Financial Risk Management Activities

6 Months Ended

Jun. 30, 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. 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 June 30, 2021, these forward contracts relate to the British Pound, 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:


	June 30, 2021		December 31, 2020

	(In millions)
Commodity - crude oil put options (millions of barrels)	27.6		27.4

Foreign exchange forwards	$	91	$	163
Interest rate swaps	$	100	$	100

As of June 30, 2021, we have 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)
June 30, 2021
Derivative Contracts Designated as Hedging Instruments:
Crude oil put options	$	19	$	—
Interest rate swaps	4		—
Total derivative contracts designated as hedging instruments	23		—
Derivative Contracts Not Designated as Hedging Instruments:
Foreign exchange forwards	—		—
Total derivative contracts not designated as hedging instruments	—		—
Gross fair value of derivative contracts	23		—
Gross amounts offset in the Consolidated Balance Sheet	—		—
Net Amounts Presented in the Consolidated Balance Sheet	$	23	$	—
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 is presented within Other current assets 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 designated as cash flow hedges: Crude oil hedging contracts decreased Sales and other operating revenues by $64 million and $115 million in the three and six months ended June 30, 2021, respectively. In the three and six months ended June 30, 2020, crude oil hedging contracts increased Sales and other operating revenues by $228 million and $292 million, respectively. At June 30, 2021, pre-tax deferred losses in Accumulated other comprehensive income (loss) related to outstanding crude oil put option contracts were $112 million, all of which will be reclassified into earnings during the remainder of 2021 as the hedged crude oil sales are recognized in earnings.

Interest rate swaps designated as fair value hedges: At June 30, 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 and six months ended June 30, 2021, the change in fair value of interest rate swaps was a decrease in the asset of nil and $1 million, respectively, compared with an increase in the asset of $1 million and $6 million in the three and six months ended June 30, 2020, 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 $2 million in the three and six months ended June 30, 2021, respectively, compared with losses of $2 million and $3 million in the three and six months ended June 30, 2020, 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 nil in the three and six months ended June 30, 2021, respectively, compared with net gains of $1 million and $3 million in the three and six months ended June 30, 2020, respectively.

Fair Value Measurement:

At June 30, 2021, consolidated long-term debt, which was substantially comprised of fixed-rate debt instruments, had a carrying value of $8,223 million and a fair value of $9,749 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 June 30, 2021 and December 31, 2020.