For put options, we typically pay a premium to the counterparty in exchange for the sale of the
instrument. If the index price is below the floor price of the put option, we receive the difference
between the floor price and the index price multiplied by the contract volumes less the option premium.
If the index price settles at or above the floor price of the put option, we pay only the option premium.
In a typical collar transaction, if the floating price based on a market index is below the floor price
in the derivative contract, we receive from the counterparty an amount equal to this difference
multiplied by the specified volume. If the floating price exceeds the ceiling price, we must pay the
counterparty an amount equal to the difference multiplied by the specified volume. We may pay a
premium to the counterparty in exchange for a certain floor or ceiling. Any premium reduces amounts
we would receive under the floor or increases amounts we would pay above the ceiling. If the floating
price exceeds the floor price and is less than the ceiling price, then no payment, other than the
premium, is required. If we have less production than the volumes specified under the collar
transaction when the floating price exceeds the ceiling price, we must make payments against which
there are no offsetting revenues from production.
Under a swap contract, the counterparty is required to make a payment to us if the index price for
any settlement period is less than the fixed price, and we are required to make a payment to the
counterparty if the index price for any settlement period is greater than the fixed price. The amount we
receive or pay is the difference between the index price and the fixed price multiplied by the contract
volumes. If we have less production than the volumes specified under the swap transaction when the
index price exceeds the fixed price, we must make payments against which there are no offsetting
revenues from production.
The fair value of outstanding crude oil and natural gas commodity derivative instruments at
December 31, 2011 and the change in fair value that would be expected from a 10% price increase or
decrease is shown below (in millions):
Fair Value
Asset
Effect of 10%
Price
Increase
Price
Decrease
Crude oil puts . . . . . . . . . . . $
48 $
(12) $
14
Crude oil collars . . . . . . . . .
11
(81)
70
Natural gas collars . . . . . . .
13
(3)
2
Natural gas puts . . . . . . . . .
41
(6)
6
Natural gas swaps . . . . . . .
13
(15)
16
$
126 $
(117) $
108
None of our offsetting physical positions are included in the above table. Price risk sensitivities
were calculated by assuming an across-the-board 10% increase or decrease in price regardless of
term or historical relationships between the contractual price of the instruments and the underlying
commodity price.
Our management intends to continue to maintain derivative arrangements for a portion of our
production. These contracts may expose us to the risk of financial loss in certain circumstances. Our
derivative arrangements provide us protection on the volumes if prices decline below the prices at
which these derivatives are set, but ceiling prices in our derivatives may cause us to receive less
revenue on the volumes than we would receive in the absence of derivatives.
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