Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 10. Fair Value Measurements

     The following table presents, by level within the fair value hierarchy, our assets and liabilities that are measured at fair value on a recurring basis.

	June 30, 2011								December 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(Millions)
Assets:
Energy derivatives	$	46	$	352	$	3	$	401	$	96	$	475	$	2	$	573
ARO Trust investments (see Note 11)		40		—		—		40		40		—		—		40
Available-for-sale equity securities (see Note 11)		27		—		—		27		—		—		—		—
Total assets	$	113	$	352	$	3	$	468	$	136	$	475	$	2	$	613
Liabilities:
Energy derivatives	$	41	$	173	$	2	$	216	$	78	$	210	$	1	$	289
Total liabilities	$	41	$	173	$	2	$	216	$	78	$	210	$	1	$	289

     Energy derivatives include commodity based exchange-traded contracts and over-the-counter (OTC) contracts. Exchange-traded contracts include futures, swaps, and options. OTC contracts include forwards, swaps and options.

     The instruments included in our Level 1 measurements consist of energy derivatives that are exchange-traded, a portfolio of mutual funds, and an investment in marketable equity securities. Exchange-traded contracts include New York Mercantile Exchange and Intercontinental Exchange contracts and are valued based on quoted prices in these active markets.

     The instruments included in our Level 2 measurements consist primarily of OTC instruments. Forward, swap, and option contracts included in Level 2 are valued using an income approach including present value techniques and option pricing models. Option contracts, which hedge future sales of production from our Exploration & Production segment, are structured as costless collars and are financially settled. They are valued using an industry standard Black-Scholes option pricing model. Significant inputs into our Level 2 valuations include commodity prices, implied volatility by location, and interest rates, as well as considering executed transactions or broker quotes corroborated by other market data. These broker quotes are based on observable market prices at which transactions could currently be executed. In certain instances where these inputs are not observable for all periods, relationships of observable market data and historical observations are used as a means to estimate fair value. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2.

     The instruments in our Level 3 measurements primarily consist of natural gas index transactions that are used by our Exploration & Production segment to manage physical requirements. These instruments are valued with a present value technique using inputs that may not be readily observable or corroborated by other market data. These instruments are classified within Level 3 because these inputs have a significant impact on the measurement of fair value. As the fair value of natural gas index transactions is primarily driven by the typically nominal differential transacted and the market price, these transactions do not have a material impact on our results of operations or liquidity.

     Our energy derivatives portfolio is largely comprised of exchange-traded products or like products and the tenure of our derivatives portfolio is relatively short with more than 99 percent of the value of our derivatives portfolio expiring in the next 18 months. Due to the nature of the products and tenure, we are consistently able to obtain market pricing. All pricing is reviewed on a daily basis and is formally validated with broker quotes and documented on a monthly basis.

     Reclassifications of fair value between Level 1, Level 2, and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. No significant transfers between Level 1 and Level 2 occurred during the period ended June 30, 2011 or 2010.

     The following table presents a reconciliation of changes in the fair value of our net energy derivatives classified as Level 3 in the fair value hierarchy.

Level 3 Fair Value Measurements Using Significant Unobservable Inputs

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
	(Millions)
Beginning balance	$	—		$	5		$	1		$	2
Realized and unrealized gains (losses):
Included in income (loss) from continuing operations		3			(1	)		2			(1	)
Included in other comprehensive income (loss)		—			11			(1	)		15
Settlements		(2	)		(1	)		(2	)		(2	)
Transfers into Level 3		—			—			—			—
Transfers out of Level 3		—			—			1			—
Ending balance	$	1		$	14		$	1		$	14
Unrealized gains (losses) included in income (loss) from continuing operations relating to instruments still held at June 30	$	1		$	(1	)	$	—		$	(1	)

     Realized and unrealized gains (losses) included in income (loss) from continuing operations for the above periods are reported in revenues or costs and operating expenses in our Consolidated Statement of Operations.