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Derivative financial instruments
 12 Months Ended
Dec. 31, 2017
Financial Instruments [Abstract]  
Derivative financial instruments
Derivative financial instruments
In the normal course of business the group enters into derivative financial instruments (derivatives) to manage its normal business exposures in relation to commodity prices, foreign currency exchange rates and interest rates, including management of the balance between floating rate and fixed rate debt, consistent with risk management policies and objectives. An outline of the group’s financial risks and the objectives and policies pursued in relation to those risks is set out in Note 27. Additionally, the group has a well-established entrepreneurial trading operation that is undertaken in conjunction with these activities using a similar range of contracts.
For information on significant estimates and judgements made in relation to the valuation of derivatives see Derivative financial instruments within Note 1.
The fair values of derivative financial instruments at 31 December are set out below.
Exchange traded derivatives are valued using closing prices provided by the exchange as at the balance sheet date. These derivatives are categorized within level 1 of the fair value hierarchy.
Over-the-counter (OTC) financial swaps and physical commodity sale and purchase contracts are generally valued using readily available information in the public markets and quotations provided by brokers and price index developers. These quotes are corroborated with market data and are categorized within level 2 of the fair value hierarchy.
In certain less liquid markets, or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC financial swaps and physical commodity sale and purchase contracts are valued using internally developed methodologies that consider historical relationships between various commodities, and that result in management’s best estimate of fair value. These contracts are categorized within level 3 of the fair value hierarchy.
Financial OTC and physical commodity options are valued using industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic factors. The degree to which these inputs are observable in the forward markets determines whether the option is categorized within level 2 or level 3 of the fair value hierarchy.
28. Derivative financial instruments – continued
 
 
 
 
 
$ million

 
 
 
2017

 
2016

 
 
Fair value
asset

Fair value
liability

Fair value
asset

Fair value
liability

Derivatives held for trading
 
 
 
 
 
Currency derivatives
 
237

(756
)
167

(2,000
)
Oil price derivatives
 
1,637

(1,281
)
1,543

(952
)
Natural gas price derivatives
 
3,580

(2,844
)
3,780

(2,845
)
Power price derivatives
 
885

(693
)
768

(560
)
Other derivatives
 
115

—

232

—

 
 
6,454

(5,574
)
6,490

(6,357
)
Embedded derivatives
 
 
 
 
 
Commodity price contracts
 
—

(16
)
—

(50
)
Other embedded derivatives
 
—

(115
)
—

(100
)
 
 
—

(131
)
—

(150
)
Cash flow hedges
 
 
 
 
 
Currency forwards, futures and cylinders
 
35

(35
)
32

(451
)
Cross-currency interest rate swaps
 
—

—

—

(154
)
 
 
35

(35
)
32

(605
)
Fair value hedges
 
 
 
 
 
Currency forwards, futures and swaps
 
460

(523
)
22

(1,159
)
Interest rate swaps
 
193

(306
)
831

(233
)
 
 
653

(829
)
853

(1,392
)
 
 
7,142

(6,569
)
7,375

(8,504
)
Of which – current
 
3,032

(2,808
)
3,016

(2,991
)
– non-current
 
4,110

(3,761
)
4,359

(5,513
)

Derivatives held for trading
The group maintains active trading positions in a variety of derivatives. The contracts may be entered into for risk management purposes, to satisfy supply requirements or for entrepreneurial trading. Certain contracts are classified as held for trading, regardless of their original business objective, and are recognized at fair value with changes in fair value recognized in the income statement. Trading activities are undertaken by using a range of contract types in combination to create incremental gains by arbitraging prices between markets, locations and time periods. The net of these exposures is monitored using market value-at-risk techniques as described in Note 27.
The following tables show further information on the fair value of derivatives and other financial instruments held for trading purposes.
Derivative assets held for trading have the following fair values and maturities.
 
 
 
 
 
 
 
 
$ million

 
 
 
 
 
 
 
 
2017

 
 
Less than
1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over
5 years

Total

Currency derivatives
 
186

31

8

5

3

4

237

Oil price derivatives
 
1,280

177

99

66

14

1

1,637

Natural gas price derivatives
 
1,122

609

428

328

288

805

3,580

Power price derivatives
 
420

188

81

60

38

98

885

Other derivatives
 
—

—

—

—

—

115

115

 
 
3,008

1,005

616

459

343

1,023

6,454

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ million

 
 
 
 
 
 
 
 
2016

 
 
Less than
1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over
5 years

Total

Currency derivatives
 
102

34

20

2

7

2

167

Oil price derivatives
 
1,178

201

91

49

22

2

1,543

Natural gas price derivatives
 
1,238

647

424

313

267

891

3,780

Power price derivatives
 
305

164

114

58

53

74

768

Other derivatives
 
132

—

—

—

—

100

232

 
 
2,955

1,046

649

422

349

1,069

6,490


At 31 December 2016 the group had a contingent consideration receivable in respect of the disposal of the Texas City refinery. The sale agreement contained an embedded derivative and had been designated at fair value through profit or loss and shown within other derivatives held for trading, within level 3 of the fair value hierarchy. The valuation was dependent on refinery throughput and future margins and final payment was received in 2017.
28. Derivative financial instruments – continued
Derivative liabilities held for trading have the following fair values and maturities.
 
 
 
 
 
 
 
 
$ million

 
 
 
 
 
 
 
 
2017

 
 
Less than
1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over
5 years

Total

Currency derivatives
 
(92
)
(232
)
(66
)
(188
)
(99
)
(79
)
(756
)
Oil price derivatives
 
(1,120
)
(118
)
(33
)
(4
)
(6
)
—

(1,281
)
Natural gas price derivatives
 
(973
)
(410
)
(334
)
(224
)
(194
)
(709
)
(2,844
)
Power price derivatives
 
(337
)
(134
)
(63
)
(39
)
(29
)
(91
)
(693
)
 
 
(2,522
)
(894
)
(496
)
(455
)
(328
)
(879
)
(5,574
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ million

 
 
 
 
 
 
 
 
2016

 
 
Less than
1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over
5 years

Total

Currency derivatives
 
(379
)
(36
)
(402
)
(101
)
(338
)
(744
)
(2,000
)
Oil price derivatives
 
(787
)
(105
)
(40
)
(11
)
(3
)
(6
)
(952
)
Natural gas price derivatives
 
(947
)
(421
)
(257
)
(258
)
(197
)
(765
)
(2,845
)
Power price derivatives
 
(201
)
(126
)
(81
)
(39
)
(31
)
(82
)
(560
)
 
 
(2,314
)
(688
)
(780
)
(409
)
(569
)
(1,597
)
(6,357
)

The following table shows the fair value of derivative assets and derivative liabilities held for trading, analysed by maturity period and by methodology of fair value estimation. This information is presented on a gross basis, that is, before netting by counterparty.
 
 
 
 
 
 
 
 
$ million

 
 
 
 
 
 
 
 
2017

 
 
Less than
1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over
5 years

Total

Fair value of derivative assets
 
 
 
 
 
 
 
 
Level 2
 
3,663

1,003

438

244

140

135

5,623

Level 3
 
386

258

231

226

211

899

2,211

 
 
4,049

1,261

669

470

351

1,034

7,834

Less: netting by counterparty
 
(1,041
)
(256
)
(53
)
(11
)
(8
)
(11
)
(1,380
)
 
 
3,008

1,005

616

459

343

1,023

6,454

Fair value of derivative liabilities
 
 
 
 
 
 
 
 
Level 2
 
(3,338
)
(953
)
(358
)
(289
)
(163
)
(166
)
(5,267
)
Level 3
 
(225
)
(197
)
(191
)
(177
)
(173
)
(724
)
(1,687
)
 
 
(3,563
)
(1,150
)
(549
)
(466
)
(336
)
(890
)
(6,954
)
Less: netting by counterparty
 
1,041

256

53

11

8

11

1,380

 
 
(2,522
)
(894
)
(496
)
(455
)
(328
)
(879
)
(5,574
)
Net fair value
 
486

111

120

4

15

144

880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ million

 
 
 
 
 
 
 
 
2016

 
 
Less than
1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over
5 years

Total

Fair value of derivative assets
 
 
 
 
 
 
 
 
Level 2
 
3,962

1,035

509

208

117

189

6,020

Level 3
 
448

265

249

243

241

906

2,352

 
 
4,410

1,300

758

451

358

1,095

8,372

Less: netting by counterparty
 
(1,455
)
(254
)
(109
)
(29
)
(9
)
(26
)
(1,882
)
 
 
2,955

1,046

649

422

349

1,069

6,490

Fair value of derivative liabilities
 
 
 
 
 
 
 
 
Level 2
 
(3,610
)
(778
)
(701
)
(249
)
(401
)
(872
)
(6,611
)
Level 3
 
(159
)
(164
)
(188
)
(189
)
(177
)
(751
)
(1,628
)
 
 
(3,769
)
(942
)
(889
)
(438
)
(578
)
(1,623
)
(8,239
)
Less: netting by counterparty
 
1,455

254

109

29

9

26

1,882

 
 
(2,314
)
(688
)
(780
)
(409
)
(569
)
(1,597
)
(6,357
)
Net fair value
 
641

358

(131
)
13

(220
)
(528
)
133


28. Derivative financial instruments – continued
Level 3 derivatives
The following table shows the changes during the year in the net fair value of derivatives held for trading purposes within level 3 of the fair value hierarchy.
 
 
 
 
 
 
$ million

 
 
Oil
price

Natural gas
price

Power
price

Other

Total

Fair value contracts at 1 January 2017
 
68

145

(147
)
231

297

Gains (losses) recognized in the income statement
 
76

161

61

15

313

Settlements
 
(68
)
(35
)
(113
)
(131
)
(347
)
Transfers out of level 3
 
(9
)
(206
)
(27
)
—

(242
)
Net fair value of contracts at 31 December 2017
 
67

65

(226
)
115

21

Deferred day-one gains (losses)
 
 
 
 
 
503

Derivative asset (liability)
 
 
 
 
 
524

 
 
 
 
 
 
 
 
 
 
 
 
 
$ million

 
 
Oil
price

Natural gas
price

Power
price

Other

Total

Fair value contracts at 1 January 2016
 
169

214

91

292

766

Gains (losses) recognized in the income statement
 
(37
)
1

(82
)
139

21

Settlements
 
(63
)
(51
)
(145
)
(200
)
(459
)
Transfers out of level 3
 
(1
)
(19
)
(11
)
—

(31
)
Net fair value of contracts at 31 December 2016
 
68

145

(147
)
231

297

Deferred day-one gains (losses)
 
 
 
 
 
427

Derivative asset (liability)
 
 
 
 
 
724


The amount recognized in the income statement for the year relating to level 3 held-for-trading derivatives still held at 31 December 2017 was a $234-million gain (2016 $253-million loss related to derivatives still held at 31 December 2016).
Derivative gains and losses
The group enters into derivative contracts including futures, options, swaps and certain forward sales and forward purchases contracts, relating to both currency and commodity trading activities. Gains or losses arise on contracts entered into for risk management purposes, optimization activity and entrepreneurial trading. They also arise on certain contracts that are for normal procurement or sales activity for the group but that are required to be fair valued under accounting standards. These gains and losses are included within sales and other operating revenues in the income statement. Also included within this line item are gains and losses on inventory held for trading purposes. The total amount relating to all these items (excluding gains and losses on realized physical derivative contracts that have been reflected gross in the income statement within sales and purchases) was a net gain of $1,983 million (2016 $1,435 million net gain and 2015 $5,508 million net gain). This number does not include gains and losses on realized physical derivative contracts that have been reflected gross in the income statement within sales and purchases or the change in value of transportation and storage contracts which are not recognized under IFRS, but does include the associated financially settled contracts. The net amounts for actual gains and losses relating to these derivative contracts and all related items therefore differ significantly from the amounts disclosed above.
The group also enters into derivative contracts including futures, options, swaps and certain forward sales and forward purchase contracts primarily relating to foreign currency risk management activities. Gains and losses on these contracts are included within production and manufacturing expenses in the income statement. The change in the unrealized value of these contracts was a net gain of $1,420 million (2016 $154 million net loss and 2015 $833 million net loss), however the gains and losses in each year are largely offset by opposing net foreign exchange differences on retranslation of the associated non-US dollar debt. The net amounts for actual gains and losses relating to these derivative contracts and all related items therefore differ significantly from the amounts disclosed above.
Cash flow hedges
At 31 December 2017, the group held currency forwards used to hedge the foreign currency risk of highly probable forecast transactions. Note 27 outlines the group’s approach to foreign currency exchange risk management. For cash flow hedges the group only claims hedge accounting for the spot value on the currency with any fair value attributable to forward points taken immediately to the income statement. The amounts remaining in equity at 31 December 2017 in relation to these cash flow hedges consist of deferred losses of $21 million maturing in 2018, deferred gains of $8 million maturing in 2019 and deferred gains of $2 million maturing in 2020 and beyond.
Fair value hedges
At 31 December 2017, the group held interest rate and cross-currency interest rate swap contracts as fair value hedges of the interest rate risk and foreign currency risk on fixed rate debt issued by the group. The gain on the hedging derivative instruments recognized in the income statement in 2017 was $364 million (2016 $316-million loss and 2015 $788-million loss) offset by a loss on the fair value of the finance debt of $394 million (2016 $270-million gain and 2015 $833-million gain).
The interest rate and cross-currency interest rate swaps mature within one to twelve years, and have the same maturity terms as the debt that they are hedging. They are used to convert sterling, euro, Swiss franc, Australian dollar, Canadian dollar, Norwegian krone and Hong Kong dollar denominated fixed rate borrowings into floating rate debt. Note 27 outlines the group’s approach to interest rate and foreign currency exchange risk management.