ith U.S. refining utilization rates significantly above the industry average in 2007, ConocoPhillips’ Refining and Marketing (R&M) business benefited from strong margins and operational results and achieved record-breaking financial performance for the second year in a row.

In addition, several newly completed strategic projects have positioned R&M for future profitability. A 50/50 business venture with EnCana Corporation was successfully initiated, comprised of a downstream limited liability company and an upstream partnership. The downstream company is anchored by the Wood River refinery in Roxana, Ill., and the Borger, Texas, refinery. Both are being modified to increase their capacity to process heavy crude oil from Canada, while the venture’s upstream partnership provides long-term access to cost-advantaged crude oil.

During 2007, a new 25,000 barrel-per-day (BPD) coker and 75,000 BPD vacuum unit started up at the Borger refinery to process heavier crude oil and increase clean fuels production. The units meet regulatory requirements for low-sulfur fuels while also reducing emissions and lowering maintenance and operating costs. A debottlenecking project at the Ferndale, Wash., refinery increased its crude capacity by 4 percent and improved its energy efficiency.

“Operating excellence, cost control, margin enhancement and good portfolio management are vital to our competitive position and financial success,” says Jim Gallogly, executive vice president, Refining, Marketing and Transportation. “We have a number of initiatives under way to gain maximum value from our existing assets while further improving our already-strong safety and environmental performance.”

Safe, Reliable Operations

“Our operating excellence strategy is focused on ensuring that we operate safely and reliably while reducing our environmental impact,” Gallogly says. “Operating excellence forms the basis for everything we do.”

This emphasis resulted in improved employee safety performance in 2007. R&M is currently implementing enhanced standards for process and personal safety that focus on critical elements such as asset integrity inspections, facility siting, change management and incident investigations. A specialized team is auditing refining process safety to identify improvement opportunities and share best practices.

The company’s focus on safety also is evident in the number of facilities that have qualified for “Star” status under the U.S. Occupational Safety & Health Administration’s Voluntary Protection Program, which distinguishes work sites that achieve exemplary safety and health standards. The Bryan, Texas, Flow Improver facility and Sweeny, Texas, refinery earned this status in 2007, while the Wood River refinery and Gulf Coast Lubricants plant also were recommended for this status. The goal is for all of R&M’s U.S. operating facilities to earn this distinguished certification.

High operating reliability helped R&M achieve a U.S. refining crude oil capacity utilization rate of 96 percent, exceeding the industry average for the sixth consecutive year, and a combined U.S. and international utilization rate of 94 percent. R&M has improved reliability through risk-reduction best practices, infrastructure modernization, operator training and key debottlenecking projects at several U.S. refineries.

R&M also is working to reduce the environmental impact of its refineries through projects to lower emissions of sulfur dioxide and nitrogen oxide more than 70 percent and 35 percent, respectively, by 2012. These include installation of flare gas recovery systems and modifications to heaters and fluid catalytic cracking units at the U.S. refineries. In addition, reductions in carbon dioxide emissions are being achieved through energy-efficiency improvements.

Water-use assessments were completed at several refineries in 2007, with more planned in 2008 to identify ways to recycle water and reduce fresh-water consumption.

R&M continues increasing its clean fuels production while incorporating more biofuels and renewable fuels into the refined products mix. In late 2007, the Borger refinery began producing renewable diesel fuel made from by-product animal fats through an alliance with Tyson Foods. Additionally, most of the U.S. product storage terminals have been upgraded to blend ethanol, and several are being upgraded to distribute biodiesel. In Europe, the Whitegate refinery in Ireland began producing renewable diesel fuel in 2006, and the company expects to increase sales of biofuels in European markets in 2008.

The company has completed the first phase of its clean fuels upgrades, centered on ultra-low-sulfur diesel fuel and low-sulfur gasoline. Future clean fuels projects will involve reducing the amount of benzene in gasoline.

 

Addressing the Rising Cost Environment

R&M continually optimizes its operations and asset portfolio to manage the impact of high inflation rates on its business. The disposition of certain nonstrategic transportation and marketing assets in the United States, Europe and Asia will result in the elimination of approximately $250 million in controllable costs going forward. These assets were divested during 2007 and in the first quarter of 2008. More than 750 U.S. retail sites also are planned for sale, allowing R&M to focus on the wholesale channel of trade to optimize sales volumes to desired refining integration levels.

Another way R&M manages costs is through increasing its capacity to process heavier, cost-advantaged crude oil. The new coker unit at the Borger refinery enables it to process heavy Canadian crude oil. A planned upgrade of the fractionator unit at the Billings, Mont., refinery also will increase heavy Canadian crude oil processing capacity, as well as improve efficiency and energy usage at the facility.

Energy consumption is one of R&M’s biggest operating costs, and the business is incorporating efficiency improvements into its slate of capital projects. Efficiency initiatives at the Billings and Lake Charles, La., refineries earned the U.S. Environmental Protection Agency’s Energy Star award for facilities that achieve top-quartile energy efficiency.

“The costs of materials, labor, feedstocks and other critical resources are rapidly increasing,” Gallogly says. “We’re adapting to this environment and controlling our costs by ensuring that our operations run as efficiently and reliably as possible.”

 

Building on Our Base

R&M’s capital investments are aimed at maintaining and enhancing existing refineries to increase their output of higher-value clean fuels, raise overall distillation capacity, and enable them to process heavier and higher-sulfur crude oils that are lower in cost. The company also is pursuing several major downstream growth opportunities to complement these enhancements.

“Through expansion projects at existing refineries over the next five years, we will add enough clean fuels production on a net basis to equal an average-sized new refinery,” Gallogly says.

For example, a 20,000 BPD hydrocracker under construction at the Rodeo facility of the San Francisco refinery will increase clean fuels production by 12 percent and improve energy efficiency. Other projects are planned for the Ferndale, Los Angeles, Billings and Bayway refineries.

Through the joint venture with EnCana, a major expansion planned for the Wood River refinery will leverage the company’s upstream position by more than doubling the refinery’s capacity to process bitumen-based crude oil produced in Canada, while increasing overall crude oil capacity and clean product yields. Also, an investment in the proposed Keystone pipeline that will carry crude oil from Canada to the United States will further leverage ConocoPhillips’ upstream position in Canada.

Several major international refining capital investments also are planned, including an upgrade project at the Wilhelmshaven refinery in Germany to enable it to process heavier, higher-sulfur crude oil and produce more low-sulfur diesel fuel and gasoline.

In Saudi Arabia, ConocoPhillips is working with Saudi Aramco on the development of a proposed new joint venture 400,000 BPD full-conversion refinery in Yanbu. The facility would process heavy crude oil into high-quality refined products for export into world markets. Plans also are proceeding to expand processing capacity at the Melaka joint-venture refinery in Malaysia by 20,000 net BPD.

“We are selectively investing in major projects that enhance opportunities for profitability and support the company’s upstream business,” Gallogly says. “In addition, our employees’ commitment to continuous improvement in safety, environmental stewardship and reliability will help R&M retain its strong competitive advantage.”