5. Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and interest rates. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. We do not enter into derivative instruments for speculative trading purposes. Our derivative instruments currently consist of commodity option contracts. We are exposed to credit loss in the event of nonperformance by the counterparties; however, we do not currently anticipate any of our counterparties being unable to fulfill their contractual obligations.

We account for derivative contracts in accordance with GAAP, which requires each derivative to be recorded on the balance sheet as an asset or a liability at its fair value. Changes in a derivative's fair value are required to be recognized currently in earnings unless specific hedge accounting criteria are met at the time we enter into a derivative contract. We have elected not to designate our commodity derivatives as hedging instruments. For additional information about fair value measurements, refer to Note 7.

Commodity Derivative: During 2010, we entered into commodity option contracts to manage our exposure to commodity price risk from sales of oil through December 31, 2012. While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements. As of June 30, 2011, our open commodity derivatives were as follows:

At June 30, 2011, $9.6 million and $3.5 million were included in accrued liabilities and other long-term liabilities, respectively, related to our commodity derivative contracts. At December 31, 2010, $9.5 million and $5.4 million were included in accrued liabilities and other long-term liabilities, respectively, related to our commodity derivative contracts. Our derivative gain for the three months ended June 30, 2011 includes realized losses of $6.1 million and unrealized gains of $23.4 million related to our commodity derivatives. Our derivative loss for the six months ended June 30, 2011 includes realized losses of $8.3 million and unrealized gains of $1.8 million related to our commodity derivatives. Our derivative gain for the three months ended June 30, 2010 includes realized and unrealized gains of $2.1 million and $5.3 million, respectively, related to our commodity derivatives. Our derivative gain for the six months ended June 30, 2010 includes realized and unrealized gains of $3.2 million and $10.4 million, respectively, related to our commodity derivatives.

Interest Rate Swap: Our interest rate swap contract with a fixed interest rate of 5.21% expired in August 2010. During the three months ended June 30, 2010, we recognized an unrealized gain of $1.8 million and a realized loss of $1.8 million for this contract. During the six months ended June 30, 2010, we recognized an unrealized gain of $3.3 million and a realized loss of $3.6 million for this contract.