13. Financial Risk Management Activities

In the normal course of our business, we are 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. Financial risk management activities include transactions designed to reduce risk in the selling prices of crude oil or natural gas we produce or by reducing our exposure to foreign currency or interest rate movements. Generally, futures, swaps or option strategies may be used to fix the forward selling price of a portion of our crude oil or natural gas production. Forward contracts may also be used to purchase certain currencies in which we conduct the business with the intent of reducing exposure to foreign currency fluctuations. At September 30, 2017, these forward contracts relate to the British Pound. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates and, in the case of certain long-term debt relating to our Midstream operating segment, from floating to fixed rates.

Gross notional amounts of both long and short positions are presented in the table below. These amounts include long and short positions that offset in closed positions and have not reached contractual maturity. Gross notional amounts do not quantify risk or represent assets or liabilities of the Corporation, but are used in the calculation of cash settlements under the contracts.

The gross notional amounts of financial risk management derivative contracts outstanding were as follows:

	September 30, 2017		December 31, 2016
	(In millions)
Commodity - crude oil (millions of barrels)		54		—
Foreign exchange	$	35	$	785
Interest rate swaps	$	909	$	350

At September 30, 2017, we have outstanding Brent and West Texas Intermediate (WTI) crude oil collar positions by year of settlement as follows:

	2017				2018
	Brent		WTI		Brent		WTI
Outstanding average barrels of oil per day		20,000		110,000		—		115,000
Average ceiling price	$	75	$	68		—	$	65
Average floor price	$	55	$	50		—	$	50

These crude oil price collars, which have been designated as cash flow hedges, reduce the price exposure to our crude oil production that is hedged.

The table below reflects the gross and net fair values of the risk management derivative instruments, all of which are based on Level 2 inputs:

	Assets			Liabilities
	(In millions)
September 30, 2017
Derivative Contracts Designated as Hedging Instruments
Commodity - Accounts receivable	$	105		$	—
Commodity - Other assets (noncurrent)		41			—
Interest rate - Other assets (noncurrent) and Accounts payable		2			(3	)
Total derivative contracts designated as hedging instruments		148			(3	)
Derivative Contracts Not Designated as Hedging Instruments
Foreign exchange		—			—
Total derivative contracts not designated as hedging instruments		—			—
Gross fair value of derivative contracts		148			(3	)
Net Fair Value of Derivative Contracts	$	148		$	(3	)

December 31, 2016
Derivative Contracts Designated as Hedging Instruments
Interest rate	$	—		$	—
Total derivative contracts designated as hedging instruments		—			—
Derivative Contracts Not Designated as Hedging Instruments
Foreign exchange - Accounts receivable and Accrued liabilities		9			(1	)
Total derivative contracts not designated as hedging instruments		9			(1	)
Gross fair value of derivative contracts		9			(1	)
Master netting arrangements		(1	)		1
Net Fair Value of Derivative Contracts	$	8		$	—

Derivative contracts designated as hedging instruments:

Crude oil collars: The impact from realized and unrealized movements in crude oil price collars on Sales and other operating revenues was an increase of $6 million and a reduction of $5 million in the three and nine months ended September 30, 2017, respectively. Realized and unrealized movements were inclusive of a $2 million charge for hedge ineffectiveness in the third quarter of 2017. Reclassifications to the Statement of Consolidated Income from Other comprehensive income in the three and nine months ended September 30, 2017 amounted to gains of $18 million and $38 million, respectively. At September 30, 2017, after-tax deferred losses in Accumulated other comprehensive income (loss) related to crude oil collars were $39 million, of which $33 million will be reclassified into earnings during the next 12 months as the hedged crude oil sales are recognized in earnings. There were no crude oil hedge contracts in 2016.

Interest rate swaps designated as fair value hedges: At September 30, 2017 and December 31, 2016, Hess Corporation had interest rate swaps with gross notional amounts totaling $450 million and $350 million, respectively, which were designated as fair value hedges and relate to debt where we have converted interest payments on certain long-term debt from fixed to floating rates. For the three and nine months ended September 30, 2017, the change in fair value of interest rate swaps was an increase in the liability of less than $1 million and $3 million respectively. There was an increase of $9 million and a decrease of $9 million in the liability in the third quarter and first nine months of 2016, respectively. Changes in the fair value of the interest rate swaps and the hedged fixed‑rate debt are recorded in Interest expense in the Statement of Consolidated Income.

Interest rate swaps designated as cash flow hedges: At September 30, 2017, HIP had interest rate swaps with gross notional amounts totaling $459 million, which convert interest payments on certain long-term debt from floating to fixed rates. For the three and nine months ended September 30, 2017, the change in fair value of interest rate swaps was an increase to assets of $1 million and $2 million, respectively. At September 30, 2017, the after-tax deferred gains in Accumulated other comprehensive income (loss) related to interest rate swaps was $2 million before noncontrolling interests, which will be reclassified into earnings as the hedged interest payments are recognized in the Statement of Income. Of this amount, losses of less than $1 million will be reclassified into earnings during the next 12 months. There were no floating to fixed interest rate swap contracts in 2016.

Derivative contracts not designated as hedging instruments:

Foreign exchange: Foreign exchange gains, which are reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income were $17 million and $26 million in the three months and nine months ended September 30, 2017, respectively, compared with $11 million and $32 million in the third quarter and first nine months of 2016, respectively. A component of foreign exchange gains is the result of foreign exchange derivative contracts that are not designated as hedges. These contracts had gains of less than $1 million and $2 million in the third quarter and first nine months of 2017, respectively, compared to a loss of $2 million and a gain of $11 million in the third quarter and first nine months of 2016, respectively.

The after‑tax foreign currency translation adjustments included in the Statement of Consolidated Comprehensive Income amounted to gains of $121 million and $208 million in the three months and nine months ended September 30, 2017, respectively, compared to gains of $117 million and $259 million in the third quarter and first nine months of 2016, respectively. The cumulative currency translation adjustment at September 30, 2017, was a reduction to shareholders’ equity of $837 million compared with a reduction of $1,045 million at December 31, 2016.

Fair Value Measurement: We have other short-term financial instruments, primarily cash equivalents, accounts receivable and accounts payable, for which the carrying value approximated fair value at September 30, 2017. Total long-term debt with a carrying value of $6,714 million at September 30, 2017, had a fair value of $7,157 million based on Level 2 inputs.