Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Objective and Strategies for Using Derivative Instruments   We are exposed to fluctuations in crude oil and natural gas prices on the majority of our production. In order to mitigate the effect of commodity price volatility and enhance the predictability of cash flows relating to the marketing of our global crude oil and domestic natural gas, we enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. The derivative instruments we use include variable to fixed price commodity swaps, two-way and three-way collars and put options.

During the first quarter of 2013, we restructured our hedge portfolio to better align hedge benchmark prices with our realized crude oil sales prices. We terminated certain of our crude oil swaps and three way collars while entering into new hedging instruments including crude oil swaps and put options. As a result of this restructuring, we recognized a de minimis gain on hedge terminations.

We also may enter into forward contracts to hedge anticipated exposure to interest rate risk associated with public debt financing.

While these instruments mitigate the cash flow risk of future reductions in commodity prices or increases in interest rates, they may also curtail benefits from future increases in commodity prices or decreases in interest rates. See Note6. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.

Unsettled Derivative Instruments   As of June 30, 2013, we had entered into the following crude oil derivative instruments: 

				Swaps		Options		Collars
Settlement Period	Type of Contract	Index	Bbls Per Day	Weighted Average Fixed Price		Put Option Premium		Weighted Average  Short Put  Price		Weighted Average Floor Price		Weighted Average  Ceiling Price
Instruments Entered Into as of June 30, 2013
2013	Swaps	NYMEX WTI  (1)	9,000	$	90.16	$	—	$	—	$	—	$	—
2013	Swaps	Dated Brent	3,000	98.03		—		—		—		—
2013	Two-Way Collars	NYMEX WTI	5,000	—		—		—		95.00		115.00
2013	Three-Way Collars	NYMEX WTI	7,000	—		—		63.57		83.57		109.04
2013	Three-Way Collars	Dated Brent	13,000	—		—		81.15		100.75		124.68
2013	Put Options (2)	NYMEX WTI	11,000	—		5.97		—		97.60		—
2014	Swaps	NYMEX WTI	37,000	92.67		—		—		—		—
2014	Swaps	Dated Brent	10,000	103.33		—		—		—		—
2014	Three-Way Collars	NYMEX WTI	9,000	—		—		75.89		90.89		100.44
2014	Three-Way Collars	Dated Brent	8,000	—		—		84.38		98.25		121.56
2015	Swaps	NYMEX WTI	10,000	87.01		—		—		—		—
2015	Swaps	Dated Brent	5,000	99.04		—		—		—		—
2015	Three-Way Collars	NYMEX WTI	10,000	—		—		68.50		88.50		92.87
2015	Three-Way Collars	Dated Brent	5,000	—		—		75.00		95.00		112.53

⁽¹⁾  West Texas Intermediate

⁽²⁾  For put options, we typically pay a premium to the counterparty in exchange for the sale of the instrument. If the index price is below the floor price of the put option, we receive the difference between the floor price and the index price multiplied by the contract volumes less the option premium. If the index price settles at or above the floor price of the put option, we pay only the put option premium.

As of June 30, 2013, we had entered into the following natural gas derivative instruments:

				Swaps		Collars
Settlement Period	Type of Contract	Index	MMBtu Per Day	Weighted Average Fixed Price		Weighted Average Short Put  Price		Weighted Average Floor Price		Weighted Average Ceiling Price
Instruments Entered Into as of June 30, 2013
2013	Swaps	NYMEX HH (1)	60,000	$	4.58	$	—	$	—	$	—
2013	Two-Way Collars	NYMEX HH	40,000	—		—		3.25		5.14
2013	Three-Way Collars	NYMEX HH	100,000	—		3.88		4.75		5.63
2014	Swaps	NYMEX HH	60,000	4.24		—		—		—
2014	Three-Way Collars	NYMEX HH	230,000	—		2.83		3.75		4.98
2015	Swaps	NYMEX HH	80,000	4.32		—		—		—
2015	Three-Way Collars	NYMEX HH	120,000	—		3.54		4.25		5.06

⁽¹⁾  Henry Hub

Fair Value Amounts and Gains and Losses on Derivative Instruments   The fair values of derivative instruments in our consolidated balance sheets were as follows: 

Fair Value of Derivative Instruments
	Asset Derivative Instruments						Liability Derivative Instruments
	June 30, 2013			December 31, 2012			June 30, 2013			December 31, 2012
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair  Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
(millions)
Commodity DerivativeInstruments	Current Assets	$	72	Current Assets	$	63	Current Liabilities (1)	$	13	Current Liabilities	$	7
	Noncurrent Assets	95		Noncurrent Assets	21		Noncurrent Liabilities	—		Noncurrent Liabilities	3
Total		$	167		$	84		$	13		$	10

⁽¹⁾ Includes $12 million of deferred put option premium.

The effect of derivative instruments on our consolidated statements of operations was as follows: 

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
(millions)
Realized Mark-to-Market (Gain) Loss
Crude Oil	$	6		$	17		$	14		$	51
Natural Gas	(8		)	(16		)	(23		)	(27		)
Total Realized Mark-to-Market (Gain) Loss	(2		)	1			(9		)	24
Unrealized Mark-to-Market (Gain) Loss
Crude Oil	(124		)	(300		)	(83		)	(208		)
Natural Gas	(35		)	23			3			4
Total Unrealized Mark-to-Market Gain	(159		)	(277		)	(80		)	(204		)
Total Gain on Commodity Derivative Instruments	$	(161	)	$	(276	)	$	(89	)	$	(180	)

 Accumulated other comprehensive loss (AOCL) at June 30, 2013 included deferred losses of $25 million, net of tax, related to interest rate derivative instruments. This amount will be reclassified to earnings as an adjustment to interest expense over the terms of our senior notes due April 2014 and March 2041.  Approximately $2 million of deferred losses (net of tax) will be reclassified to earnings during the next 12 months and will be recorded as an increase in interest expense.