Project Evaluation in Emerging Market: Exxon Mobil, Oil Case

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- Hedge effectiveness of selected derivatives

(basing on the correlation of jet fuel and different constracts)

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Conclusion and Discussion

Aircraft Fuel and Hedging

The price and availability of aircraft fuel are extremely volatile due to global economic and geopolitical factors we can neither control nor accurately predict. During 2012 fuel prices remained volatile, increasing 1% over average 2011 prices. We maintain a diversified fuel hedge portfolio by entering into a variety of fuel hedge contracts in order to provide some protection against sharp and sudden volatility and further increases in fuel prices. In total, we hedged 30% of our total 2012 fuel consumption. We also use fixed forward price agreements, or FFPs, which allow us to lock in a price for fixed quantities of fuel to be delivered at a specified date in the future, to manage fuel price volatility. As of December 31, 2012, we had outstanding fuel hedge contracts covering approximately 8% of our forecasted consumption for the first quarter of 2013 and 5% for the full year 2013. As of December 31, 2012, we had 6% of our 2013 fuel consumption requirements covered under FFPs. In January and February 2013, we entered into jet fuel swap and cap agreements covering an additional 6% of our 2013 forecasted consumption. We will continue to monitor fuel prices closely and intend to take advantage of reasonable fuel hedging opportunities as they become available.

Aircraft fuel expense represented approximately 40% of our total operating expenses. The increase in year-over-year average fuel cost per gallon resulted in $20 million of higher fuel expense. Additionally, we consumed 38 million more gallons of aircraft fuel, resulting in $122 million of higher fuel expense. Based on our expected fuel volume for 2013, a 10% per gallon increase in the cost of aircraft fuel would increase our annual fuel expense by approximately $190 million.

During 2012, we recorded $10 million in effective fuel hedge gains which offset fuel expense; this compares to $3 million in 2011. Fuel derivatives not qualifying as cash flow hedges in 2012 resulted in approximately $3 million in losses recorded in interest income and other, compared to an insignificant amount in 2011. Accounting ineffectiveness on fuel derivatives classified as cash flow hedges resulted in insignificant losses in 2012 and $2 million in 2011, recorded in interest income and other. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities.

Appendix 3 – Sensitivity Analysis

Sensitivity Analysis--NPV ($ million)

Discount rate

Oil price

7.85%

8.20%

12.85%

17.68%

18.37%

10

(104.69)

(104.95)

(108.12)

(110.78)

(111.12)

15

(89.60)

(90.02)

(95.08)

(99.32)

(99.86)

20

(74.50)

(75.08)

(82.03)

(87.86)

(88.60)

25

(59.41)

(60.15)

(68.98)

(76.40)

(77.34)

30

(44.32)

(45.21)

(55.94)

(64.94)

(66.08)

35

(29.23)

(30.27)

(42.89)

(53.48)

(54.82)

40

(14.13)

(15.34)

(29.84)

(42.01)

(43.56)

45

0.96

(0.40)

(16.80)

(30.55)

(32.30)

50

16.05

14.53

(3.75)

(19.09)

(21.04)

55

31.15

29.47

9.30

(7.63)

(9.78)

60

46.24

44.41

22.34

3.83

1.48

65

61.33

59.34