payable	—			—			1			1
Total Gross Mark-to-Market Derivatives		102			93			140			99
Derivatives Designated for Hedge Accounting (a):
Commodity Futures Contracts	Other Current Assets	—			—			—			3
Less: Counterparty Netting and Cash Collateral (b)		(63		)	(72		)	(138		)	(101		)
Total Net Fair Value of Derivatives		$	39		$	21		$	2		$	1

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(a) The above fair values are presented as gross amounts, including when the derivatives are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheet.

(b) As of December 31, 2011 and 2010, cash collateral amounts of $75 million and $29 million, respectively are being netted with mark-to-market commodity future contracts.

Gains (losses) for our mark-to-market derivatives for the years ended December 31, 2011, 2010, and 2009 were as follows (in millions):

Mark-to-Market Derivatives:	2011			2010			2009
Commodity Futures Contracts	$	(28	)	$	(36	)	$	(55	)
Commodity OTC Swap Contracts	15			9			(13		)
Commodity Forward Contracts	3			1			—
Foreign Currency Forward Contracts	(6		)	1			1
Total Mark-to-Market Derivatives	$	(16	)	$	(25	)	$	(67	)

The income statement location of gains (losses) for our mark-to market derivatives above were as follows:

Income Statement Location:	2011			2010			2009
Revenues	$	3		$	(17	)	$	—
Cost of sales	(13		)	(9		)	(68		)
Foreign currency exchange gain (loss)	(6		)	1			1
Total Loss on Mark-to-Market Derivatives	$	(16	)	$	(25	)	$	(67	)

Gains (losses) on our derivatives designated for hedge accounting during the year ended December 31, 2011 and 2010, were as follows (in millions). We did not designate any of our derivative instruments for hedge accounting treatment during the year ended December 31, 2009.

Derivatives Designated for Hedge Accounting:	Amount of Gain (Loss) Recognized in Income on Derivatives			Amount of Gain (Loss) Recognized in Income on Hedged Item			Amount of Gain (Loss) Recognized in Income on Ineffective Portion of Derivative (b)
Year ended December 31, 2011
Commodity Futures Contracts (a)	$	4		$	(4	)	$	—
Year ended December 31, 2010
Commodity Futures Contracts (a)	(3		)	4			1

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(a) Gains (losses) recognized in income on the derivative and the hedged item are included in cost of sales in the statements of consolidated operations.

(b) For fair value hedges, no component of the derivative instruments' gains or losses was excluded from the assessment of hedges effectiveness. No amounts were recognized in income for hedged firm commitments that no longer qualify as fair value hedges.

Open Long (Short) Positions

All of our open positions are scheduled to mature within the next twelve months. As of December 31, 2011, we had an open forward contract to purchase 64 million Canadian dollars that matured on January 25, 2012. The information below presents the net volume of outstanding commodity contracts by type of instrument and year of maturity as of December 31, 2011 (volumes in thousands of barrels):

Fair Value Hedges		Mark-to-Market Derivatives
Derivative instrument and Year of maturity	Long (Short) Contract Volumes	Derivative instrument and Year of maturity	Long (Short) Contract Volumes
Swaps		Swaps
2012	—	2012	(321)
Futures		Futures
2012	—	2012	(3,008)
Forwards		Forwards
2012	—	2012	(1,026)