Fair Value Measurements

Fair Values of Financial Instruments

We used the following methods and assumptions to estimate the fair value of financial instruments:


•	Cash and cash equivalents: The carrying amount reported on the consolidated balance sheet approximates fair value.


•	Accounts and notes receivable: The carrying amount reported on the consolidated balance sheet approximates fair value.


•	Debt: The carrying amount of our floating-rate debt approximates fair value. The fair value of our fixed-rate debt is estimated based on quoted market prices.


•	Commodity swaps: Fair value is estimated based on forward market prices and approximates the exit price at period end. When forward market prices are not available, we estimate fair value using the forward price of a similar commodity, adjusted for the difference in quality or location.


•	Interest-rate swaps: We determine fair value based upon observed market valuations for interest-rate swaps that have notionals, durations, and pay and reset frequencies similar to ours.


•	Futures: Fair values are based on quoted market prices obtained from the New York Mercantile Exchange, the Intercontinental Exchange, or other traded exchanges.


•	Forward-exchange contracts: Fair value is estimated by comparing the contract rate to the forward rate in effect at the end of the reporting period, which approximates the exit price at that date.

We carry certain assets and liabilities at fair value, which we measure at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability), and disclose the quality of these fair values based on the valuation inputs used in these measurements under the following hierarchy:


•	Level 1: Fair value measured with unadjusted quoted prices from an active market for identical assets or liabilities.


•	Level 2: Fair value measured either with: (1) adjusted quoted prices from an active market for similar assets or liabilities; or (2) other valuation inputs that are directly or indirectly observable.


•	Level 3: Fair value measured with unobservable inputs that are significant to the measurement.

We classify the fair value of an asset or liability based on the lowest level of input significant to its measurement; however, the fair value of an asset or liability initially reported as Level 3 will be subsequently reported as Level 2 if the unobservable inputs become inconsequential to its measurement or corroborating market data becomes available. Conversely, an asset or liability initially reported as Level 2 will be subsequently reported as Level 3 if corroborating market data becomes unavailable. For the year ended December 31, 2016, derivative assets with an aggregate value of $201 million and derivative liabilities with an aggregate value of $156 million were transferred into Level 1, as measured from the beginning of the reporting period. The measurements were reclassified within the fair value hierarchy due to the availability of unadjusted quoted prices from an active market.

Recurring Fair Value Measurements

Financial assets and liabilities recorded at fair value on a recurring basis consist primarily of investments to support nonqualified deferred compensation plans and derivative instruments. The deferred compensation investments are measured at fair value using unadjusted prices available from national securities exchanges; therefore, these assets are categorized as Level 1 in the fair value hierarchy. We value our exchange-traded commodity derivatives using closing prices provided by the exchange as of the balance sheet date, and these are also classified as Level 1 in the fair value hierarchy. When exchange-cleared contracts lack sufficient liquidity or are valued using either adjusted exchange-provided prices or non-exchange quotes, we classify those contracts as Level 2. OTC financial swaps and physical commodity forward purchase and sales contracts are generally valued using quotes provided by brokers and price index developers such as Platts and Oil Price Information Service. We corroborate these quotes with market data and classify the resulting fair values as Level 2. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sales contracts are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. We classify these contracts as Level 3. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the options are classified as Level 2 or 3. We use a mid-market pricing convention (the mid-point between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

The following tables display the fair value hierarchy for our material financial assets and liabilities either accounted for or disclosed at fair value on a recurring basis. These values are determined by treating each contract as the fundamental unit of account; therefore, derivative assets and liabilities with the same counterparty are shown gross (i.e., without the effect of netting where the legal right of setoff exists) in the hierarchy sections of these tables. These tables also show that our Level 3 activity was not material.

We have master netting agreements for all of our exchange-cleared derivative instruments, the majority of our OTC derivative instruments, and certain physical commodity forward contracts (primarily pipeline crude oil deliveries). The following tables show the fair value of these contracts on a net basis in the column “Effect of Counterparty Netting,” which is how these also appear on the consolidated balance sheet.

The carrying values and fair values by hierarchy of our material financial instruments and commodity forward contracts, either carried or disclosed at fair value, including any effects of netting derivative assets with liabilities and netting collateral due to right of setoff or master netting agreements, were:



	Millions of Dollars
	December 31, 2016
	Fair Value Hierarchy				Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
	Level 1		Level 2	Level 3	Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value		Net Carrying Value Presented on the Balance Sheet
Commodity Derivative Assets
Exchange-cleared instruments	$	273	371	—	644	(628	)	—		—		16
OTC instruments	—		6	—	6	(1	)	—		—		5
Physical forward contracts*	—		94	2	96	—		—		—		96
Interest-rate derivatives	—		8	—	8	—		—		—		8
Rabbi trust assets	97		—	—	97	N/A		N/A		—		97
	$	370	479	2	851	(629	)	—		—		222

Commodity Derivative Liabilities
Exchange-cleared instruments	$	249	452	—	701	(628	)	(73	)	—		—
OTC instruments	—		1	—	1	(1	)	—		—		—
Physical forward contracts*	—		61	5	66	—		—		—		66
Floating-rate debt	50		210	—	260	N/A		N/A		—		260
Fixed-rate debt, excluding capital leases**	—		10,260	—	10,260	N/A		N/A		(570	)	9,690
	$	299	10,984	5	11,288	(629	)	(73	)	(570	)	10,016

*Physical forward contracts may have a larger value on the balance sheet than disclosed in the fair value hierarchy when the remaining contract term at the reporting date is greater than 12 months and the short-term portion is an asset while the long-term portion is a liability, or vice versa.

**We carry fixed-rate debt on the balance sheet at amortized cost.



	Millions of Dollars
	December 31, 2015
	Fair Value Hierarchy				Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value	Net Carrying Value Presented on the Balance Sheet
	Level 1		Level 2	Level 3	Total Fair Value of Gross Assets & Liabilities	Effect of Counterparty Netting		Effect of Collateral Netting		Difference in Carrying Value and Fair Value	Net Carrying Value Presented on the Balance Sheet
Commodity Derivative Assets
Exchange-cleared instruments	$	1,851	703	—	2,554	(2,389	)	(100	)	—	65
OTC instruments	—		13	—	13	(12	)	—		—	1
Physical forward contracts*	3		40	2	45	—		—		—	45
Rabbi trust assets	83		—	—	83	N/A		N/A		—	83
	$	1,937	756	2	2,695	(2,401	)	(100	)	—	194

Commodity Derivative Liabilities
Exchange-cleared instruments	$	1,745	646	—	2,391	(2,389	)	—		—	2
OTC instruments	—		17	—	17	(12	)	—		—	5
Physical forward contracts*	—		22	—	22	—		—		—	22
Floating-rate debt	50		—	—	50	N/A		N/A		—	50
Fixed-rate debt, excluding capital leases**	—		8,434	—	8,434	N/A		N/A		195	8,629
	$	1,795	9,119	—	10,914	(2,401	)	—		195	8,708

**We carry fixed-rate debt on the balance sheet at amortized cost.

At December 31, 2016 and 2015, there were no material cash collateral received or paid that were not offset on the balance sheet.

The rabbi trust assets appear on our consolidated balance sheet in the “Investments and long-term receivables” line, while the floating-rate and fixed-rate debt appear in the “Short-term debt” and “Long-term debt” lines. For information regarding where our commodity derivative assets and liabilities appear on the balance sheet, see the first table in Note 16—Derivatives and Financial Instruments.

Nonrecurring Fair Value Remeasurements

During the years ended December 31, 2016 and 2015, there were no material nonrecurring fair value remeasurements of assets subsequent to their initial recognition.