Financial Risk Management Activities

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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. 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 or establish a floor price for 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 also be used to purchase certain currencies in which we conduct business with the intent of reducing exposure to foreign currency fluctuations. At March 31, 2021, these forward contracts relate to the British Pound, Danish Krone, Canadian Dollar 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:


	March 31, 2021		December 31, 2020

	(In millions)
Commodity - crude oil put options (millions of barrels)	41.3		27.4
Foreign exchange forwards	$	121	$	163
Interest rate swaps	$	100	$	100

As of March 31, 2021, we have purchased West Texas Intermediate (WTI) put options of 120,000 barrels of oil per day (bopd) with an average monthly floor price of $55 per barrel and Brent put options of 30,000 bopd with an average monthly floor price of $60 per barrel for the remainder of 2021.

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


	Assets		Liabilities

	(In millions)
March 31, 2021
Derivative Contracts Designated as Hedging Instruments:
Crude oil put options	$	154	$	—
Interest rate swaps	4		—
Total derivative contracts designated as hedging instruments	158		—
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards	—		(2)
Total derivative contracts not designated as hedging instruments	—		(2)
Gross fair value of derivative contracts	158		(2)
Gross amounts offset in the Consolidated Balance Sheet	—		—
Net Amounts Presented in the Consolidated Balance Sheet	$	158	$	(2)
December 31, 2020
Derivative Contracts Designated as Hedging Instruments:
Crude oil put options	$	64	$	—
Crude oil swaps	—		(54)
Interest rate swaps	5		—
Total derivative contracts designated as hedging instruments	69		(54)
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards	—		(1)
Total derivative contracts not designated as hedging instruments	—		(1)
Gross fair value of derivative contracts	69		(55)
Gross amounts offset in the Consolidated Balance Sheet	(13)		13
Net Amounts Presented in the Consolidated Balance Sheet	$	56	$	(42)

During the first quarter of 2021, we completed the sale of 4.2 million barrels of Bakken crude oil transported and stored on two VLCCs during 2020 for sale in Asian markets. We recognized net losses of $4 million from crude oil hedging contracts associated with the VLCC volumes in the first quarter of 2021.

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 is presented within Accrued liabilities 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 decreased Sales and other operating revenues by $51 million in the first quarter of 2021, including hedge contracts associated with the VLCC transactions, and increased Sales and other operating revenues by $64 million in the first quarter of 2020. At March 31, 2021, pre-tax deferred losses in Accumulated other comprehensive income (loss) related to outstanding crude oil price hedging contracts were $47 million, all of which will be reclassified into earnings during the remainder of 2021 as the originally hedged crude oil sales are recognized in earnings.

Interest rate swaps designated as fair value hedges: At March 31, 2021 and December 31, 2020, 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 months ended March 31, 2021, the change in fair value of interest rate swaps was a decrease in the asset of $1 million (2020 Q1: increase in the asset of $5 million) 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 in the three months ended March 31, 2021 (2020 Q1: $1 million loss). 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 losses of $1 million in the three months ended March 31, 2021 (2020 Q1: $2 million gain).

Fair Value Measurement:At March 31, 2021, our total long-term debt, which was substantially comprised of fixed rate debt instruments, had a carrying value of $8,286 million and a fair value of $9,381 million, based on Level 2 inputs in the fair value measurement hierarchy. We also have short-term financial instruments, primarily cash equivalents, accounts receivable, and accounts payable, for which the carrying value approximated fair value at March 31, 2021 and December 31, 2020.