Oil and Gas Operations (Unaudited)

In accordance with SFAS No. 69, “Disclosures about Oil and Gas Producing Activities,” and regulations of the U.S. Securities and Exchange Commission (SEC), we are making certain supplemental disclosures about our oil and gas exploration and production operations. While this information was developed with reasonable care and disclosed in good faith, we emphasize some of the data is necessarily imprecise and represents only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent our current financial condition or our expected future results.

These disclosures include information about our consolidated oil and gas activities and our proportionate share of our equity affiliates’ oil and gas activities, covering both those in our Exploration and Production segment, as well as in our LUKOIL Investment segment. As a result, amounts reported as Equity Affiliates in Oil and Gas Operations may differ from those shown in the individual segment disclosures reported elsewhere in this report. The data included for the LUKOIL Investment segment reflects the company’s estimated share of OAO LUKOIL’s (LUKOIL) amounts. Because LUKOIL’s accounting cycle close and preparation of U.S. GAAP financial statements occur subsequent to our reporting deadline, our equity share of financial information and statistics for our LUKOIL investment are estimated based on current market indicators, publicly available LUKOIL operating results, and other objective data. Once the difference between actual and estimated results is known, an adjustment is recorded. Our estimated year-end 2007 reserves related to our equity investment in LUKOIL are based on LUKOIL’s year-end 2007 reserve estimates and include adjustments to conform them to ConocoPhillips’ reserve policy.

The information about our proportionate share of equity affiliates is necessary for a full understanding of our operations because equity affiliate operations are an integral part of the overall success of our oil and gas operations.

Our proved reserves include estimated quantities related to production sharing contracts (PSCs), which are reported under the “economic interest” method and are subject to fluctuations in prices of crude oil, natural gas and natural gas liquids; recoverable operating expenses; and capital costs. If costs remain stable, reserve quantities attributable to recovery of costs will change inversely to changes in commodity prices. For example, if prices go up then our applicable reserve quantities would decline. At December 31, 2007, approximately 12 percent of our total proved reserves, excluding LUKOIL, were under PSCs, primarily in our Asia Pacific geographic reporting area.

Our disclosures by geographic area for our consolidated operations include the United States (U.S.), Canada, Europe (primarily Norway and the United Kingdom), Asia Pacific, Middle East and Africa, Russia and Caspian, and Other Areas (primarily South America). In these supplemental oil and gas disclosures, where we use equity accounting for operations that have proved reserves, these operations are shown separately and designated as Equity Affiliates, and include Canada, Middle East and Africa, Russia and Caspian, and Other Areas. Canada includes our share of FCCL Oil Sands Partnership (FCCL). Middle East and Africa includes Qatargas 3. The Russia and Caspian area includes our share of Polar Lights Company, OOO Naryanmarneftegaz, and LUKOIL. Other Areas consists of the Petrozuata and Hamaca heavy-oil projects in Venezuela, which were expropriated on June 26, 2007.

 

Reserves Governance

The recording and reporting of proved reserves are governed by criteria established by regulations of the SEC. Those regulations define proved reserves as those estimated quantities of hydrocarbons that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved reserves are further classified as either developed or undeveloped. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods, while proved undeveloped reserves are the quantities expected to be recovered from new wells on undrilled acreage, or from an existing well where relatively major expenditures are required for recompletion.

We have a companywide, comprehensive SEC compliant internal policy that governs the determination and reporting of proved reserves. This policy is applied by the geologists, geophysicists and reservoir engineers in our E&P business units around the world. As part of our internal control process, each business unit’s reserves are reviewed annually by an internal team composed of reservoir engineers, geologists, geophysicists and finance personnel for adherence to SEC guidelines and company policy through on-site visits and review of documentation. In addition to providing independent reviews of the business units’ recommended reserve changes, this internal team also ensures reserves are calculated using consistent and appropriate standards and procedures. This team is independent of business unit line management and is responsible for reporting their findings to senior management and internal audit. The team is responsible for maintaining and communicating our reserves policy and procedures and is available for internal peer reviews and consultation on major projects or technical issues throughout the year.

All of our proved crude oil, natural gas and natural gas liquids reserves held by consolidated companies have been estimated by ConocoPhillips. Our policy with respect to equity affiliates is either to estimate the proved reserve quantities ourselves (applicable to those situations where we have a substantial engineering presence), or to rely on estimates prepared by the equity affiliate, and perform a reasonableness review of those assessments. Of the proved reserves attributable to equity affiliates at year-end 2007, 38 percent was based on assessments of the available data performed by ConocoPhillips. The remaining 62 percent, reflecting our equity interest in LUKOIL, was based on estimates prepared by the equity affiliate. These equity-affiliate-prepared estimates are reviewed by ConocoPhillips and adjusted to comply with our internal reserves governance policies.

In addition, during 2007, approximately 43 percent of our year-end 2006 E&P proved reserves were reviewed by an outside unrelated third-party petroleum engineering consulting firm. At the present time, we plan to continue to have an outside firm review a pro rata portion of a similar percentage of our reserve base over the next two years.

Engineering estimates of the quantities of recoverable oil and gas reserves in oil and gas fields and in-place crude bitumen volumes in oil sand mining operations are inherently imprecise. See the “Critical Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional discussion of the sensitivities surrounding these estimates.