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Derivative and Financial Instruments | 9 Months Ended
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Sep. 30, 2012
Derivative and Financial Instruments [Abstract] |
Derivative and Financial Instruments | Note 14—Derivative and Financial Instruments Derivative Instruments We use derivative instruments to manage our exposure to cash flow variability from commodity price risk. We occasionally use derivatives to capture market opportunities based on our industry knowledge. Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and natural gas liquids. Our derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented net. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, realized and unrealized gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the normal purchase normal sale exception are recognized upon settlement. We generally apply this exception to eligible crude contracts. We do not use hedge accounting for our commodity derivatives.
The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they would appear on our consolidated balance sheet:
| Millions of Dollars
| September 30 |  | December 31
| 2012 |  | 2011
Assets |  |  |  |
Prepaid expenses and other current assets | $ | 2,429 |  | 4,433
Other assets |  | 188 |  | 415
Liabilities |  |  |  |
Other accruals |  | 2,389 |  | 4,350
Other liabilities and deferred credits |  | 189 |  | 374
The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were:
|  | Millions of Dollars
|  | Three Months Ended |  | Nine Months Ended
September 30 | September 30
|  | 2012 |  | 2011 |  | 2012 |  | 2011
Sales and other operating revenues |  | $ | (217) |  | 249 |  | (357) |  | 198
Other income |  |  | 3 |  | (6) |  | (2) |  | (2)
Purchased commodities |  |  | 184 |  | (191) |  | 288 |  | (129)
The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts.
| Open Position
Long/(Short)
| September 30 |  | December 31
| 2012 |  | 2011
Commodity |  |  |  |
Crude oil, refined products and natural gas liquids (millions of barrels) |  | - |  | (13)
Natural gas and power (billions of cubic feet equivalent) |  |  |  |
Fixed price |  | (64) |  | (57)
Basis |  | 97 |  | (25)
Foreign Currency Exchange Derivatives We have foreign currency exchange rate risk resulting from international operations. Our foreign currency exchange derivative activity primarily consists of transactions designed to mitigate our cash-related and foreign currency exchange rate exposures, such as firm commitments for capital projects or local currency tax payments, dividends, and cash returns from net investments in foreign affiliates. We do not elect hedge accounting on our foreign currency exchange derivatives.
The following table presents the gross fair values of our foreign currency exchange derivatives, excluding collateral, and the line items where they would appear on our consolidated balance sheet:
| Millions of Dollars
| September 30 |  | December 31
| 2012 |  | 2011
Assets |  |  |  |
Prepaid expenses and other current assets | $ | 72 |  | 12
Other assets |  | - |  | 1
Liabilities |  |  |  |
Other accruals |  | 16 |  | 23
Other liabilities and deferred credits |  | 1 |  | -
The (gains) losses from foreign currency exchange derivatives incurred, and the line items where they appear on our consolidated income statement were:
|  | Millions of Dollars
|  | Three Months Ended |  | Nine Months Ended
September 30 | September 30
|  | 2012 |  | 2011 |  | 2012 |  | 2011
Foreign currency transaction (gains) losses |  | $ | (39) |  | (11) |  | (129) |  | (15)
We had the following net notional position of outstanding foreign currency exchange derivatives:
|  | In Millions
|  |  | Notional Currency (1)
| September 30 |  | December 31
|  |  | 2012 |  | 2011
Sell U.S. dollar, buy other currencies (2) | USD | 285 |  | 1,949
Sell euro, buy other currencies (3) | EUR | - |  | 61
Buy U.S. dollar, sell other currencies (4) | USD | 477 |  | -
Buy British pound, sell other currencies (5) | GBP | 3,709 |  | -
Buy euro, sell British pound | EUR | 176 |  | -
(1) | Denominated in U.S. dollars (USD), British pound (GBP) and euros (EUR).
(2) | Primarily euro, Canadian dollar, Norwegian krone and British pound.
(3) | Primarily Norwegian krone and British pound.
(4) | Primarily Canadian dollar, euro and Norwegian krone.
(5) | Primarily euro and U.S. dollar.
Financial Instruments We have certain financial instruments on the consolidated balance sheet related to interest bearing time deposits and commercial paper. These held-to-maturity financial instruments are included in “Cash and cash equivalents” on our consolidated balance sheet if the maturities at the time we made the investments were 90 days or less; otherwise, these investments are included in “Short-term investments” on our consolidated balance sheet.
These balances consisted of the following:
| Millions of Dollars
| Carrying Amount
| Cash and Cash Equivalents |  | Short-Term Investments
| September 30 |  | December 31 |  | September 30 |  | December 31
2012 | 2011 | 2012 | 2011
Cash | $ | 636 |  | 1,169 |  | - |  | -
Time Deposits |  |  |  |  |  |  |  |
Remaining maturities from 1 to 90 days |  | 632 |  | 4,318 |  | - |  | 349
Commercial Paper |  |  |  |  |  |  |  |
Remaining maturities from 1 to 90 days |  | - |  | 293 |  | - |  | 232
| $ | 1,268 |  | 5,780 |  | - |  | 581
In conjunction with the separation of our Downstream business, we received a special cash distribution from Phillips 66 of $7,818 m illion. See Note 2—Separation of Downstream Business, for additional information. At September 30, 2012, the unused amount of the special cash distribution was $2,468 m illion and is designated as “Restricted cash” on our consolidated balance sheet. At September 30, 2012, the funds in the restricted cash account were invested in U.S. Treasury Bills ($26 8 m illion) and money market funds ($2,200 m illion) with maturities within 90 days from September 30, 2012. Credit Risk Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, over-the-counter (OTC) derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, money market funds, government debt securities and time deposits with major international banks and financial institutions. The credit risk from our OTC derivative contracts, such as forwards and swaps, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins or letters of credit when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit and performance risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements. Our trade receivables result primarily from our petroleum operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We do not generally require collateral to limit the exposure to loss; however, we will sometimes use letters of credit, prepayments and master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due us. Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position on September 30, 2012, and December 31, 2011, was $142 million and $237 million, respectively. No collateral was posted for September 30, 2012, and $3 million was posted for December 31, 2011. If our credit rating had been lowered one level from its “A” rating (per Standard and Poor's) on September 30, 2012, we would be required to post no additional collateral to our counterparties. If we had been downgraded below investment grade, we would be required to post $142 million of additional collateral, either with cash or letters of credit.

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- Definition The entire disclosure for the entity's entire derivative instruments and other financial instruments. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References No definition available. + Details
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