Jim W. Nokes, Executive Vice President, Refining, Marketing, Supply and Transportation

Part of the San Francisco, Calif., refining unit, the Santa Maria facility is one of several ConocoPhillips refineries with coker units. The ability to produce petroleum coke enables ConocoPhillips to take advantage of lower-cost, heavy, high-sulfur crude oils.

ConocoPhillips’ marketing efforts rely on the strength of well-known brands such as Conoco and Phillips 66, and long-term relationships with independent marketers, like Jerry Perry (right) of Grace Petroleum in Carthage, Mo. Perry has marketed fuels and lubricants under both brands for more than 50 years. “We always felt we were working with the two best companies in the business,” says Perry. “With the combination of their marketer programs, we think we’re working with a truly great company.”

The company’s Humber refinery in the United Kingdom is one of the most advanced in Europe. Since it was built in 1969, approximately $750 million has been invested to enhance efficiency, safety and environmental protection. Additions in recent years include a vacuum distillation unit to process high-acid crude oil from the latest generation of North Sea fields; a wastewater plant to clean up discharges from the refinery; and a clean fuels plant producing ultra-low sulfur fuels years ahead of European legislation.

R&M earnings declined as the addition of the Conoco assets was more than offset by lower refining margins along with asset impairments.

Refining and Marketing
A Global Downstream
Leader Emerges

With the completion of its merger of equals in 2002, ConocoPhillips combined two strong organizations to create one of the largest downstream businesses in the world. 

The company’s global refining business includes interests in 18 refineries with a crude oil refining capacity of 2.6 million barrels per day (BPD). The marketing organization includes branded outlets in the United States, Europe and Asia. A comprehensive global transportation network, including shipping and pipelines, supports the refining and marketing assets.

Jim Nokes, executive vice president of ConocoPhillips’ global downstream business, believes that highly capable people are the most valuable assets realized in the merger.  “The merger created a strong business for ConocoPhillips,” says Nokes. “But it’s our people that make the difference. They have the talent, experience and dedication required to make it successful.”

Following the merger, the downstream organization has focused on integrating assets to maximize their combined capabilities. Nokes expects ConocoPhillips’ downstream organization to generate $470 million in annual synergies, a 135 percent increase over the original synergy target of $200 million.

The downstream organization has a straightforward strategy for achieving first-quartile performance. Says Nokes, “We will continue our relentless pursuit of operating excellence and a low cost structure, while leveraging integration within our global organization and with ConocoPhillips’ Exploration and Production segment.”

The downstream organization also plans to utilize in-house research and development capabilities to capitalize on proprietary desulfurization technology, as well as its expertise in alkylation and coking. ConocoPhillips’ strong technology and engineering resources will help deliver low-cost solutions as the company moves toward increasing its clean fuels production. 

ConocoPhillips is developing regional strategies within the United States to integrate its refining base with key marketing and transportation operations. The effort is focused on creating a sustainable, cost-competitive supply of fuels to ConocoPhillips’ customers and improving the company’s competitive position in each region.

“These strategies will enable us to improve our return on capital employed and create strong cash flow for ConocoPhillips,” adds Nokes.

Refining Gearing Up for Cleaner Fuels
In the United States, the merger brought together a network of 12 ConocoPhillips refineries with a total crude oil throughput capacity of some 2.2 million BPD, excluding refineries in Denver, Colo., and Woods Cross, Utah, that the company is divesting as part of an agreement with the U.S. Federal Trade Commission. Internationally, the merger resulted in ConocoPhillips having ownership or interest in six refineries in Europe and Malaysia.

The geographic diversity of ConocoPhillips’ refineries helps set the company apart from its competitors, especially in the United States. For example, ConocoPhillips benefits from having its refineries located throughout the country, which allows the company to take advantage of market opportunities wherever they occur. 

Coking units at several of the company’s refineries enable ConocoPhillips to process large volumes of heavy, high-sulfur, lower-cost crude oils. This capability helps mitigate the impact of fluctuations in crude oil prices and gives ConocoPhillips an advantage over other refiners that have limited flexibility in the types of crude oils they can process. 

ConocoPhillips is benefiting from recent and ongoing improvements at its refineries. Work progressed throughout 2002 on two major projects. A new fluid catalytic cracking unit expected to be fully operational in the second quarter of 2003 at the Ferndale, Wash., refinery will enable it to significantly improve gasoline production per barrel of crude oil input. A new polypropylene plant that became operational in March 2003 at the Bayway refinery in Linden, N.J., is capable of upgrading chemical feedstocks produced there into 775 million pounds per year of plastic resins used to manufacture automotive parts, textiles, films, carpets and other products.

The company is well under way with a program to meet regulatory clean fuels requirements throughout its refining system. The company plans to spend approximately $400 million per year for the next two years on clean fuels projects in the United States and already is well ahead of regulatory mandates for clean fuels specifications in Europe. 

A major expansion of the alkylation unit at the Los Angeles, Calif., refinery was completed in the first quarter of 2002, increasing its ability to produce non-MTBE (methyl tertiary-butyl ether) gasoline. Construction of a new ultra-low-sulfur diesel project is expected to begin in the second half of 2003 at the company’s San Francisco, Calif., refinery complex. The project will help improve air quality while making the refinery more efficient and competitive. The project also will enable the refinery to more efficiently process crude oil from the company’s operations on Alaska’s North Slope. A clean fuels project that will allow the Humber refinery in the United Kingdom to produce more ultra-low-sulfur gasoline is scheduled for completion by mid-year 2003.

ConocoPhillips’ clean fuels initiatives also are enhanced by the company’s proprietary S Zorb™ Sulfur Removal Technology (S Zorb). A 6,000-BPD S Zorb gasoline unit at the company’s Borger, Texas, refinery demonstrates the effectiveness of S Zorb to other refiners interested in licensing the technology. ConocoPhillips is building a larger S Zorb gasoline unit at its Ferndale, Wash., refinery.

Tom Nimbley, president of North America Refining, says the company intends to be the best refiner in the industry by making each of its refineries first-quartile performers. 

“To make our goal a reality, ConocoPhillips must be a safe, reliable and environmentally responsible operator,” says Nimbley. “We will maintain a competitive edge by processing lower-cost crude oils and by utilizing our integrated network and commercial expertise to maximize our return on assets.”

Marketing Builds Strength Through Wholesale Network
The merger created a global marketing network of 17,000 branded outlets, including almost 14,000 in the United States and some 3,000 in Europe and Asia, excluding those sites recently announced for divestiture.

In the United States, the company’s marketing assets, like its refining assets, are located in each major region, with outlets in 48 states. An extensive network of marketers and dealers operates more than 95 percent of these outlets. 

ConocoPhillips primarily markets gasoline under three U.S. brands: Conoco, Phillips 66 and 76. Conoco and Phillips 66 are strong brands in the Midcontinent, the Rockies and parts of the Southeast, while the 76 brand is popular on the West Coast.

Internationally, the company applies a strategic niche marketing approach to outperform the competition. In Europe, the company’s low-cost, high-volume network of some 2,900 outlets, primarily Jet branded, is supplied mainly by ConocoPhillips’ Humber refinery in the United Kingdom and the MiRO refinery in Karlsruhe, Germany — historically two of the most efficient refineries in Europe. ConocoPhillips markets under the Jet brand at 137 retail outlets in Thailand, where the company has captured 6 percent of the retail market. The company also is developing a network of outlets under the ProJET brand in Malaysia. 

Marketing is delivering synergies through consolidating staffs and administrative offices, implementing best practices, and finding more effective ways to utilize advertising, promotion and support programs. The company has made a strategic decision to focus its marketing efforts on wholesale and commercial customers. As part of an overall disposition program directed at reducing downstream assets by $1.5 billion to $2 billion over the next 18 months, ConocoPhillips plans to sell a large number of its retail stores.

Building on a long tradition, ConocoPhillips will continue to strengthen its relationships with independent marketers and provide ways to help improve their profitability and financial strength. Because the company’s portfolio includes strong regional brands, it makes strategic sense to move much of the company’s fuels products through the wholesale channel. 

According to Mark Harper, president of Wholesale Marketing for North America, ConocoPhillips intends to be an extremely reliable, low-cost supplier of quality products and efficient, value-adding systems to support its historic brands. 

“We can’t be successful unless our marketers and dealers also are financially sound,” Harper says. “We are committed to becoming an even more customer-focused, value-adding supplier for our marketers and dealers.”

One example of the company’s commitment to helping its marketers and dealers improve their profitability is a proprietary extranet Web site that provides quick, easy access to electronic forms, policies and guidelines related to each brand. This business-to-business sharing of electronic information streamlines communication, saving time and money.

Specialty Products Diversify Downstream Portfolio
ConocoPhillips manufactures and globally markets a number of high-value specialty products. These products include finished lubricants, specialty petroleum coke, proprietary pipeline flow improvers and solvents.  

The company markets lubricants under the Conoco, Hydroclear, Phillips 66, 76 and Kendall brands in the United States and in more than 40 other countries. The combination of the lubricant businesses has resulted in ConocoPhillips becoming the fourth-largest U.S. lubricant supplier. The company markets through a network of petroleum marketers, and directly to original equipment manufacturers, large end-users, retailers and installers.   

ConocoPhillips is a co-venturer in Penreco, a worldwide specialty products company manufacturing specialty oils for a variety of industries, including food, pharmaceuticals, cosmetics and household products. Penreco also markets specialty solvents and process oils.

Additionally, ConocoPhillips is a co-venturer in the Excel Paralubes base oil facility located in Lake Charles, La. This world-class facility produces almost 330 million gallons per year of high-quality base oils used in making lubricants.

With production sites in North America and Europe, ConocoPhillips is a major producer of high-value, premium grade petroleum coke, used in the steel and aluminum industries. “Our coke production capability provides significant economies of scale and logistical advantages relative to our competitors,” says Carin Knickel, president of Specialty Businesses. “Production facilities that are integrated with the company’s refineries — coupled with our proprietary technology — provide low operating costs and high-quality products to global customers.”

Transportation Focused on Lower Costs
In the United States, ConocoPhillips’ refining and marketing assets are linked through a transportation network of some 31,500 miles of crude oil, raw natural gas liquids and refined products pipelines, 82 terminals and a complement of truck and rail facilities. The company also operates a domestic barge and international marine business and maintains an unwavering commitment to safe, environmentally responsible operations. 

In support of its U.S. refining operations, ConocoPhillips charters a fleet of 15 double-hulled crude oil tankers, with capacities ranging from 650,000 to 1.1 million barrels. In addition, the company has agreements for the long-term chartering of five double-hulled crude oil tankers that are currently under construction to replace older vessels that supply its U.S. East Coast refinery operations. Delivery is expected in the second half of 2003. 

These combined transportation assets provide strategic opportunities to reduce refinery crude oil costs and improve regional integration between ConocoPhillips’ refineries and its marketing network. The company’s transportation infrastructure gives it the flexibility to provide cost-effective supply alternatives in response to changing market conditions.

“Our primary focus always is on providing safe, reliable, cost-effective and environmentally responsible transportation solutions for ConocoPhillips,” says Steve Barham, president of Transportation.