BP 2009 Annual Report Download - page 157

31. Derivative financial instruments continued
1
BP Annual Report and Accounts 2009
Notes on financial statements
Financial statements
155
The following table shows the changes during the year in the net fair value of derivatives held for trading purposes within level 3 of the fair value
hierarchy.
$ million
Oil Natural gas Power
Currency price price price Other Total
Net fair value of contracts at 1 January 2009 3 149 17 – – 169
Gains (losses) recognized in the income statement (1) 205 91 – (1) 294
Settlements – (91) (5) – – (96)
Purchases –––1 –
Sales – – – (2) 1 (1)
Transfers out of level 3 (2) (50) (4) – – (56)
Transfers in to level 3 – 2 (25) – – (23)
Exchange adjustments – – (2) – – (2)
Net fair value of contracts at 31 December 2009 – 215 72 (1) – 286
$ million
Oil Natural gas Power
Currency price price price Other Total
Net fair value of contracts at 1 January 2008 (17) 1 (67) (1) – (84)
Gains recognized in the income statement 8 148 160 – – 316
Settlements – 18 3 1 – 22
Transfers out of level 3 12 (25) (79) – – (92)
Transfers in to level 3 – 7 3 – – 10
Exchange adjustments – – (3) – – (3)
Net fair value of contracts at 31 December 2008 3 149 17 – – 169
The amount recognized in the income statement for the year relating to level 3 derivatives still held at 31 December 2009 was a $278 million gain
(2008 $199 million gain relating to derivatives still held at 31 December 2008).
Gains and losses relating to derivative contracts are included either within sales and other operating revenues or within purchases in the income
statement depending upon the nature of the activity and type of contract involved. The contract types treated in this way include futures, options, swaps
and certain forward sales and forward purchases contracts. Gains or losses arise on contracts entered into for risk management purposes, optimization
activity and entrepreneurial trading. They also arise on certain contracts that are for normal procurement or sales activity for the group but that are
required to be fair valued under accounting standards. Also included within sales and other operating revenues are gains and losses on inventory held for
trading purposes. The total amount relating to all of these items was a net gain of $3,735 million (2008 $6,721 million net gain and 2007 $376 million net
gain).
Embedded derivatives
Prior to the development of an active gas trading market, UK gas contracts were priced using a basket of available price indices, primarily relating to oil
products, power and inflation. After the development of an active UK gas market, certain contracts were entered into or renegotiated using pricing
formulae not directly related to gas prices, for example, oil product and power prices. In these circumstances, pricing formulae have been determined
to be derivatives, embedded within the overall contractual arrangements that are not clearly and closely related to the underlying commodity. The
resulting fair value relating to these contracts is recognized on the balance sheet with gains or losses recognized in the income statement.
All the embedded derivatives are valued using inputs that include price curves for each of the different products that are built up from active
market pricing data. Where necessary, these are extrapolated to the expiry of the contracts (the last of which is in 2018) using all available external
pricing information. Additionally, where limited data exists for certain products, prices are interpolated using historic and long-term pricing relationships.
Embedded derivative assets have the following fair values and maturities.
$ million
2009
Less than Over
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
Commodity price embedded derivatives 134 – – – – 3 137
$ million
2008
Less than Over
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
Commodity price embedded derivatives 50 116 75 45 36 75 397