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 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 June 30, 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 as of the dates shown below were as follows:

	June 30, 2018				December 31, 2017
Calendar year program	2018		2019		2018
Instrument type	Puts		Puts		Collars
Effective date	Jul. 1, 2018		Jan. 1, 2019		Jan. 1, 2018
End date	Dec. 31, 2018		Dec. 31, 2019		Dec. 31, 2018
Crude oil volumes (millions of barrels)		21.2		7.3		42.0
Ceiling price	N/A		N/A		$	65
Floor price	$	50	$	60	$	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. In the second quarter of 2018, we purchased WTI put options with a notional amount of 20,000 bopd and a WTI average monthly floor price of $60 per barrel for calendar year 2019.

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

	June 30, 2018		December 31, 2017
	(In millions)
Foreign exchange	$	16	$	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)
June 30, 2018
Derivative Contracts Designated as Hedging Instruments
Commodity - Accounts receivable and Accounts payable	$	33	$	(31	)
Interest rate - Other liabilities and deferred credits (noncurrent)		—		(5	)
Total derivative contracts designated as hedging instruments		33		(36	)
Derivative Contracts Not Designated as Hedging Instruments
Commodity - Accounts receivable		—		—
Total derivative contracts not designated as hedging instruments		—		—
Gross fair value of derivative contracts		33		(36	)
Net Fair Value of Derivative Contracts	$	33	$	(36	)

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 derivatives: Crude oil price hedging contracts for the three and six months ended June 30, 2018 decreased Sales and other operating revenues by $44 million and $74 million, respectively, and decreased Sales and other operating revenues by $12 million and $11 million for the three and six months ended June 30, 2017, respectively. At June 30, 2018, after-tax deferred losses in Accumulated other comprehensive income (loss) related to outstanding hedged crude oil collars were $89 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 June 30, 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. For the three and six months ended June 30, 2018, the change in fair value of interest rate swaps was an increase in the liability of $1 million and $4 million, respectively, compared with increase in liability of $2 million and $3 million in the second quarter and first six months of 2017, respectively, 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 4, Debt.

Interest rate swaps designated as cash flow hedges: There were no floating to fixed interest rate swap contracts in 2018. During the six months ended June 30, 2017, HIP had interest rate swaps with gross notional amounts totaling $545 million, which were designated as cash flow hedges and relates to debt in our Midstream operating segment where HIP converted interest payments on certain long-term debt from floating to fixed rates. For the three and six months ended June 30, 2017, the change in fair value of interest rate swaps was an increase to assets of $1 million.

Derivative contracts not designated as hedging instruments:

Crude oil collars: For the three and six months ended June 30, 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 and $16 million, respectively. At June 30, 2018, after-tax deferred losses in Accumulated other comprehensive income (loss) in connection with the de-designation, were $6 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 and losses which are reported in Other, net in Revenues and non-operating income in the Statement of Consolidated Income were losses of $5 million and less than $1 million in the three months and six months ended June 30, 2018, respectively, compared with gains of $10 million and $9 million in the three months and six months ended June 30, 2017, respectively. A component of foreign exchange gain or loss is the result of foreign exchange derivative contracts that are not designated as hedges which amounted to losses of $3 million and $1 million in the three months and six months ended June 30, 2018, respectively, compared to gains of $2 million in both the second quarter and first six months of 2017, respectively.

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 June 30, 2018. Total long-term debt with a carrying value of $6,439 million at June 30, 2018, had a fair value of $6,925 million based on Level 2 inputs.