Financial and derivative instruments

3 Months Ended

Mar. 31, 2022

8.	Financial and derivative instruments

Financial instruments

The fair value of the company’s financial instruments is determined by reference to various market data and other appropriate valuation techniques. There are no material differences between the fair value of the company’s financial instruments and the recorded carrying value. At March 31, 2022 and December 31, 2021, the fair value of long-term debt ($4,447 million, excluding finance lease obligations) was primarily a level 2 measurement.

Derivative instruments

The company’s size, strong capital structure and the complementary nature of the Upstream, Downstream and Chemical businesses reduce the company’s enterprise-wide risk from changes in commodity prices and currency exchange rates. In addition, the company uses commodity-based contracts, including derivative instruments to manage commodity price risk and to generate returns from trading. Commodity contracts held for trading purposes are presented in the Consolidated statement of income on a net basis in the line “Revenues”. The company does not designate derivative instruments as a hedge for hedge accounting purposes.

Credit risk associated with the company’s derivative position is mitigated by several factors, including the use of derivative clearing exchanges and the quality of and financial limits placed on derivative counterparties. The company maintains a system of controls that includes the authorization, reporting and monitoring of derivative activity.

The net notional long/(short) position of derivative instruments was:


	As at Mar 31			As at Dec 31
thousands of barrels	2022			2021
Crude		(620	)		7,390
Products		(70	)		(560	)

Realized and unrealized gain or (loss) on derivative instruments recognized in the Consolidated statement of income is included in the following lines on a

before-tax

basis:


	Three Months to March 31
millions of Canadian dollars	2022		2021
Revenues		37		-
Purchases of crude oil and products		-		(14	)
Total		37		(14	)

The estimated fair value of derivative instruments, and the related hierarchy level for the fair value measurement is as follows:


At March 31, 2022
millions of Canadian dollars
	Fair value								Effect of			Effect of			Net
									counterparty			collateral			carrying
	Level 1		Level 2		Level 3		Total		netting			netting			value
Assets
Derivative assets (a)		48		18		-		66		(59	)		-			7

Liabilities
Derivative liabilities (b)		53		25		-		78		(59	)		(4	)		15

(a)	Included in the Consolidated balance sheet line: “Materials, supplies and prepaid expenses”, “Accounts receivable—net” and “Other assets, including intangibles - net”.

(b)	Included in the Consolidated balance sheet line: “Accounts payable and accrued liabilities” and “Other long-term obligations”.


At December 31, 2021
millions of Canadian dollars
	Fair value								Effect of			Effect of			Net
									counterparty			collateral			carrying
	Level 1		Level 2		Level 3		Total		netting			netting			value
Assets
Derivative assets (a)		24		17		-		41		(31	)		-			10

Liabilities
Derivative liabilities (b)		31		12		-		43		(31	)		(7	)		5

(a)	Included in the Consolidated balance sheet line: “Materials, supplies and prepaid expenses”, “Accounts receivable - net” and “Other assets, including intangibles - net”.

(b)	Included in the Consolidated balance sheet line: “Accounts payable and accrued liabilities” and “Other long-term obligations”.

At March 31, 2022 and December 31, 2021, the company had $47 million and $6 million, respectively, of collateral under a master netting arrangement not offset against the derivatives on the Consolidated balance sheet in “Accounts receivable - net”, primarily related to initial margin requirements.