netrashetty
Netra Shetty
ConocoPhillips Company (NYSE: COP) is an American multinational energy corporation with its headquarters located in the Energy Corridor district of Houston, Texas in the United States. It is also one of the Fortune 500 companies.[2] ConocoPhillips is the fifth largest private sector energy corporation in the world and is one of the six "supermajor" vertically integrated oil companies. It sells fuel under the Conoco, Phillips 66 and Union 76 brands in North America, and Jet in Europe. ConocoPhillips was created through the merger of Conoco Inc. and the Phillips Petroleum Company on August 30, 2002.[3]
ConocoPhillips (NYSE: COP) is the third largest of the oil majors in the world. It operates in all sectors of the oil and natural gas industry: exploration and production, midstream, refining and marketing, and petrochemicals, and supplements its own operations with a 20% share in Russian oil giant, Lukoil.[1]
ConocoPhillips was formed by the merger of Conoco Inc. (Conoco) and Phillips Petroleum (Phillips) in 2001. It is a vertically integrated petroleum company with operations in more than 30 countries.[2]
Due to steep declines in oil prices at the end of 2008 and the beginning of 2009 COP net income dropped by up to 80% (in the first quarter of 2009), as compared to periods of one year earlier. With oil prices back on the decline, ConocoPhillips, like its major competitors Exxon Mobil, Chevron, Shell, BP, and Total, are facing increased pressure.
Business and Financials
Fourth Quarter 2010 Summary
On January 26, 2011, ConocoPhillips reported fourth quarter 2010 earnings of $2 billion, a 5% increase from the fourth quarter of 2009, primarily due to higher realized oil prices and higher refining margins, despite lower production volumes and higher costs. This included $718 million in asset sales from its North America Exploration & Production (E&P) segment and reduction of its LUKOIL equity position. WTI crude oil averaged $85.06 per barrel during the quarter, a 12% increase from the same quarter in 2009, while natural gas averaged $3.80 per million BTU, a 9% decrease from the same period in 2009.[3] The E&P segment produced 1.72 million BOE per day during the quarter, a 5% decrease year over year due to normal field decline, particularly in North America and Europe.[4]
Contents
1 Business and Financials
1.1 Exploration and Production
1.2 Lukoil Investments
1.3 Midstream
1.4 Refining and Marketing
1.5 Chemicals
1.6 Coal-Seam Methane Beds
2 Trends and Forces
2.1 Oil Majors Develop Response System for Deepwater Oil Spills
2.2 U.S. to Propose at the G-20 Summit to End Fossil Fuel Subsidies Within Five Years
2.3 Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips
2.4 International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses
2.5 Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.
2.6 ConocoPhillips Often has to Pay Recompense for Environmental Damages
3 Competition
4 References
Third Quarter 2010 Summary
In the third quarter of 2010, ConocoPhillips reported earnings of $3 billion, an 8% increase as compared to the same period in 2009. This increase was primarily due to higher realized prices for crude oil, natural gas and natural gas liquids, the divestiture of LUKOIL shares, and higher refining margins. WTI crude oil averaged $76.03 per barrel in the third quarter of 2010 as opposed to $68.19 in the third quarter of 2009, while natural gas averaged $4.38 per million BTU in the third quarter of 2010 as opposed to $3.39 in the third quarter of 2009. The E&P segment produced 1.72 million BOE per day, a slight 4% decrease from third quarter of 2009, due to normal field decline and unplanned downtime. This decline was partially offset by increases in petroleum prices.[5]
Second Quarter 2010 Summary
ConocoPhilips reported second quarter 2010 earnings of $4.2 billion, a 366.7% increase as compared to the same period in 2009. In the E&P business, production volumes and costs were in line with expectations.[6] The E&P segment produced 1.73 million BOE per day, a 7.5% decrease from the same quarter 2009, this decline was due primarily to planned maintenance and normal field decline in North America, the United Kingdom, and Norway. On the R&M side, improved market conditions led to better global refining and refining capacity utilization rates and more favorable marketing margins.[7]
Additionally in the second quarter, ConocoPhillips and LUKOIL (LUKOY) agreed to the sale of a 7.6% interest in LUKOIL held by ConocoPhillips, under which LUKOIL will purchase 64.6 million Russian registered shares for $3.44 billion, the deal is expected to close in the third quarter of 2010.[8] This is part of a move by ConocoPhililips to sell its entire stake in LUKOIL, which it expects to complete by the end of 2011. ConocoPhillips then plans to use the proceeds from the sale to repurchase its own shares.[9]
First Quarter 2010 Summary
At the end of April 2010, ConocoPhilips reported first quarter earnings of $2.1 billion, an increase of 162.5 percent as compared to the same quarter in 2009. The increase was due primarily to improved oil prices, rising U.S. refinery capacity utilization rates (88%), a widening of light-heavy differentials and reductions in costs.[10]
Production from the companies E&P segments was 1.83 million boe per day down from 1.93 million boe per day in the first quarter of 2009. This decline was due primarily to normal field decline in the UK and U.S., increased production sharing agreements and down time due to weather in the U.S. The decrease was partially offset by increases in production in China and Canadian oil sands.[10]
Also in the first quarter COP announced plans to reduce its ownership in LUKOIL (LUKOY) from 20 to 10 percent. Additionally, the company plans to execute a $5 billion share repurchase program by the end of 2011.[10]
Fourth Quarter 2009 Summary
In the 4th Quarter of 2009 ConocoPhillips reported adjusted earnings of 1.7 billion dollars or $1.16 per share, and this compares to 4Q 2008 earnings of 1.9 billion or $1.28 a share. The decrease can largely be attributed to lower refining and marketing margins. For the full year 2009, COP reported solid operations in their upstream business as they ramped up BOE (barrels of oil equivalent) from 1.79 million per day to 1.85 million. However, the downstream side suffered from reduced run rates and lower utilization rates largely due to low worldwide refining margins. [11]
ConocoPhillips looks to aggressively move forward with drilling in Alaska's Chukichi Sea after President Obama announced that that region would be open to drilling in a new bill that he is proposing. ConocoPhillips already invested 308 million dollars in drilling in the region in 2008. [12]
Third Quarter 2009 Summary
In the third quarter of 2009 revenue was down 42% to $41.3 billion as compared to the same period last year. Net income was up from the previous quarter at $1.5 billion, but down 71% as compared to the third quarter of 2008. The decline was due primarily to lower oil and natural gas prices, as well as poor refining margins. ConocoPhillips stated that it will sell $10 billion in assets in the next two years and reduce 2010 capital expenditure by $1.5 billion to $10 billion.[13]
ConocoPhillips had a loss of nearly $17 billion in 2008 because of the damage caused by falling oil and gas prices. The company wrote-down $25.4 billion of goodwill attributed to its E&P segment, and faced a $7.4 billion reduction in the carrying value of its LUKOIL investment.[14] In addition, shrinking reserves forced the company to lower its production volume, all the while selling at a lower price.
COP Operating Performance
Revenues
($B)[15][16][17][13][13][18][19] Net Income
($M)[20][16][17][13][18][19] Oil Production
(MBbl/day)[21][22][23][24][25][26] Liquid Natural Gas Production
(MBbl/day)[21][22][23][24][25][26] Natural Gas Production
(MMCf/day)[21][22][23][24][25][27] Refinery Production
(Thousands BPD)[28][22][29][24][30]
2008 $240.84 $(16,998.00) 806 153 4,847 2,610
1Q 2009 $31.28 $840 817 153 5,087 2,292
2Q 2009 $36.6 $1,300 859 155 5,051 2,517
3Q 2009 $41.3 $1,500 829 146 4,746 2,565
4Q 2009 $43.6 $1,217 872 157 4,632 --
1Q 2010 $45.8 $2,098 958 186 4,726 2,238
COP Average Consolidated Sale Prices[31][32][33][24][34][35]
2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010
Crude Oil
(Dollars per barrel) 95.15 42.36 56.11 67.01 73.31 -
Natural Gas
(Dollars per thousand cubic feet) 8.28 4.98 3.72 3.69 4.81 5.51
Natural Gas Liquids
(Dollars per barrel) 57.43 27.53 28.73 34.62 44.37 -
Exploration and Production
The E&P segment is mainly involved in the exploration and production of oil and natural gas, as well as the marketing of natural gas and natural gas liquids. In 2009, ConocoPhillips' proved reserves contained 8.36 billion barrels of oil equivalents.[36] During the same year, its oil production averaged 2.29 million BOE per day, and its natural gas production averaged 4.9 mmcf per day.[37][38] In 2009, the E&P segment accounted for 66% of the company's total assets of $153 billion.[39][40]
Lukoil Investments
ConocoPhillips owns a 20% share of Russian oil major, Lukoil. Its share of Lukoils's upstream production included 401 MBbl per day of oil, 256 MMcf of natural gas per day, and 214 MBbls of refined petroleum per day.[41] Despite Lukoil being hit hard by fluctuating fuel prices, with weak profits in 2009, Lukoil had net income of $2 billion in the first quarter of 2010, a 126.9% increase year-over-year.[10]
Despite the struggles that Lukoil faced, ConocoPhillips maintains its beliefs that Lukoil may pay dividends in their restructuring process, as Lukoil Chief Executive, Vagit Alekpero, has been quoted as stating the he hopes Lukoil will be informed of any assets that ConocoPhillips brings to the markets such as pipelines, terminals, and natural gas pipelines in North America that it may be divesting[42].
Midstream
COP's midstream segment "gathers" natural gas, moving it from the well to the pipeline, and processes it, breaking it down into individual components and purifying it for use. On April 8th, 2008, COP announced that it would build a pipeline, in partnership with Chevron and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand[43].
On January 12, 2010 it was announced that BP and ConocoPhillips had a joint venture to plan and build a pipeline from the Alaskan North Slopes to the contiguous states. The earliest that it could be in operation is 2018, however TransCanada Corp TRP is also planning to build a competing pipeline, and has state backing which the BP-COP joint venture does not. Federal officials would like to see one pipeline rather than two competing projects, but it does not seem as if any agreement or deal between these two competing projects has been reached. [44]
Refining and Marketing
Petroleum refining operations turn crude oil into the petroleum products that people use everyday, like gasoline and diesel. ConocoPhillips is the second largest petroleum refiner in the U.S and the fourth largest refiner in the world. The company owns 12 refineries in the U.S (the largest of which, Wood River is jointly owned with Cenovus Energy) and either owns or has an interest in six European refineries. In 2009, refinery production was 1,986 million barrels per day with a utilization of 84%, lower than the 90% of the previous year due to economic conditions and higher planned downtime.[45][46]
The company has a distribution network of 10,500 branded outlets in the U.S, Europe, and the Asia Pacific. Its products are marketed under brand names Phillips 66, 76 and Conoco brand in the U.S and under the Jet and ProJet brands in Europe and the Asia Pacific region.[47]
Chemicals
COP's chemicals segment is essentially the company's 50% share in Chevron Phillips Chemical Company LLC, a JV between ConocoPhillips and Chevron. It processes petroleum into petrochemicals.[48]
Coal-Seam Methane Beds
In September 2008, COP entered a, $8 billion, 50/50 joint venture with Australian energy company Origin to develop coal-seam methane beds.[49]
Trends and Forces
Oil Majors Develop Response System for Deepwater Oil Spills
In an effort to respond to criticism from members of Congress and to reassure the public after the Deepwater Horizon rig disaster, some of the oil majors have come together to prepare for deepwater oil spills.[50] In July 2010 ExxonMobil, Chevron Corporation (CVX), CONOCOPHILLIPS (COP) and Royal Dutch Shell (RDS'A) agreed to pool $1 billion to establish a new company, which would be tasked to respond to offshore oil spills at up to 10,000 feet underwater. The company would deploy equipment that could arrive within days and be operational in weeks of a spill.[50]
The company would be a nonprofit organization called the Marine Well Containment Company and would operate the response system that would be used for any spills.[50] The response system would use underwater equipment designed to seal busted wells and have the ability to separate oil from gas and bring it to the surface where the gas would be burned off and oil would be stored in containers. The equipment should be useful in depths up to 10,000 feet.[50]
The establishment of the company is an effort for the oil majors to demonstrate that plans are in place to minimize any potential damage of deepwater drilling. All four companies rely significantly on offshore drilling, while Shell and Chevron have significant operations in the Gulf of Mexico. All companies will participate, however ExxonMobil will lead the effort.[50]
U.S. to Propose at the G-20 Summit to End Fossil Fuel Subsidies Within Five Years
At the end of September 2009 the G-20 summit will be held in Pittsburgh, Pennsylvania. It has been reported that the U.S. contingent will ask the G-20 to eliminate worldwide fossil fuel subsidies in five years. Currently G20 countries spend $335 billion every year for subsidies on oil, gas and coal.[51] The U.S. will argue that the subsidies distort oil product markets and artificially raise fuel demand. It will also argue for more transparency of oil markets with more timely and accurate information about inventory levels and positions held in future markets.[52] According to the White House's deputy national security adviser for international economic affairs, the elimination of subsidies will also improve energy security and fight climate change through conservation and the freeing up of additional funding for cleaner technologies.[53]
Growing support against fossil fuels may have a negative impact on ConocoPhillips, especially if there is further support by the G-20. Ending of subsidies will affect all areas of its business, especially in rapidly expanding markets such as India and China, which have currently offset loses due to drops in demand elsewhere in the world.
Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips
Since the middle of 2008, oil prices have been trending downwards, to levels not seen since 2004. These falling oil prices have driven down COP's E&P margins. However, the company earns about 45% of its revenue, not including its Lukoil investment, from its Refining & Marketing segment.[54] Since oil is the primary input for a refiner, when oil prices rise, refining costs rise. In the first quarter of 2008, right after oil prices hit $100/barrel for the first time, COP's oil refining (downstream) business saw productivity decline. Capital utilization dropped 6% year on year. U.S. refining margins fell $3.56 per barrel from the fourth quarter of 2007, while international refining margins fell $0.30 per barrel (international demand for refined products is rising, while U.S. demand is falling).[55] Q3 earnings reflect a similar situation, during which crude oil prices for West Texas Intermediate averaged $117.83. Earnings estimates for the first quarter of 09 are a little less than 50% earnings for Q3 08, taking into consideration the new, low price of oil.[56]
International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses
As one of the oil majors, ConocoPhillips control oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable Most of COP's petroleum comes from North America and Europe, two regions where oil production is declining; expanding around the globe allows the company to keep growing its average reserve life.
In a partnership with Lane Energy, ConocoPhillips is looking to drill a horizontal well in Poland to harness the country's 3 trillion cubic meters of shale gas reserves. With Poland consuming over 14 billion cubic meters of gas per year, and importing over 70% of its consumption from Russia, this deal will greatly relieve the country of its dependency on Russia.[57]
An international presence makes the company highly vulnerable to terrorism. In early July, 2008, the company penned a $10 billion deal to develop the Shah natural gas field and build a one bcf gas-processing facility in the United Arab Emirates.[58] Just a month earlier, however, the U.S. released a high-alert warning for its citizens living and working in the region - after the UK did the same.[59] A terrorist attack on one of COP's facilities would halt production and hurt employees, leading to higher costs and lower margins.
Exploitation of natural resources in other countries also puts COP at risk of property loss from nationalization. For example, ConocoPhillips' 3Q07 income of $3.7 billion appears to be many times higher than the 2Q07 income of $301 million. In 2Q07, however, the company's Venezuelan assets were seized by Hugo Chavez, causing the company to lose $4.5 billion of expected income.[60]
COP's investment in Lukoil is another example of the benefits and possible risks of international expansion. Lukoil has the second-largest reserves of any publicly-traded oil company[61], and ConocoPhillips has a 20% share of the value generated by them. Russia, however, has gone through numerous upheavals in the last century, and, with Vladmir Putin in power, is less friendly about its resources than it has been in years. In 2006, the Kremlin forced Shell to cede 50% of its share of the lucrative Sakhalin-2 gas field to Gazprom, the state-controlled oil company, at below-market prices by using "environmental concerns" to pressure the company.[62] In early 2008, the Kremlin made multiple raids of BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage; a little over a year before, Gazprom expressed interest in the $40 billion TNK-BP project.[63] All these events indicate that the Russian government has no problem with pressuring companies into ceding their interests in Russian petroleum projects, especially at lower price, after significant capital has been sunk into the projects. With a 20% stake in Lukoil, ConocoPhillips is risking significant losses, especially if the Kremlin decides to nationalize Lukoil and its assets.
Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.
Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[64], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.
Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.[65] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but in the first quarter of 2008 ConocoPhillips sold 74% of its petroleum in the U.S.[66] A changing American environmental and energy legislation landscape would be disastrous to COP's business without the development of some effective carbon sequestration technology.
A more immediate threat to oil based demand is the rapidly evolving technology of solar and wind and the heavy government subsidies that make them competitive in some cases with oil based energy. John McCain recently introduced a bill that would give a 50% government subsidy to solar panels. President Obama himself has endorsed nuclear energy and backed government subsidies for them, and the first nuclear power plants in 30 years are currently being built, with 33 slated to be built.
ConocoPhillips Often has to Pay Recompense for Environmental Damages
Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by COP's operations occur to the extent that they break environmental protection laws, the company is sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, ConocoPhillips, Shell, BP, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether[67], an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.
Competition
The major competitors of ConocoPhillips are the oil majors: BP, Exxon Mobil, Valero, Chevron, Royal Dutch Shell, Total S.A., etc.
The table provided below compares the operational metrics for ConocoPhillips vis-à-vis its competitors in 2008.
Comparison to Competitors - 2008
CONOCOPHILLIPS ROYAL DUTCH SHELL EXXONMOBIL CHEVRON BP LUKOIL(1) Eni S.p.A(1) Total S.A.
Reserves
Oil and Gas Liquids
(Millions of barrels) 5,817[68][69] 3775[70] 7,576(2)[71] 7,350[72] 10,353[73] 15,715[74] 3,219[75] 5,695[76]
Natural Gas
(Billions of cubic feet) 24,948[77] 40,895[78] 31,402(2)[71] 23,075[72] 45,208[73] 27,921[79] 18,090[75] 26,218[76]
Production
Oil and Gas Liquids
(Thousand b/d) 1,108[80] 1,695[70] 2,405[81] 1,649[82] 2,401[83] 1,954[84] 1,020[75] 1,456[85]
Natural Gas
(Million cf/d) 4,970[80] 8,595[78] 9,095[81] 5,125[82] 8,334[83] 1,586[86] 4,114[75] 4,837[85]
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates
Refining Industry 2008 Metrics
SUNOCO CHEVRON VALERO EXXON MOBIL Royal Dutch Shell SINOPEC WESTERN REFINING ConocoPhillips BP LUKOIL(1) Eni S.p.A(1)[87] Total S.A.
Refinery Capacity
(Million BPD) 0.91[88] 2.139[89] 2.99[90] 6.2[91] 3.678[92] 3.376[93] 0.238[94] 1.986[95] 2.678[96] 1.135[97][98] 0.544 2.604[99]
Number of Refineries (including partial interests) 5[100] 18[89] 16[101] 37[91] 40[102] 17[103] 4[104] 12[95] 17[96] 9[105] N/A 25[99]
Number of Retail Gas Stations 7,785[106] 25,000[107][108] 5,800[101] 10,516[109] 45,000[110] 29,279[111] 153[112] 8,340[113] 22,600[114] 6,287[115] 6,441 (in Europe) 16,425[99]
(1) Latest data is for 2007
The oil majors face intense competition from national and state-owned oil and energy companies. Governments in oil-rich countries support these companies and give them preferential access to reserves by prohibiting direct foreign investment in oil exploration and production projects. Further, investments made by foreign companies are made unattractive by the government through taxation and other measures. Oil and gas companies, such as ConocoPhillips, thus face problems in gaining access to oil reserves and commencing operations in spite of their large size.
ConocoPhillips (NYSE: COP) is the third largest of the oil majors in the world. It operates in all sectors of the oil and natural gas industry: exploration and production, midstream, refining and marketing, and petrochemicals, and supplements its own operations with a 20% share in Russian oil giant, Lukoil.[1]
ConocoPhillips was formed by the merger of Conoco Inc. (Conoco) and Phillips Petroleum (Phillips) in 2001. It is a vertically integrated petroleum company with operations in more than 30 countries.[2]
Due to steep declines in oil prices at the end of 2008 and the beginning of 2009 COP net income dropped by up to 80% (in the first quarter of 2009), as compared to periods of one year earlier. With oil prices back on the decline, ConocoPhillips, like its major competitors Exxon Mobil, Chevron, Shell, BP, and Total, are facing increased pressure.
Business and Financials
Fourth Quarter 2010 Summary
On January 26, 2011, ConocoPhillips reported fourth quarter 2010 earnings of $2 billion, a 5% increase from the fourth quarter of 2009, primarily due to higher realized oil prices and higher refining margins, despite lower production volumes and higher costs. This included $718 million in asset sales from its North America Exploration & Production (E&P) segment and reduction of its LUKOIL equity position. WTI crude oil averaged $85.06 per barrel during the quarter, a 12% increase from the same quarter in 2009, while natural gas averaged $3.80 per million BTU, a 9% decrease from the same period in 2009.[3] The E&P segment produced 1.72 million BOE per day during the quarter, a 5% decrease year over year due to normal field decline, particularly in North America and Europe.[4]
Contents
1 Business and Financials
1.1 Exploration and Production
1.2 Lukoil Investments
1.3 Midstream
1.4 Refining and Marketing
1.5 Chemicals
1.6 Coal-Seam Methane Beds
2 Trends and Forces
2.1 Oil Majors Develop Response System for Deepwater Oil Spills
2.2 U.S. to Propose at the G-20 Summit to End Fossil Fuel Subsidies Within Five Years
2.3 Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips
2.4 International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses
2.5 Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.
2.6 ConocoPhillips Often has to Pay Recompense for Environmental Damages
3 Competition
4 References
Third Quarter 2010 Summary
In the third quarter of 2010, ConocoPhillips reported earnings of $3 billion, an 8% increase as compared to the same period in 2009. This increase was primarily due to higher realized prices for crude oil, natural gas and natural gas liquids, the divestiture of LUKOIL shares, and higher refining margins. WTI crude oil averaged $76.03 per barrel in the third quarter of 2010 as opposed to $68.19 in the third quarter of 2009, while natural gas averaged $4.38 per million BTU in the third quarter of 2010 as opposed to $3.39 in the third quarter of 2009. The E&P segment produced 1.72 million BOE per day, a slight 4% decrease from third quarter of 2009, due to normal field decline and unplanned downtime. This decline was partially offset by increases in petroleum prices.[5]
Second Quarter 2010 Summary
ConocoPhilips reported second quarter 2010 earnings of $4.2 billion, a 366.7% increase as compared to the same period in 2009. In the E&P business, production volumes and costs were in line with expectations.[6] The E&P segment produced 1.73 million BOE per day, a 7.5% decrease from the same quarter 2009, this decline was due primarily to planned maintenance and normal field decline in North America, the United Kingdom, and Norway. On the R&M side, improved market conditions led to better global refining and refining capacity utilization rates and more favorable marketing margins.[7]
Additionally in the second quarter, ConocoPhillips and LUKOIL (LUKOY) agreed to the sale of a 7.6% interest in LUKOIL held by ConocoPhillips, under which LUKOIL will purchase 64.6 million Russian registered shares for $3.44 billion, the deal is expected to close in the third quarter of 2010.[8] This is part of a move by ConocoPhililips to sell its entire stake in LUKOIL, which it expects to complete by the end of 2011. ConocoPhillips then plans to use the proceeds from the sale to repurchase its own shares.[9]
First Quarter 2010 Summary
At the end of April 2010, ConocoPhilips reported first quarter earnings of $2.1 billion, an increase of 162.5 percent as compared to the same quarter in 2009. The increase was due primarily to improved oil prices, rising U.S. refinery capacity utilization rates (88%), a widening of light-heavy differentials and reductions in costs.[10]
Production from the companies E&P segments was 1.83 million boe per day down from 1.93 million boe per day in the first quarter of 2009. This decline was due primarily to normal field decline in the UK and U.S., increased production sharing agreements and down time due to weather in the U.S. The decrease was partially offset by increases in production in China and Canadian oil sands.[10]
Also in the first quarter COP announced plans to reduce its ownership in LUKOIL (LUKOY) from 20 to 10 percent. Additionally, the company plans to execute a $5 billion share repurchase program by the end of 2011.[10]
Fourth Quarter 2009 Summary
In the 4th Quarter of 2009 ConocoPhillips reported adjusted earnings of 1.7 billion dollars or $1.16 per share, and this compares to 4Q 2008 earnings of 1.9 billion or $1.28 a share. The decrease can largely be attributed to lower refining and marketing margins. For the full year 2009, COP reported solid operations in their upstream business as they ramped up BOE (barrels of oil equivalent) from 1.79 million per day to 1.85 million. However, the downstream side suffered from reduced run rates and lower utilization rates largely due to low worldwide refining margins. [11]
ConocoPhillips looks to aggressively move forward with drilling in Alaska's Chukichi Sea after President Obama announced that that region would be open to drilling in a new bill that he is proposing. ConocoPhillips already invested 308 million dollars in drilling in the region in 2008. [12]
Third Quarter 2009 Summary
In the third quarter of 2009 revenue was down 42% to $41.3 billion as compared to the same period last year. Net income was up from the previous quarter at $1.5 billion, but down 71% as compared to the third quarter of 2008. The decline was due primarily to lower oil and natural gas prices, as well as poor refining margins. ConocoPhillips stated that it will sell $10 billion in assets in the next two years and reduce 2010 capital expenditure by $1.5 billion to $10 billion.[13]
ConocoPhillips had a loss of nearly $17 billion in 2008 because of the damage caused by falling oil and gas prices. The company wrote-down $25.4 billion of goodwill attributed to its E&P segment, and faced a $7.4 billion reduction in the carrying value of its LUKOIL investment.[14] In addition, shrinking reserves forced the company to lower its production volume, all the while selling at a lower price.
COP Operating Performance
Revenues
($B)[15][16][17][13][13][18][19] Net Income
($M)[20][16][17][13][18][19] Oil Production
(MBbl/day)[21][22][23][24][25][26] Liquid Natural Gas Production
(MBbl/day)[21][22][23][24][25][26] Natural Gas Production
(MMCf/day)[21][22][23][24][25][27] Refinery Production
(Thousands BPD)[28][22][29][24][30]
2008 $240.84 $(16,998.00) 806 153 4,847 2,610
1Q 2009 $31.28 $840 817 153 5,087 2,292
2Q 2009 $36.6 $1,300 859 155 5,051 2,517
3Q 2009 $41.3 $1,500 829 146 4,746 2,565
4Q 2009 $43.6 $1,217 872 157 4,632 --
1Q 2010 $45.8 $2,098 958 186 4,726 2,238
COP Average Consolidated Sale Prices[31][32][33][24][34][35]
2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010
Crude Oil
(Dollars per barrel) 95.15 42.36 56.11 67.01 73.31 -
Natural Gas
(Dollars per thousand cubic feet) 8.28 4.98 3.72 3.69 4.81 5.51
Natural Gas Liquids
(Dollars per barrel) 57.43 27.53 28.73 34.62 44.37 -
Exploration and Production
The E&P segment is mainly involved in the exploration and production of oil and natural gas, as well as the marketing of natural gas and natural gas liquids. In 2009, ConocoPhillips' proved reserves contained 8.36 billion barrels of oil equivalents.[36] During the same year, its oil production averaged 2.29 million BOE per day, and its natural gas production averaged 4.9 mmcf per day.[37][38] In 2009, the E&P segment accounted for 66% of the company's total assets of $153 billion.[39][40]
Lukoil Investments
ConocoPhillips owns a 20% share of Russian oil major, Lukoil. Its share of Lukoils's upstream production included 401 MBbl per day of oil, 256 MMcf of natural gas per day, and 214 MBbls of refined petroleum per day.[41] Despite Lukoil being hit hard by fluctuating fuel prices, with weak profits in 2009, Lukoil had net income of $2 billion in the first quarter of 2010, a 126.9% increase year-over-year.[10]
Despite the struggles that Lukoil faced, ConocoPhillips maintains its beliefs that Lukoil may pay dividends in their restructuring process, as Lukoil Chief Executive, Vagit Alekpero, has been quoted as stating the he hopes Lukoil will be informed of any assets that ConocoPhillips brings to the markets such as pipelines, terminals, and natural gas pipelines in North America that it may be divesting[42].
Midstream
COP's midstream segment "gathers" natural gas, moving it from the well to the pipeline, and processes it, breaking it down into individual components and purifying it for use. On April 8th, 2008, COP announced that it would build a pipeline, in partnership with Chevron and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand[43].
On January 12, 2010 it was announced that BP and ConocoPhillips had a joint venture to plan and build a pipeline from the Alaskan North Slopes to the contiguous states. The earliest that it could be in operation is 2018, however TransCanada Corp TRP is also planning to build a competing pipeline, and has state backing which the BP-COP joint venture does not. Federal officials would like to see one pipeline rather than two competing projects, but it does not seem as if any agreement or deal between these two competing projects has been reached. [44]
Refining and Marketing
Petroleum refining operations turn crude oil into the petroleum products that people use everyday, like gasoline and diesel. ConocoPhillips is the second largest petroleum refiner in the U.S and the fourth largest refiner in the world. The company owns 12 refineries in the U.S (the largest of which, Wood River is jointly owned with Cenovus Energy) and either owns or has an interest in six European refineries. In 2009, refinery production was 1,986 million barrels per day with a utilization of 84%, lower than the 90% of the previous year due to economic conditions and higher planned downtime.[45][46]
The company has a distribution network of 10,500 branded outlets in the U.S, Europe, and the Asia Pacific. Its products are marketed under brand names Phillips 66, 76 and Conoco brand in the U.S and under the Jet and ProJet brands in Europe and the Asia Pacific region.[47]
Chemicals
COP's chemicals segment is essentially the company's 50% share in Chevron Phillips Chemical Company LLC, a JV between ConocoPhillips and Chevron. It processes petroleum into petrochemicals.[48]
Coal-Seam Methane Beds
In September 2008, COP entered a, $8 billion, 50/50 joint venture with Australian energy company Origin to develop coal-seam methane beds.[49]
Trends and Forces
Oil Majors Develop Response System for Deepwater Oil Spills
In an effort to respond to criticism from members of Congress and to reassure the public after the Deepwater Horizon rig disaster, some of the oil majors have come together to prepare for deepwater oil spills.[50] In July 2010 ExxonMobil, Chevron Corporation (CVX), CONOCOPHILLIPS (COP) and Royal Dutch Shell (RDS'A) agreed to pool $1 billion to establish a new company, which would be tasked to respond to offshore oil spills at up to 10,000 feet underwater. The company would deploy equipment that could arrive within days and be operational in weeks of a spill.[50]
The company would be a nonprofit organization called the Marine Well Containment Company and would operate the response system that would be used for any spills.[50] The response system would use underwater equipment designed to seal busted wells and have the ability to separate oil from gas and bring it to the surface where the gas would be burned off and oil would be stored in containers. The equipment should be useful in depths up to 10,000 feet.[50]
The establishment of the company is an effort for the oil majors to demonstrate that plans are in place to minimize any potential damage of deepwater drilling. All four companies rely significantly on offshore drilling, while Shell and Chevron have significant operations in the Gulf of Mexico. All companies will participate, however ExxonMobil will lead the effort.[50]
U.S. to Propose at the G-20 Summit to End Fossil Fuel Subsidies Within Five Years
At the end of September 2009 the G-20 summit will be held in Pittsburgh, Pennsylvania. It has been reported that the U.S. contingent will ask the G-20 to eliminate worldwide fossil fuel subsidies in five years. Currently G20 countries spend $335 billion every year for subsidies on oil, gas and coal.[51] The U.S. will argue that the subsidies distort oil product markets and artificially raise fuel demand. It will also argue for more transparency of oil markets with more timely and accurate information about inventory levels and positions held in future markets.[52] According to the White House's deputy national security adviser for international economic affairs, the elimination of subsidies will also improve energy security and fight climate change through conservation and the freeing up of additional funding for cleaner technologies.[53]
Growing support against fossil fuels may have a negative impact on ConocoPhillips, especially if there is further support by the G-20. Ending of subsidies will affect all areas of its business, especially in rapidly expanding markets such as India and China, which have currently offset loses due to drops in demand elsewhere in the world.
Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips
Since the middle of 2008, oil prices have been trending downwards, to levels not seen since 2004. These falling oil prices have driven down COP's E&P margins. However, the company earns about 45% of its revenue, not including its Lukoil investment, from its Refining & Marketing segment.[54] Since oil is the primary input for a refiner, when oil prices rise, refining costs rise. In the first quarter of 2008, right after oil prices hit $100/barrel for the first time, COP's oil refining (downstream) business saw productivity decline. Capital utilization dropped 6% year on year. U.S. refining margins fell $3.56 per barrel from the fourth quarter of 2007, while international refining margins fell $0.30 per barrel (international demand for refined products is rising, while U.S. demand is falling).[55] Q3 earnings reflect a similar situation, during which crude oil prices for West Texas Intermediate averaged $117.83. Earnings estimates for the first quarter of 09 are a little less than 50% earnings for Q3 08, taking into consideration the new, low price of oil.[56]
International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses
As one of the oil majors, ConocoPhillips control oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable Most of COP's petroleum comes from North America and Europe, two regions where oil production is declining; expanding around the globe allows the company to keep growing its average reserve life.
In a partnership with Lane Energy, ConocoPhillips is looking to drill a horizontal well in Poland to harness the country's 3 trillion cubic meters of shale gas reserves. With Poland consuming over 14 billion cubic meters of gas per year, and importing over 70% of its consumption from Russia, this deal will greatly relieve the country of its dependency on Russia.[57]
An international presence makes the company highly vulnerable to terrorism. In early July, 2008, the company penned a $10 billion deal to develop the Shah natural gas field and build a one bcf gas-processing facility in the United Arab Emirates.[58] Just a month earlier, however, the U.S. released a high-alert warning for its citizens living and working in the region - after the UK did the same.[59] A terrorist attack on one of COP's facilities would halt production and hurt employees, leading to higher costs and lower margins.
Exploitation of natural resources in other countries also puts COP at risk of property loss from nationalization. For example, ConocoPhillips' 3Q07 income of $3.7 billion appears to be many times higher than the 2Q07 income of $301 million. In 2Q07, however, the company's Venezuelan assets were seized by Hugo Chavez, causing the company to lose $4.5 billion of expected income.[60]
COP's investment in Lukoil is another example of the benefits and possible risks of international expansion. Lukoil has the second-largest reserves of any publicly-traded oil company[61], and ConocoPhillips has a 20% share of the value generated by them. Russia, however, has gone through numerous upheavals in the last century, and, with Vladmir Putin in power, is less friendly about its resources than it has been in years. In 2006, the Kremlin forced Shell to cede 50% of its share of the lucrative Sakhalin-2 gas field to Gazprom, the state-controlled oil company, at below-market prices by using "environmental concerns" to pressure the company.[62] In early 2008, the Kremlin made multiple raids of BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage; a little over a year before, Gazprom expressed interest in the $40 billion TNK-BP project.[63] All these events indicate that the Russian government has no problem with pressuring companies into ceding their interests in Russian petroleum projects, especially at lower price, after significant capital has been sunk into the projects. With a 20% stake in Lukoil, ConocoPhillips is risking significant losses, especially if the Kremlin decides to nationalize Lukoil and its assets.
Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.
Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[64], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.
Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.[65] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but in the first quarter of 2008 ConocoPhillips sold 74% of its petroleum in the U.S.[66] A changing American environmental and energy legislation landscape would be disastrous to COP's business without the development of some effective carbon sequestration technology.
A more immediate threat to oil based demand is the rapidly evolving technology of solar and wind and the heavy government subsidies that make them competitive in some cases with oil based energy. John McCain recently introduced a bill that would give a 50% government subsidy to solar panels. President Obama himself has endorsed nuclear energy and backed government subsidies for them, and the first nuclear power plants in 30 years are currently being built, with 33 slated to be built.
ConocoPhillips Often has to Pay Recompense for Environmental Damages
Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by COP's operations occur to the extent that they break environmental protection laws, the company is sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, ConocoPhillips, Shell, BP, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether[67], an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.
Competition
The major competitors of ConocoPhillips are the oil majors: BP, Exxon Mobil, Valero, Chevron, Royal Dutch Shell, Total S.A., etc.
The table provided below compares the operational metrics for ConocoPhillips vis-à-vis its competitors in 2008.
Comparison to Competitors - 2008
CONOCOPHILLIPS ROYAL DUTCH SHELL EXXONMOBIL CHEVRON BP LUKOIL(1) Eni S.p.A(1) Total S.A.
Reserves
Oil and Gas Liquids
(Millions of barrels) 5,817[68][69] 3775[70] 7,576(2)[71] 7,350[72] 10,353[73] 15,715[74] 3,219[75] 5,695[76]
Natural Gas
(Billions of cubic feet) 24,948[77] 40,895[78] 31,402(2)[71] 23,075[72] 45,208[73] 27,921[79] 18,090[75] 26,218[76]
Production
Oil and Gas Liquids
(Thousand b/d) 1,108[80] 1,695[70] 2,405[81] 1,649[82] 2,401[83] 1,954[84] 1,020[75] 1,456[85]
Natural Gas
(Million cf/d) 4,970[80] 8,595[78] 9,095[81] 5,125[82] 8,334[83] 1,586[86] 4,114[75] 4,837[85]
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates
Refining Industry 2008 Metrics
SUNOCO CHEVRON VALERO EXXON MOBIL Royal Dutch Shell SINOPEC WESTERN REFINING ConocoPhillips BP LUKOIL(1) Eni S.p.A(1)[87] Total S.A.
Refinery Capacity
(Million BPD) 0.91[88] 2.139[89] 2.99[90] 6.2[91] 3.678[92] 3.376[93] 0.238[94] 1.986[95] 2.678[96] 1.135[97][98] 0.544 2.604[99]
Number of Refineries (including partial interests) 5[100] 18[89] 16[101] 37[91] 40[102] 17[103] 4[104] 12[95] 17[96] 9[105] N/A 25[99]
Number of Retail Gas Stations 7,785[106] 25,000[107][108] 5,800[101] 10,516[109] 45,000[110] 29,279[111] 153[112] 8,340[113] 22,600[114] 6,287[115] 6,441 (in Europe) 16,425[99]
(1) Latest data is for 2007
The oil majors face intense competition from national and state-owned oil and energy companies. Governments in oil-rich countries support these companies and give them preferential access to reserves by prohibiting direct foreign investment in oil exploration and production projects. Further, investments made by foreign companies are made unattractive by the government through taxation and other measures. Oil and gas companies, such as ConocoPhillips, thus face problems in gaining access to oil reserves and commencing operations in spite of their large size.
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