Fair Value Measurements

Fair values – Recurring

The following tables present assets and liabilities accounted for at fair value on a recurring basis as of December 31, 2013 and 2012 by fair value hierarchy level.



	December 31, 2013
(In millions)	Level 1		Level 2		Level 3		Collateral		Total
Derivative instruments, assets
Interest rate	$	—	$	8	$	—	$	—	$	8
Foreign currency	—		2		—		—		2
Derivative instruments, assets	$	—	$	10	$	—	$	—	$	10
Derivative instruments, liabilities
Foreign currency	$	—	$	4	$	—	$	—	$	4
Derivative instruments, liabilities	$	—	$	4	$	—	$	—	$	4

	December 31, 2012
(In millions)	Level 1		Level 2		Level 3		Collateral		Total
Derivative instruments, assets
Commodity	$	—	$	52	$	—	$	1	$	53
Interest rate	—		21		—		—		21
Foreign currency	—		18		—		—		18
Derivative instruments, assets	$	—	$	91	$	—	$	1	$	92

Interest rate swaps are measured at fair value with a market approach using actionable broker quotes which are Level 2 inputs. Foreign currency forwards are measured at fair value with a market approach using third-party pricing services, such as Bloomberg L.P., which have been corroborated with data from active markets for similar assets or liabilities, and are Level 2 inputs.

Commodity swaps in Level 2 are measured at fair value with a market approach using prices obtained from exchanges or pricing services, which have been corroborated with data from active markets for similar assets or liabilities. Commodity options in Level 2 are valued using the Black-Scholes Model. Inputs to this model include prices as noted above, discount factors, and implied market volatility. The inputs to this fair value measurement are categorized as Level 2 because predominantly all assumptions and inputs are observable in active markets throughout the term of the instruments. Collateral deposits related to commodity derivatives are in broker accounts covered by master netting agreements.

Fair values – Nonrecurring

The following table shows the values of assets, by major category, measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition.



	2013				2012				2011
(In millions)	Fair Value		Impairment		Fair Value		Impairment		Fair Value		Impairment
Long-lived assets held for use	$	5	$	96	$	16	$	371	$	226	$	285
Intangible assets	—		—		—		—		—		25

International E&P

Long-lived assets held for use – In light of E.G.’s recent natural gas policy developments related to the country’s natural gas resources, we elected to cease our efforts to develop a second LNG production train on Bioko Island and recorded a $40 million impairment of all capitalized costs associated with engineering and feasibility studies in the fourth quarter of 2013. In addition, our share of income from EGHoldings included a $4 million impairment related to the same project which is reflected in income from equity method investments in the 2013 consolidated statement of income.

North America E&P

Long-lived assets held for use – The fair values were measured using an income approach based upon internal estimates of future production levels, prices and discount rate, all of which are Level 3 inputs. Inputs to the fair value measurement included reserve and production estimates made by our reservoir engineers, estimated commodity prices adjusted for quality and location differentials, and forecasted operating expenses for the remaining estimated life of the reservoir.

In the fourth quarter of 2012, declining natural gas prices related to our Powder River Basin asset prompted lower production expectations and reductions in estimated reserves which resulted in an impairment of $73 million. Subsequently, in the first quarter of 2013, as a result of our decision to wind down operations in the Powder River Basin due to poor economics, an additional impairment of $15 million was recorded to write down the asset's remaining fair value.

During early 2012, production rates from the Ozona development in the Gulf of Mexico declined significantly. Accordingly, our reserve engineers performed evaluations of our future production as well as our reserves and an impairment was recorded in the first quarter of 2012. As the development produced toward abandonment pressures, further downward revisions of reserves were taken for an aggregate impairment of $289 million in 2012. Ozona production ceased in the first quarter of 2013 and an additional $21 million impairment was recorded.

In May 2011, significant water production and reservoir pressure declines occurred at our Droshky development in the Gulf of Mexico. Plans for a waterflood were canceled and due to a decrease in proved reserves, a $273 million impairment of this asset to its $226 million fair value was recorded in 2011.

Other impairments of long-lived assets held for use in 2013, 2012 and 2011 were a result of reduced drilling expectations, reductions of estimated reserves or declining natural gas prices.

Intangible assets – In the second quarter of 2011, our outlook for U.S. natural gas prices made it unlikely that sufficient U.S. demand for LNG would materialize by 2021, which is when the rights lapse under our arrangements at the Elba Island, Georgia regasification facility. Using an income approach based upon internal estimates of gas prices and future deliveries, which are Level 3 inputs, we determined that the contract had no remaining fair value and recorded a full impairment of this intangible asset.

Fair values – Financial instruments

Our current assets and liabilities include financial instruments, the most significant of which are receivables, commercial paper and payables. We believe the carrying values of our receivables, commercial paper and payables approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments, (2) our investment-grade credit rating, and (3) our historical incurrence of and expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk.

The following table summarizes financial instruments, excluding receivables, commercial paper, payables and derivative financial instruments, and their reported fair value by individual balance sheet line item at December 31, 2013 and 2012.



	December 31,
	2013				2012
(In millions)	Fair Value		Carrying Amount		Fair Value		Carrying Amount
Financial assets
Other noncurrent assets	$	154	$	147	$	189	$	186
Total financial assets	$	154	$	147	$	189	$	186
Financial liabilities
Other current liabilities	$	13	$	13	$	13	$	13
Long-term debt, including current portion^(a)	6,922		6,427		7,610		6,642
Deferred credits and other liabilities	149		147		94		94
Total financial liabilities	$	7,084	$	6,587	$	7,717	$	6,749


^(a)	Excludes capital leases.

Fair values of our financial assets included in other noncurrent assets, and of our financial liabilities included in other current liabilities and deferred credits and other liabilities are measured using an income approach and most inputs are internally generated, which results in a Level 3 classification. Estimated future cash flows are discounted using a rate deemed appropriate to obtain the fair value.

Most of our long-term debt instruments are publicly-traded. A market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value of such debt. The fair value of our debt that is not publicly-traded is measured using an income approach. The future debt service payments are discounted using the rate at which we currently expect to borrow. All inputs to this calculation are Level 3.