KOSMOS ENERGY LTD. Notes to Consolidated Financial Statements (Continued) 9. Derivative Financial Instruments (Continued) Amount of Gain/(Loss) Years Ended December 31, Type of Contract Location of Gain/(Loss) 2017 2016 2015 (In thousands) Derivatives in cash flow hedging relationships: Interest rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense $ — $ — $ 767 Total derivatives in cash flow hedging relationships . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 767 Derivatives not designated as hedging instruments: Commodity(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . Oil and gas revenue $(12,502) $ 2,538 $ 3 Commodity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivatives, net (59,968) (48,021) 210,649 Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense 648 (1,076) (462) Total derivatives not designated as hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . $(71,822) $(46,559) $210,190 (1) Amounts were reclassified from AOCI into earnings upon settlement. (2) Amounts represent the change in fair value of our provisional oil sales contracts. Offsetting of Derivative Assets and Derivative Liabilities Our derivative instruments which are subject to master netting arrangements with our counterparties only have the right of offset when there is an event of default. As of December 31, 2017 and 2016, there was not an event of default and, therefore, the associated gross asset or gross liability amounts related to these arrangements are presented on the consolidated balance sheets. 10. Fair Value Measurements In accordance with ASC 820—Fair Value Measurements and Disclosures, fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. We prioritize the inputs used in measuring fair value into the following fair value hierarchy: • Level 1—quoted prices for identical assets or liabilities in active markets. • Level 2—quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data by correlation or other means. • Level 3—unobservable inputs for the asset or liability. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety. 135