11. Financial Risk Management

In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil and natural gas as well as changes in interest rates and foreign currency values. In the disclosures that follow, corporate risk management activities refer to the mitigation of these risks through hedging activities. The Corporation was also exposed to commodity price risks primarily related to crude oil, natural gas, refined petroleum products and electricity, as well as foreign currency values from a 50% voting interest in a consolidated energy trading joint venture up until the sale of the Corporation’s interest in the joint venture in February 2015.

Corporate Financial Risk Management Activities: Financial risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas produced by the Corporation or to reduce exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix or reduce volatility in the forward selling price of a portion of the Corporation’s crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which the Corporation does business with the intent of reducing exposure to foreign currency fluctuations. These forward contracts comprise various currencies, primarily the British Pound and Danish Krone. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

The gross volumes of Corporate risk management derivative contracts outstanding were as follows:

	March 31,		December 31,
	2015		2014
Commodity, primarily crude oil (millions of barrels)		16		—
Foreign exchange (millions of USD *)	$	862	$	1,189
Interest rate swaps (millions of USD)	$	1,300	$	1,300

*	Denominated in U.S. dollars (USD).

In the first quarter of 2015, the Corporation entered into Brent crude oil collars to hedge 50,000 barrels of oil per day for the ten months from March 2015 to December 2015 at a cost of $38 million. Under the terms of these contracts, the floor price to be received by the Corporation is $60 per barrel and the ceiling price it may receive is $80 per barrel. All Brent crude oil collars have been designated as cash flow hedges.

At March 31, 2015, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to Brent crude oil collars were $12 million, which will be reclassified into earnings during 2015, as the hedged crude oil sales are recognized in earnings. There was no hedge ineffectiveness for the three months ended March 31, 2015 and a loss of approximately $1 million for the three months ended March 31, 2014 under the 2014 hedge program. The Corporation recorded within Sales and other operating revenues a pre-tax gain of $12 million for the three months ended March 31, 2015, associated with changes in the time value of Brent crude oil collars.

At March 31, 2015 and December 31, 2014, the Corporation had interest rate swaps with gross notional amounts of $1,300 million. During the first quarter of 2015, the Corporation settled existing interest rate swaps and received cash of $41 million. Simultaneously, the Corporation entered into new interest rate swap arrangements. All interest rate swaps have been designated as fair value hedges. The Corporation recorded an increase of approximately $10 million for the three months ended March 31, 2015 and an increase of approximately $1 million (excluding accrued interest) for the three months ended March 31, 2014, in the fair value of interest rate swaps. These items, excluding accrued interest, offset changes in the carrying value of the hedged fixed-rate debt.

Total foreign exchange gains reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income totaled $15 million pre-tax in the first quarter of 2015 compared with a loss of $6 million pre-tax in the first quarter of 2014. Gains or losses on foreign exchange derivative contracts not designated as hedges, which are a component of total foreign exchange gains and losses, amounted to gains of $98 million in the first quarter of 2015 and was nil in the first quarter of 2014.

Fair Value Measurements: The following table provides information about the effect of netting arrangements on the presentation of the Corporation’s physical and financial derivative assets and (liabilities) that are measured at fair value, with the effect of single counterparty multilateral netting being included in column (v):

				Gross Amounts Offset
				in the Consolidated
				Balance Sheet
				Physical					Net Amounts			Gross Amounts
				Derivative					Presented in			Not Offset in
				and					the			the
	Gross			Financial			Cash		Consolidated			Consolidated		Net
	Amounts			Instruments			Collateral		Balance Sheet			Balance Sheet		Amounts
	(i)			(ii)			(iii)		(iv)=(i)+(ii)+(iii)			(v)		(vi)=(iv)+(v)
	(In millions)
March 31, 2015
Assets
Derivative contracts
Commodity	$	81		$	(12	)	$	—	$	69		$	—	$	69
Interest rate and other		38			(1	)		—		37			—		37
Counterparty netting		—			(1	)		—		(1	)		—		(1	)
Total derivative contracts	$	119		$	(14	)	$	—	$	105		$	—	$	105
Liabilities
Derivative contracts
Commodity	$	(15	)	$	12		$	—	$	(3	)	$	—	$	(3	)
Other		(3	)		1			—		(2	)		—		(2	)
Counterparty netting		—			1			—		1			—		1
Total derivative contracts	$	(18	)	$	14		$	—	$	(4	)	$	—	$	(4	)

The net assets and liabilities that were offset in the Consolidated Balance Sheet as reflected in column (iv) of the table above were included in Accounts receivable – Trade and Accounts payable, respectively.

The table below reflects the gross and net fair values of risk management derivative instruments:

	Accounts			Accounts
	Receivable			Payable
	(In millions)
March 31, 2015
Derivative contracts designated as hedging instruments
Commodity	$	69		$	—
Interest rate and other		4			(1	)
Total derivative contracts designated as hedging instruments		73			(1	)
Derivative contracts not designated as hedging instruments
Commodity		12			(15	)
Foreign exchange		34			(2	)
Total derivative contracts not designated as hedging instruments		46			(17	)
Gross fair value of derivative contracts		119			(18	)
Master netting arrangements		(14	)		14
Net fair value of derivative contracts	$	105		$	(4	)

As at March 31, 2015, Level 1 items comprised $3 million of Derivative liabilities. Level 2 items comprised Derivative liabilities of $1 million and Derivative assets of $105 million, which included commodity contracts of $69 million and interest rate and other items of $36 million. The Corporation did not have Level 3 instruments at March 31, 2015. For all other short-term financial instruments, primarily cash equivalents and accounts receivable and payable, carrying value approximated their fair value at March 31, 2015. Total Long-term debt of $5,980 million at March 31, 2015, had a fair value of $6,938 million based on Level 2 inputs.

Discontinued Operations - Trading Activities: In the first quarter of 2015, the Corporation sold its interest in the energy trading joint venture. Pursuant to the terms of the sale, the successor entity is permitted to continue to utilize the Corporation’s guarantees issued in favor of existing counterparties until November 12, 2015, provided that new trades are for a period of one year or less, comply with certain credit requirements, and net exposures remain within value at risk limits previously applied by the Corporation. The Corporation has the right to seek reimbursement from the successor entity upon any counterparty draw on the applicable guarantee from the Corporation. The fair value of the guarantee recorded by the Corporation amounted to $11 million.