Derivative Instruments

9 Months Ended

Sep. 30, 2011

Disclosure Text Block [Abstract]

Derivative Instruments

7.  Derivative Instruments

Objective and Strategy   The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price and interest-rate risks.

       Futures, swaps, and options are used to manage exposure to commodity-price risk inherent in the Company's oil and natural-gas production and natural-gas processing operations (Oil and Natural-Gas Production/Processing Derivative Activities). Futures contracts and commodity-price swap agreements are used to fix the price of expected future oil and natural-gas sales at major industry trading locations, such as Henry Hub for natural gas and Cushing for oil. Basis swaps are used to fix or float the price differential between product prices at one market location versus another. Options are used to establish a floor price, a ceiling price, or a floor and a ceiling price (collar) for expected future oil and natural-gas sales. Derivative instruments are also used to manage commodity-price risk inherent in customer price requirements and to fix margins on the future sale of natural gas and NGLs from the Company's leasedstoragefacilities (Marketing and Trading Derivative Activities).

       Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company's existing or anticipated exposure to unfavorable interest-rate changes. The fair value of this swap portfolio increases (decreases) when interest rates increase (decrease).

       The Company does not apply hedge accounting to any of its derivative instruments. As a result, both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings. Net derivative losses attributable to derivatives previously subject to hedge accounting reside in accumulated other comprehensive income (loss) and are reclassified to earnings as the transactions to which the derivatives relate are recognized in earnings. Accumulated other comprehensive loss balances of $113 million ($72 million after tax) and $125 million ($79 million after tax) at September 30, 2011, and December 31, 2010, respectively, relate to interest-rate derivatives that were previously subject to hedge accounting.

Oil and Natural-Gas Production/Processing Derivative Activities   Below is a summary of the Company's derivative instruments at September 30, 2011, related to its Oil and Natural-Gas Production/ProcessingActivities. The natural-gas prices listed below are New York Mercantile Exchange (NYMEX) Henry Hub prices. The crude-oil prices listed below are NYMEX Cushing prices.

		2011		2012		2013
Natural Gas
	Three-Way Collars (thousand MMBtu/d)		480		500		450
	Average price per MMBtu
	Ceiling sold price (call)	$	8.29	$	9.03	$	6.57
	Floor purchased price (put)	$	6.50	$	6.50	$	5.00
	Floor sold price (put)	$	5.00	$	5.00	$	4.00
	Fixed-Price Contracts (thousand MMBtu/d)		90		—		—
	Average price per MMBtu	$	6.17	$	—	$	—
	Basis Swaps (thousand MMBtu/d)		45		—		—
	Average price per MMBtu	$	(1.74)	$	—	$	—
MMBtu—million British thermal units
MMBtu/d—million British thermal units per day

		2011		2012
Crude Oil
	Three-Way Collars (MBbls/d)		126		2
	Average price per barrel
	Ceiling sold price (call)	$	99.95	$	92.50
	Floor purchased price (put)	$	79.29	$	50.00
	Floor sold price (put)	$	64.29	$	35.00
MBbls/d—thousand barrels per day

       A three-way collar is a combination of three options: a sold call, a purchased put, and a sold put. The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes. The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.

Marketing and Trading Derivative Activities   In addition to the positions in the above tables, the Company also engages in marketing and trading activities, which include physical product sales and related derivative transactions used to manage commodity-price risk. At September 30, 2011, and December 31, 2010, the Company had fixed-price physical transactions related to natural gas totaling28 billion cubic feet (Bcf) and 32 Bcf, respectively, offset by derivative transactions for 15 Bcf and 28 Bcf, respectively, for net positions of 13 Bcf and 4 Bcf, respectively.

Interest-Rate Derivatives In December 2008 and January 2009, Anadarko entered into interest-rate swap contracts as a fixed-rate payor to mitigate the interest-rate risk associated with anticipated 2011 and 2012 debt issuances. Due to rising interest rates thereafter, the fair value of the swap contracts increased and, in 2009, the Company revised the swap contract terms to increase the weighted-average interest rate of the swap portfolio from approximately 3.25% to approximately 4.80%, and realized a $552 million gain. During the third quarter of 2011, in order to better align the swap portfolio with the anticipated timing of future debt refinancing, the Company extended the swap maturity dates from October 2011 to June 2014 for interest-rate swaps with an aggregate notional principal amount of $1.85 billion. In connection with these extensions, the swap interest rates were also adjusted.

A summary of outstanding interest-rate swaps at September 30, 2011, is presented below.

millions except percentages		Reference Period		Weighted-Average
Notional Principal Amount:		Start	End	Interest Rate
$	150	October 2011	October 2041	4.65	%
$	250	October 2012	October 2022	4.91	%
$	750	October 2012	October 2042	4.80	%
$	750	June 2014	June 2024	6.00	%
$	1,100	June 2014	June 2044	5.57	%

Effect of Derivative Instruments—Balance Sheet   The fair value of the Company's derivative instruments is presented below.

		Gross				Gross
		Derivative Assets				Derivative Liabilities
millions	Balance Sheet	September 30,		December 31,		September 30,		December 31,
Derivatives	Classification	2011		2010		2011		2010
Commodity
	Other Current Assets	$	428	$	444	$	(81)	$	(274)
	Other Assets		166		242		(9)		(56)
	Accrued Expenses		4		89		(17)		(131)
	Other Liabilities		1		26		(8)		(28)
			599		801		(115)		(489)
Interest Rate and Other
	Accrued Expenses		—		—		(185)		(190)
	Other Liabilities		—		—		(987)		(45)
			—		—		(1,172)		(235)
Total Derivatives		$	599	$	801	$	(1,287)	$	(724)

Effect of Derivative Instruments—Statement of Income   The realized and unrealized gain or loss amounts and classification of derivative instruments for the respective three and nine months ended September 30 are as follows:

			(Gain) Loss
			Three Months Ended						Nine Months Ended
millions		Classification of (Gain)	September 30, 2011						September 30, 2011
Derivatives		Loss Recognized	Realized		Unrealized		Total		Realized		Unrealized		Total
Commodity
		Gathering, Processing,
		and Marketing Sales(1)	$	1	$	(3)	$	(2)	$	17	$	(8)	$	9
		(Gains) Losses on Commodity
		Derivatives, net		(71)		(159)		(230)		(155)		(162)		(317)
Interest Rate
	and Other
		(Gains) Losses on Other
		Derivatives, net		—		854		854		2		937		939
Derivative (Gain) Loss, net			$	(70)	$	692	$	622	$	(136)	$	767	$	631

			(Gain) Loss
			Three Months Ended						Nine Months Ended
millions		Classification of (Gain)	September 30, 2010						September 30, 2010
Derivatives		Loss Recognized	Realized		Unrealized		Total		Realized		Unrealized		Total
Commodity
		Gathering, Processing,
		and Marketing Sales(1)	$	—	$	(4)	$	(4)	$	1	$	(9)	$	(8)
		(Gains) Losses on Commodity
		Derivatives, net		(157)		(43)		(200)		(339)		(713)		(1,052)
Interest Rate
	and Other
		(Gains) Losses on Other
		Derivatives, net		—		221		221		—		656		656
Derivative (Gain) Loss, net			$	(157)	$	174	$	17	$	(338)	$	(66)	$	(404)

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(1)Represents the effect of marketing and trading derivative activities.

Credit-Risk Considerations   The financial integrity of exchange-traded contracts is assured by NYMEX or the Intercontinental Exchange through systems of financial safeguards and transaction guarantees and is subject to nominal credit risk. Over-the-counter traded swaps, options, and futures contracts expose the Company to counterparty credit risk. The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company's credit policies and guidelines, and assesses the impact of a counterparty's creditworthiness on fair value. The Company has the ability to require cash collateral or letters of credit to mitigate its credit-risk exposure. The Company has netting agreements with financial institutions that permit net settlement of gross commodity derivative assets against gross commodity derivative liabilities, and routinely exercises its contractual right to offset realized gains against realized losses when settling with derivative counterparties.

       In addition, the Company has setoff agreements with certain financial institutions that may be exercised in the event of default and provide for contract termination and net settlement across all derivative types. At September 30, 2011,$340 million of the Company's $1.3billion gross derivative liability balance,and at December 31, 2010, $394 million of the Company's $724 million gross derivative liability balance, would have been eligible for setoff against the Company's gross derivative asset balance in the event of default. Other than in the event of default, the Company does not net settle across commodity and interest-rate derivatives, as settlement timing differs.

Some of the Company's derivative instruments are subject to provisions that may require collateralization of the Company's obligations. However, most of the Company's derivative counterparties maintain secured positionswith respect to the Company's derivative liabilities under the Company's $5.0 billion senior secured revolving credit facility (the $5.0 billion Facility), the available capacity of which issufficient to secure potential obligations to such counterparties.

Unsecured derivative obligations may require immediate settlement or full collateralization ifcertain credit-risk-related provisions are triggered, such as the Company's credit rating declining to a level below investment grade by major credit rating agencies. For these counterparties, the aggregate fair value of all derivative instruments with credit-risk-related contingent features for which a net liability position existed was $10 million (net of collateral) at September 30, 2011 and December 31, 2010, and is included in accrued expenses on the Company's Consolidated Balance Sheets.

Fair Value   Fair value of futures contracts is based on quoted prices in active markets for identical assets or liabilities, which represent Level 1 inputs. Valuations of physical-delivery purchase and sale agreements, over-the-counter financial swaps, and commodity option collars are based on similar transactions observable in active markets and industry-standard models that primarily rely on market-observable inputs. Inputs used to estimate the fair value of swaps and options include market-price curves; contract terms and prices; credit-risk adjustments; and, for Black-Scholes option valuations, implied market volatility and discount factors. Inputs used to estimate fair value in industry-standard models are categorized as Level 2 inputs because substantially all assumptions and inputs are observable in active markets throughout the full term of the instruments.

       The following tables set forth, by input level within the fair-value hierarchy, the fair value of the Company's derivative financial assets and liabilities.

September 30, 2011
millions			Level 1		Level 2		Level 3		Netting (1)		Collateral		Total
Assets:
	Commodity derivatives
		Financial institutions	$	2	$	466	$	—	$	(84)	$	(5)	$	379
		Other counterparties		—		131		—		(11)		—		120
	Interest-rate and other derivatives			—		—		—		—		—		—
Total derivative assets			$	2	$	597	$	—	$	(95)	$	(5)	$	499
Liabilities:
	Commodity derivatives
		Financial institutions	$	(3)	$	(88)	$	—	$	84	$	5	$	(2)
		Other counterparties		—		(24)		—		11		—		(13)
	Interest-rate and other derivatives			—		(1,172)		—		—		110		(1,062)
Total derivative liabilities			$	(3)	$	(1,284)	$	—	$	95	$	115	$	(1,077)

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(1)Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.

December 31, 2010
millions			Level 1		Level 2		Level 3		Netting (1)		Collateral		Total
Assets:
	Commodity derivatives
		Financial institutions	$	3	$	557	$	—	$	(298)	$	(15)	$	247
		Other counterparties		—		241		—		(148)		—		93
Total derivative assets			$	3	$	798	$	—	$	(446)	$	(15)	$	340
Liabilities:
	Commodity derivatives
		Financial institutions	$	(2)	$	(333)	$	—	$	298	$	—	$	(37)
		Other counterparties		—		(154)		—		148		—		(6)
	Interest-rate and other derivatives			—		(235)		—		—		15		(220)
Total derivative liabilities			$	(2)	$	(722)	$	—	$	446	$	15	$	(263)

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(1)Represents the impact of netting commodity derivative assets and liabilities with counterparties where the Company has the contractual right and intends to net settle.