Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies

     The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production. Management believes it is prudent to manage the variability in cash flows by entering into derivative instruments on a portion of its crude oil and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and options, to manage fluctuations in cash flows resulting from changes in commodity prices. Derivatives entered into are typically designated as cash flow hedges.

Counterparty Risk

     The use of derivative instruments exposes the Company to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments. To reduce the concentration of exposure to any individual counterparty, Apache utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of June 30, 2011, Apache had derivative positions with 19 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, Apache may not realize the benefit of some of its derivative instruments resulting from lower commodity prices.

     The Company executes commodity derivative transactions under master agreements that have netting provisions that provide for offsetting payables against receivables. In general, if a party to a derivative transaction incurs a material deterioration in its credit ratings, as defined in the applicable agreement, the other party has the right to demand the posting of collateral, demand a transfer or terminate the arrangement.

Derivative Instruments

     As of June 30, 2011, Apache had the following open natural gas derivative positions:

			Fixed-Price Swaps				Collars
					Weighted						Weighted		Weighted
Production	MMBtu		GJ		Average		MMBtu		GJ		Average		Average
Period	(in 000’s)		(in 000’s)		Fixed		(in 000’s)		(in 000’s)		Floor Price(1)		Ceiling Price (1)
					Price(1)
2011		35,884		—	$	5.96		4,600		—	$	5.00	$	8.85
2011		—		25,760	C$	6.26		—		1,840	C$	6.50	C$	7.10
2012		41,554		—	$	6.30		21,960		—	$	5.54	$	7.30
2012		—		43,920	C$	6.61		—		7,320	C$	6.50	C$	7.27
2013		7,665		—	$	6.83		6,825		—	$	5.35	$	6.67
2014		755		—	$	7.23		—		—	$	—	$	—

⁽¹⁾ U.S. natural gas prices represent a weighted average of several contracts entered into on a per million British thermal units (MMBtu) basis and are settled primarily against NYMEX Henry Hub and various Inside FERC indices. The Canadian gas contracts are entered into on a per gigajoule (GJ) basis and are settled against AECO Index. The Canadian natural gas prices represent a weighted average of AECO Index prices and are shown in Canadian dollars.

     As of June 30, 2011, Apache had the following open crude oil derivative positions:

	Fixed-Price Swaps						Collars
			Weighted				Weighted		Weighted
Production			Average				Average		Average
Period	Mbbls		Fixed Price(1)		Mbbls		Floor Price(1)		Ceiling Price(1)
2011		2,641	$	74.17		14,996	$	69.18	$	96.79
2012		3,786		72.26		9,142		69.30		98.11
2013		1,860		74.38		2,416		78.02		103.06
2014		76		74.50		—		—		—

⁽¹⁾ Crude oil prices represent a weighted average of several contracts entered into on a per barrel basis. Crude oil contracts are primarily settled against NYMEX WTI Cushing Index. A portion of 2011 contracts are settled against Dated Brent.

     Apache North Sea Ltd. has entered into a physical sales contract to deliver 20,000 barrels of oil per day in 2011, settled against Dated Brent with a floor price of $70 per barrel and an average ceiling price of $98.56 per barrel. This contract is not reflected in the above table because the associated sales are in the normal course of business and are recognized in oil and gas revenues on an accrual basis.

Fair Values of Derivative Instruments Recorded in the Consolidated Balance Sheet

     The Company accounts for derivative instruments and hedging activity in accordance with ASC Topic 815, “Derivatives and Hedging,” and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The fair market value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:

	June 30,		December 31,
	2011		2010
	(In millions)
Current Assets: Prepaid assets and other	$	171	$	167
Other Assets: Deferred charges and other		87		139
Total Assets	$	258	$	306
Current Liabilities: Derivative instruments	$	229	$	194
Noncurrent Liabilities: Other		125		124
Total Liabilities	$	354	$	318

     The methods and assumptions used to estimate the fair values of the Company’s commodity derivative instruments and gross amounts of commodity derivative assets and liabilities are more fully discussed in Note 9 — Fair Value Measurements of this Form 10-Q.

Derivative Activity Recorded in Statement of Consolidated Operations

     The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:

		For the Quarter					For the Six Months
		Ended June 30,					Ended June 30,
	Gain (Loss) on Derivatives	2011			2010		2011			2010
	Recognized In Income				(In millions)
Gain (loss) reclassified from accumulated other comprehensive income (loss) into operations (effective portion)	Oil and Gas Production Revenues	$	(53	)	$	52	$	(47	)	$	51
Gain (loss) on derivatives recognized in operations (ineffective portion and basis)	Revenues and Other: Other	$	4		$	—	$	1		$	—

Derivative Activity in Accumulated Other Comprehensive Income (Loss)

     A reconciliation of the components of accumulated other comprehensive income (loss) in the statement of consolidated shareholders’ equity related to Apache’s cash flow hedges is presented in the table below:

	For the Six Months Ended June 30,
	2011						2010
	Before tax			After tax			Before tax			After tax
	(In millions)
Unrealized loss on derivatives at beginning of period	$	(54	)	$	(19	)	$	(267	)	$	(170	)
Realized amounts reclassified into earnings		47			36			(51	)		(33	)
Net change in derivative fair value		(119	)		(94	)		514			346
Ineffectiveness and basis swaps reclassified into earnings		(1	)		(1	)		—			—
Unrealized gain (loss) on derivatives at end of period	$	(127	)	$	(78	)	$	196		$	143

     Gains and losses on existing hedges will be realized in future earnings through mid-2014, in the same period as the related sales of natural gas and crude oil production occur. Included in accumulated other comprehensive loss as of June 30, 2011, is a net loss of approximately $77 million ($52 million after tax) that applies to the next 12 months; however, estimated and actual amounts are likely to vary materially as a result of changes in market conditions.