NOTE 8 DERIVATIVES

We use a variety of derivative instruments to protect our cash flows, margins and capital investment program from the cyclical nature of commodity prices and to improve our ability to comply with the covenants of our credit facilities in case of further price deterioration. We will continue to be strategic and opportunistic in implementing our hedging program as market conditions permit.

Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty. We apply hedge accounting when transactions meet specified criteria for cash-flow hedge treatment and management elects and documents such treatment. Otherwise, we recognize any fair value gains or losses, over the remaining term of the hedge instrument, in earnings in the current period.

As of December 31, 2016, we did not have any derivatives designated as hedges. Unless otherwise indicated, we use the term “hedge” to describe derivative instruments that are designed to achieve our hedging program goals, even though they are not necessarily accounted for as cash-flow or fair-value hedges. As part of our hedging program, we entered into a number of derivative transactions that resulted in the following Brent-based crude oil contracts as of December 31, 2016:

	Q1 2017		Q2 2017		Q3 2017		Q4 2017		Q1 2018		Q2-Q4 2018
Crude Oil
Calls:
Barrels per day	12,100		5,000		10,000		15,000		15,600		15,000
Weighted-average price per barrel	$	56.37	$	55.05	$	56.15	$	56.12	$	58.77	$	58.83

Puts:
Barrels per day	22,100		20,000		17,000		10,000		—		—
Weighted-average price per barrel	$	49.10	$	50.25	$	50.88	$	48.00	$	—	$	—

Swaps:
Barrels per day	20,000		20,000		20,000		20,000		—		—
Weighted-average price per barrel	$	53.98	$	53.98	$	53.98	$	53.98	$	—	$	—

The second through fourth quarter 2017 crude oil swaps grant our counterparty a quarterly option to increase volumes by up to 10,000 barrels per day for that quarter at a weighted-average Brent price of $55.46. Our counterparty also has an option to increase volumes by up to 5,000 barrels per day for the second half of 2016 at a weighted-average Brent price of $61.43. During 2016, we purchased derivative assets that partially reduced our 2017 and 2018 call exposure for which we paid $86 million and deferred payment of $15 million.

The after-tax gains and losses recognized in, and reclassified to income from accumulated other comprehensive income (AOCI), for derivative instruments classified as cash-flow hedges for the years ended December 31, 2015 and 2014, and the ending AOCI balances for each period were not material. We did not have any cash-flow hedges in 2016. The amount of the ineffective portion of cash-flow hedges was immaterial for the years ended December 31, 2015 and 2014. For the years ended December 31, 2016 and 2015, we recognized non-cash derivative (losses) gains of approximately $(283) million and $52 million, respectively, from marking these contracts to market, which were included in revenues.

We had no fair-value hedges as of and during the years ended December 31, 2016, 2015 and 2014.

Fair Value of Derivatives

Our commodity derivatives are measured at fair value using industry-standard models with various inputs, including quoted forward prices, and are all classified as Level 2 in the required fair value hierarchy for the periods presented. The following table presents the fair values (at gross and net) of our outstanding derivatives as of December 31, 2016 and 2015 (in millions):

	December 31, 2016
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value			Gross Amounts Offset in the Balance Sheet			Net Fair Value Presented in the Balance Sheet
Assets
Commodity Contracts	Other current assets	$	88		$	(49	)	$	39
Commodity Contracts	Other assets	25			(6		)	19

Liabilities
Commodity Contracts	Accrued liabilities	(152		)	49			(103		)
Commodity Contracts	Other long-term liabilities	(58		)	6			(52		)

Total derivatives		$	(97	)	$	—		$	(97	)

	December 31, 2015
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value			Gross Amounts Offset in the Balance Sheet		Net Fair Value Presented in the Balance Sheet
Assets
Commodity Contracts	Other current assets	$	87		$	—	$	87

Liabilities
Commodity Contracts	Accrued liabilities	(1		)	—		(1		)

Total derivatives		$	86		$	—	$	86