Financial Risk Management Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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. Swaps may also be used to fix the difference between current selling prices and forward selling prices in periods of contango for crude oil production that will be stored and sold in the future. Forward contracts may be used to purchase certain currencies in which we conduct business with the intent of reducing exposure to foreign currency fluctuations. At September 30, 2020, these forward contracts relate to the British Pound, Danish Krone and Malaysian Ringgit. Interest rate swaps may be used to convert interest payments on certain long-term debt from fixed to floating rates.

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


	September 30, 2020		December 31, 2019

	(In millions)
Commodity - crude oil put options (millions of barrels)	13.8		54.9

Foreign exchange forwards	$	130	$	90
Interest rate swaps	$	100	$	100

For calendar year 2020 we have West Texas Intermediate (WTI) put options with an average monthly floor price of $55 per barrel for 130,000 barrels of oil per day (bopd), and Brent put options with an average monthly floor price of $60 per barrel for 20,000 bopd.

The table below reflects the fair values of risk management derivative instruments.


	Assets		Liabilities

	(In millions)
September 30, 2020
Derivative Contracts Designated as Hedging Instruments:
Crude oil put options	$	205	$	—
Crude oil swaps	—		(29)
Interest rate swaps	6		—
Total derivative contracts designated as hedging instruments	211		(29)
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards	—		—
Total derivative contracts not designated as hedging instruments	—		—
Fair Value of Derivative Contracts	$	211	$	(29)
December 31, 2019
Derivative Contracts Designated as Hedging Instruments:
Crude oil put options	$	125	$	—
Interest rate swaps	1		—
Total derivative contracts designated as hedging instruments	126		—
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards	—		(1)
Total derivative contracts not designated as hedging instruments	—		(1)
Fair Value of Derivative Contracts	$	126	$	(1)

We chartered three VLCCs and have loaded a total of 6.3 million barrels of Bakken crude oil during the second and third quarters of this year for sale in Asian markets. In connection with this activity, we entered into Brent swap transactions intended to fix the difference between Brent prices in the month of production and the forward Brent price for the expected month of sale. At September 30, 2020, net realized and unrealized gains from the Brent swaps of $17 million were deferred in Accumulated other comprehensive income, and the liability for unrealized losses from the Brent swaps was $29 million. In addition, total net realized gains from WTI put options associated with the VLCCs of $40 million were deferred in Accumulated other comprehensive income at September 30, 2020.

The fair value of our crude oil put options and crude oil swaps is presented within Other current assets and Accrued liabilities, respectively, in our Consolidated Balance Sheet. The fair value of our interest rate swaps is presented within Other assets in our Consolidated Balance Sheet. The fair value of our foreign exchange forwards at December 31, 2019 is presented within Accounts payable in our Consolidated Balance Sheet. All fair values in the table above are based on Level 2 inputs.

Derivative contracts designated as hedging instruments:

Crude oil derivatives: Crude oil hedging contracts increased Sales and other operating revenues by $143 million and $435 million in the three and nine months ended September 30, 2020, respectively. In the three and nine months ended September 30, 2019, the impact from crude oil hedging contracts on Sales and other operating revenues was an increase of $2 million and $3 million, respectively. At September 30, 2020, pre-tax deferred gains in Accumulated other comprehensive income (loss) related to outstanding crude oil price hedging contracts were $199 million which will be reclassified into earnings within the next twelve months as the originally hedged crude oil sales are recognized in earnings.

Interest rate swaps designated as fair value hedges: At September 30, 2020 and December 31, 2019, we had interest rate swaps with gross notional amounts totaling $100 million, which were designated as fair value hedges and relate to debt where we have converted interest payments 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 three and nine months ended September 30, 2020, the change in fair value of interest rate swaps was an increase in the asset of nil and $6 million, respectively, compared with a decrease in the liability of $1 million and $4 million in the three and nine months ended September 30, 2019, respectively, with a corresponding adjustment in the carrying value of the hedged fixed-rate debt.

Derivative contracts not designated as hedging instruments:

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 $1 million and $4 million in the three and nine months ended September 30, 2020, respectively, compared with gains of $1 million and $4 million in the three and nine months ended September 30, 2019, respectively. A component of foreign exchange gains and losses is the result of foreign exchange derivative contracts that are not designated as hedges which amounted to net gains of $1 million and $4 million in the three and nine months ended September 30, 2020, respectively, compared with net gains of $1 million and $2 million in the three and nine months ended September 30, 2019, 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 September 30, 2020. At September 30, 2020, total long-term debt, which was primarily comprised of fixed-rate debt instruments, had a carrying value of $8,288 million and a fair value of $9,006 million based on Level 2 inputs.