John E. Lowe, Executive Vice President, Planning and Strategic Transactions

ConocoPhillips uses small-scale plants to evaluate and demonstrate the capabilities of its technologies. The 6,000 barrel-per-day S Zorb gasoline plant (top) at the Borger, Texas, refinery helps the company license S Zorb Sulfur Removal Technology to other refiners. A gas-to-liquids plant (above) expected to start up this year at the Ponca City, Okla., refinery will provide important data for building future commercial-scale plants.

Emerging Businesses experienced increased costs from the addition of Conoco’s gas-to-liquids, carbon fibers and power generation activities. In connection with these activities, the loss in 2002 includes a $246 million write-off of acquired in-process research and development costs related to Conoco’s natural gas-to-liquids and other technologies. See page 44 in Management’s Discussion and Analysis for further information.

Emerging Businesses
Technologies Position
ConocoPhillips for the Future

ConocoPhillips’ emerging businesses — including fuels technology, gas-to-liquids, power generation and emerging technologies — are closely aligned with the company’s core businesses and provide future potential growth opportunities.

Another emerging business, carbon fibers, was shut down in early 2003 after a careful review of a number of different continuation options and as the result of the cumulative effect of market, operating and technology uncertainties.

According to John Lowe, executive vice president of Planning and Strategic Transactions, Emerging Businesses has two primary areas of focus: monitoring all the technological advances taking place in the industry and finding low-cost options related to strategic technology that can competitively position the company over the next 10 to 20 years.

“We have a disciplined and consistent process for prioritizing the funds we dedicate to emerging businesses,” explains Lowe. “The opportunities must be significant, we must have a core competency in the area and we must feel that we can create a competitive advantage. We must prove the technologies work before we assume they can produce returns. We won’t invest large amounts of money into any technologies until they are proven and will provide returns that can compete with upstream and downstream projects.”

S Zorb Units Will Produce Cleaner Fuels
ConocoPhillips is continuing to license its S Zorb™ Sulfur Removal Technology to refiners. The company also is generating additional value by applying the innovative process within its own North America refining system.

“S Zorb is an effective technology for reducing the amount of sulfur in transportation fuels,” says Brian Evans, manager of fuels technology. “Potential customers include any refiner that must meet impending government requirements for lower levels of the pollutant in their gasoline and diesel fuels.”

In 2002, several refiners in North America began engineering work on S_Zorb gasoline units. First production from a non-ConocoPhillips S_Zorb gasoline unit is expected in 2004. Also, ConocoPhillips signed its first two combined gasoline and diesel licenses with major refiners in Asia and North America.

The company’s first S Zorb diesel unit is in the planning stages at the Billings, Mont., refinery, and construction is under way on an S Zorb gasoline unit at ConocoPhillips’ Ferndale, Wash., refinery. S Zorb gasoline units are being studied for the Sweeny, Texas, and Lake Charles, La., refineries.

S Zorb has received accolades for its environmental benefits, including the Texas Natural Resources Conservation Commission’s Environmental Excellence Award for Innovative Technology and Business Week’s Global Energy Award for Most Innovative Commercial Technology.

New Plant Demonstrates Gas-to-Liquids Technology
Commissioning of the company’s new gas-to-liquids (GTL) demonstration plant in Ponca City, Okla., will begin in 2003. The GTL process produces clean liquid fuels from natural gas. Once the technology is proven, ConocoPhillips will be capable of constructing full-scale GTL facilities.

“The successful operation of our new demonstration plant using ConocoPhillips’ proprietary technology will take the company to the next level by providing valuable engineering and design data for a commercial-scale plant,” says Jim Rockwell, manager of GTL.

In addition to providing data to be used in designing a commercial-scale plant, the new demonstration plant will allow potential joint-venture partners — primarily owners of stranded gas reserves around the world — to fully evaluate ConocoPhillips’ GTL technology. That technology includes a unique synthesis gas process — the first step in converting natural gas to a liquid — that has been recognized as being more efficient and producing fewer emissions than other processes currently available.

Power Projects Lower Costs and Leverage Gas Assets
“ConocoPhillips looks for opportunities to reduce costs, improve reliability and increase integration,” says Mike Swenson, manager of power, midstream gas and water. “We can do this by integrating power projects with upstream developments and through the development of combined heat and power — or cogeneration — facilities in conjunction with company sites, like the project under way at the Humber refinery in the United Kingdom.”

A 730-megawatt cogeneration plant will supply steam and electricity to the company’s Humber refinery. Excess steam will go to a neighboring refinery and excess electricity will be fed into the country’s national grid. The plant also will have the design capacity to provide power and heat to other companies in the area. The plant is scheduled to come onstream in 2004.

Pioneering the Future of Energy
The role of emerging technologies is to develop strategic new business opportunities that will provide growth options for ConocoPhillips well into the future. The emerging technologies portfolio includes a variety of business ventures and technical programs that are pioneering the future energy landscape, including renewable energy, advanced refining processes, energy conversion technologies and hydrocarbon upgrading opportunities.

Ann Oglesby, manager of emerging technologies, explains, “We start by identifying focus areas that include markets, products or technologies that may be opportunity areas for ConocoPhillips. Within a focus area, we assess the commercial and technical issues that must be addressed to lead to a successful business.”  

Emerging technologies follows a structured process for screening opportunities and progressing those with the most potential along a phased development program. Some programs are based on internal research and development, while others are developed jointly with third parties including small and large companies, universities, government and industry organizations. In all cases, emphasis is placed on ensuring a sufficient strategic business case to warrant development.