12. 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 produced 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 March 31, 2018, 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.

We present gross notional amounts of both long and short positions 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 outstanding financial risk management derivative contracts related to West Texas Intermediate (WTI) instruments were as follows:

	March 31, 2018		December 31, 2017
Instrument type	Puts		Collars
Effective date	Apr. 1, 2018		Jan. 1, 2018
End date	Dec. 31, 2018		Dec. 31, 2018
Crude oil volumes (millions of barrels)		31.6		42.0
Ceiling price	N/A		$	65
Floor price	$	50	$	50

At December 31, 2017, we had WTI crude oil price collars with an average monthly floor price of $50 per barrel and an average monthly ceiling price of $65 per barrel with a notional amount of 115,000 bopd for the full year 2018. In the first quarter of 2018, we bought back the WTI $65 call options within the crude oil price collars for the period of May 1, 2018 through December 31, 2018. As a result, during this period we are able to realize average monthly WTI selling prices above $65 per barrel on the crude oil price collars covering the notional amount of 115,000 bopd. The put options within our crude oil collar contracts remain outstanding with a WTI average monthly floor price of $50 per barrel covering a notional amount of 115,000 bopd through December 31, 2018.

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

	March 31, 2018		December 31, 2017
	(In millions)
Foreign exchange	$	31	$	52
Interest rate swaps	$	100	$	450

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)
March 31, 2018
Derivative Contracts Designated as Hedging Instruments
Commodity - Accounts receivable	$	10	$	—
Interest rate - Other liabilities and deferred credits (noncurrent)		—		(4	)
Total derivative contracts designated as hedging instruments		10		(4	)
Derivative Contracts Not Designated as Hedging Instruments
Commodity - Accounts receivable		3		—
Total derivative contracts not designated as hedging instruments		3		—
Gross fair value of derivative contracts		13		(4	)
Net Fair Value of Derivative Contracts	$	13	$	(4	)

December 31, 2017
Derivative Contracts Designated as Hedging Instruments
Commodity - Accounts payable	$	—	$	(7	)
Interest rate - Other assets (noncurrent) and Accounts payable		—		(4	)
Total derivative contracts designated as hedging instruments		—		(11	)
Derivative Contracts Not Designated as Hedging Instruments
Commodity - Accounts payable		—		(2	)
Foreign exchange		1		—
Total derivative contracts not designated as hedging instruments		1		(2	)
Gross fair value of derivative contracts		1		(13	)
Net Fair Value of Derivative Contracts	$	1	$	(13	)

Derivative contracts designated as hedging instruments:

Crude oil collars: Crude oil price hedging contracts decreased Sales and other operating revenues by $30 million in the first quarter of 2018 and decreased Sales and other operating revenues by $1 million in the first quarter of 2017. At March 31, 2018, after-tax deferred losses in Accumulated other comprehensive income (loss) related to outstanding hedged crude oil collars were $120 million, of which all will be reclassified into earnings during the remainder of 2018 as the hedged crude oil sales are recognized in earnings.

Interest rate swaps designated as fair value hedges: At March 31, 2018 and December 31, 2017, we had interest rate swaps with gross notional amounts totaling $100 million and $450 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. Changes in the fair value of interest rate swaps and the hedged fixed-rate debt are recorded in Interest expense in the Statement of Consolidated Income. In the first quarter of 2018, the change in fair value of interest rate swaps was an increase in the liability of $3 million (2017 Q1: an increase in the liability of $1 million) with a corresponding adjustment in the carrying value of the hedged fixed‑rate debt. In the first quarter of 2018, we paid $3 million to terminate interest rate swaps with a gross notional amount of $350 million. See Note 3, Debt.

Derivative contracts not designated as hedging instruments:

Crude oil collars: In the first quarter of 2018, noncash adjustments to crude oil price hedging contracts, which were de-designated as cash flow hedges in the fourth quarter of 2017, decreased Sales and other operating revenues by $8 million. At March 31, 2018, after-tax deferred losses in Accumulated other comprehensive income (loss) in connection with the de-designation, were $11 million, of which all will be reclassified into earnings during the remainder of 2018 as the originally hedged crude oil sales are recognized in earnings.

Foreign exchange: Foreign exchange gains which are reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income were $4 million in the first quarter of 2018 (2017 Q1: loss of $1 million). A component of foreign exchange gain (loss) is the result of foreign exchange derivative contracts that are not designated as hedges which amounted to a gain of $2 million in the first quarter of 2018 (2017 Q1: loss of less than $1 million).

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 March 31, 2018. Total long-term debt with a carrying value of $6,568 million at March 31, 2018, had a fair value of $7,058 million based on Level 2 inputs.