Note 5—Inventory, Linefill, Base Gas and Long-term Inventory

Inventory primarily consists of crude oil, NGL and natural gas in pipelines, storage facilities and railcars that are valued at the lower of cost or market, with cost determined using an average cost method within specific inventory pools. At the end of each reporting period, we assess the carrying value of our inventory and make any adjustments necessary to reduce the carrying value to the applicable net realizable value. During 2012, we recorded non-cash charges of approximately $128 million related to the writedown of our crude oil and NGL inventory due to declines in prices during the period. As of December 31, 2012, a majority of the inventory subject to writedown has been liquidated and the applicable derivative instruments have been settled. The recognition of this adjustment, which is a component of “Purchases and related costs” in our accompanying Consolidated Statement of Operations, was substantially offset by the recognition of unrealized gains on derivative instruments being utilized to hedge the future sales of our crude oil and NGL inventory. Substantially all of such unrealized gains were recorded to “Supply and Logistics segment revenues” in our Consolidated Statement of Operations. See Note 11 for discussion of our derivative and risk management activities. We did not recognize material writedowns of inventory during 2011 and 2010.

Linefill, base gas and minimum working inventory requirements in assets we own are recorded at historical cost and consist of crude oil, NGL and natural gas. We classify as linefill or base gas (i) our proportionate share of barrels used to fill a pipeline that we own such that when an incremental barrel is pumped into or enters a pipeline it forces product out at another location, (ii) barrels that represent the minimum working requirements in tanks that we own and (iii) natural gas required to maintain the minimum operating pressure of natural gas storage facilities we own. During 2012, 2011 and 2010, we recorded gains of approximately $19 million, $21 million and $21 million, respectively, on the sale of pipeline linefill for proceeds of approximately $65 million, $56 million and $72 million, respectively.

Minimum working inventory requirements in third-party assets and other working inventory in our assets that is needed for our commercial operations are included within specific inventory pools in inventory (a current asset) in determining the average cost of operating inventory. At the end of each period, we reclassify the inventory not expected to be liquidated within the succeeding twelve months out of inventory, at the average cost of the applicable inventory pools, and into long-term inventory, which is reflected as a separate line item in “Other assets” on our Consolidated Balance Sheet.

Inventory, linefill, base gas and long-term inventory consisted of the following (barrels in thousands, natural gas volumes in thousands and carrying value in millions):

	December 31, 2012						December 31, 2011
	Volumes	Unit of Measure	Carrying Value		Price/ Unit (1)		Volumes	Unit of Measure	Carrying Value		Price/ Unit (1)
Inventory
Crude oil	9,492	barrels	$	737	$	77.64	5,361	barrels	$	483	$	90.10
NGL	9,472	barrels	388		$	40.96	6,885	barrels	438		$	63.62
Natural gas (2)	20,374	Mcf	60		$	2.94	16,170	Mcf	51		$	3.15
Other	N/A		24		N/A		N/A		6		N/A
Inventory subtotal			1,209						978

Linefill and base gas
Crude oil	9,919	barrels	583		$	58.78	9,366	barrels	514		$	54.88
NGL	1,400	barrels	70		$	50.00	31	barrels	2		$	64.52
Natural gas (2)	15,755	Mcf	54		$	3.43	14,105	Mcf	48		$	3.40
Linefill and base gas subtotal			707						564

Long-term inventory
Crude oil	1,962	barrels	149		$	75.94	1,714	barrels	127		$	74.10
NGL	3,238	barrels	125		$	38.60	150	barrels	8		$	53.33
Long-term inventory subtotal			274						135

Total			$	2,190					$	1,677

(1) Price per unit of measure represents a weighted average associated with various grades, qualities and locations. Accordingly, these prices may not coincide with any published benchmarks for such products.

(2) The volumetric ratio of Mcf of natural gas to crude Btu equivalent is 6:1; thus, natural gas volumes can be approximately converted to barrels by dividing by 6.