Alexandra Thompson --- alex5580@hotmail.com Joel Eagle --- jdeagle@hotmail.com ---------------------------------------

1. Case Study: Energy Security v. Energy Independence Alexandra Thompson --- alex5580@hotmail.com Joel Eagle --- jdeagle@hotmail.com -------------------------------------------------------- Energy Law, Spring 2007 Chicago-Kent College of Law

2. On Energy Independence… “At ConocoPhillips, we don’t believe that Energy Independence is practical, possible, or achievable. We need more research in all forms of potential energy. And we need to protect the environment in all we do.” --John Lowe, Executive Vice President of Commercial

3. …Why? “You can’t use a quarter [of the energy supply] but only have 3% of it here. So I just answered why we are in Saudi Arabia, why we are in Venezuela, why we are in Russia. Why are we out in all of these far-reaching places in the world? We’re trying to find oil, that’s why. We’re a country that consumes huge quantities of energy.” -- Jim Gallogy, Executive VP, Refining, Marketing, and Transportation, ConocoPhillips

4. Consistent Theme

5. George W. Bush, 2007 State of the Union Address “For too long, our Nation has been dependent on oil. America’s dependence leaves more vulnerable to hostile regimes and to terrorists, who could cause huge disruptions of oil shipments, raise the price of oil, and do great harm to our economy.” U.S “Addicted to Oil”

6. Dependence on Foreign Oil • U.S. imports roughly 60% of energy–liquids, oils and refinery product–and rising • U.S. – 4% of world’s population, consumes 25% of world’s energy • Independent companies own only 6-7% of world reserves • 93-94% owned by government controlled companies or governments themselves.

7. Imports, Demand and Oil Price DEMAND VARIES LITTLE WITH PRICE • According to the Oct. 2006 Report of the Council on Foreign Affairs: • If imports decrease anddemand decreases, prices may go down • But if imports decrease and demand remains high, prices will increase and consumers will be forced to seek higher-priced substitutes

8. World Energy Demand Three-fold increase in consumption: • As worldwide population grows, oil consumption expected to increase from 85 million barrels/day to 250 million barrels/day by 2030.

9. EnergyIndependence v. EnergySecurity • Independence: U.S. could supply all the country’s energy needs without relying on foreign energy sources. • Security: U.S. could provide the country’s energy needs through a variety of energy sources both domestically and internationally.

10. How to Reduce Energy Dependence • “If the goal is reducing dependence on Middle Eastern oil, the public must be willing to make dramatic changes: • Ethanol and biodiesel production • Reduction in usage • Research into new technologies • Realism “The choices we’re making today are not leading to energy independence” -- Lou Burke, ConocoPhillips

11. Introduction to ConocoPhillips The company which would eventually be known as Conoco was founded in 1875 as the Continental Oil and Transportation Co. by Isaac Elder Blake.

12. Introduction to ConocoPhillips • Blake and his company became one of the first petroleum marketers in the West. • Blake thought that if kerosene was imported from eastern refineries by railroad and sold in bulk in the West, prices would drop and demand would rise. Many western pioneers were still using candles and whale oil to light their homes at that time. • The company also sold candles and wax.

13. Introduction to ConocoPhillips From 1885-1913 Standard Oil controlled Continental

14. Introduction to ConocoPhillips Continental built the West’s first filling station in 1909 Continental was top marketer of petroleum products in the Rocky Mountain region In the next 20 years, Continental built 1000 more service stations in 15 states

15. Introduction to ConocoPhillips • In 1929 Continental Oil merged with Marland Oil, a petroleum company started in 1911 by E.W. Marland in Ponca City, OK. • Marland had access to a steady supply of crude and was an innovator of drilling techniques.

16. Introduction to ConocoPhillips • New company was named Continental Oil Company and it owned 3,000 wells and thousands of retail outlets spread over 30 states. • The company first began trading on the NYSE in September, 1929.

17. Introduction to ConocoPhillips On September 30, 1981 Conoco became a wholly owned subsidiary of DuPont, when 100% of its shares were purchased in the largest merger in U.S. history at that time. On October 22, 1998 Conoco split from DuPont and had the largest IPO in history at that time of $4.4 billion.

18. Introduction to ConocoPhillips • 1905 - Phillips brothers hit the first of 81 wells in a row. • 1917 – Phillips Petroleum Company was founded. • 1927 – Phillips begins marketing gasoline through service stations.

19. Introduction to ConocoPhillips • 1931 – Phillips builds the first long-distance multi-product pipeline. • 1951 – Phillips invents polypropylene plastics. • 2001 – Phillips acquires Tosco Corporation.

20. Introduction to ConocoPhillips ConocoPhillips was formed on August 30, 2002 by the merger of Conoco, Inc. and Phillips Petroleum Company of Oklahoma.

21. Introduction to ConocoPhillips Today ConocoPhillips has its headquarters in Houston, Texas and operates in more than 40 countries. The company has approx. 38,400 employees worldwide and assets of $183.7B.

22. Introduction to ConocoPhillips • Third largest integrated energy company in the U.S. based on market capitalization, oil and gas proved reserves and production. • Second largest refiner in the U.S. • Has the sixth largest total of proved reserves worldwide of nongovernment- controlled companies. • Fifth largest refiner based on crude oil capacity worldwide.

23. Introduction to ConocoPhillips • 4 Core activities worldwide • Petroleum exploration and production • Petroleum refining, marketing, supply and transportation • Natural gas gathering, processing and marketing • Chemicals and plastics production and distribution

24. Introduction to ConocoPhillips • Investing in 4 emerging businesses • Technology solutions • Carbons-to-liquids • Power generation • Alternative energy and programs

25. ConocoPhillips-Sponsored Conversations on Energy • ConocoPhillips 35 city tour • Town Hall meetings & community events • COP representatives, state & local governments, business and industry, and interested citizens • PURPOSE: Engage communities, invite questions and comments, and discuss alternative energy sources.

26. Main Themes of Conversations • Poor Communication in Oil Industry • Low Credibility in Oil Industry • 4 Steps to Energy Security • Need for Education

27. 1. Poor Industry Communication • ConocoPhillips reaching out – overcoming oil company’s historically poor communication • Jim Mulva, CEO: “Our industry, and our company, have not done an acceptable job of reaching out to public and the American consumer.” • John Lowe, Executive VP of Commercial: “Our industry has lost touch with public. We’re viewed as part of the problem. We want to be part of the solution.”

28. 2. Distrust of Oil Industry • American Petroleum Institute poll - “Out of 25 major industries that are polled and reviewed, the oil industry ranks last – last in credibility even behind tobacco.” • “High dose of reality” for oil industry and COP

29. 3. Energy Security ConocoPhillips’ 4 Steps to Energy Security • Energy Source Diversification • Greater Energy Efficiency • More Innovation and R&D • Environmental Protection

30. I. Energy Source Diversification • Ethanol • Biodiesel • Hydrogen • Oil sands & oil shale • Heavy oils • Additional liquid fuel technology (turning coal and natural gas into liquids) • Carbon sequestration

31. COP remains cautious of ethanol and biodiesels, but still sees a future for them Need government help: research and incentives/subsidies E85 – quality control will be very important Ethanol – Not a Silver Bullet

32. Iowa residents concerned about rising price of beef & dairy in response to rising corn prices Iowa Renewable Fuels Association: “Is a nickel more for a pork chop worth becoming more independent of foreign oil?” Ethanol

33. Health Risk of Ethanol • Is ethanol better for our health? • Stanford University Study: • A high blend of ethanol poses an equal or greater risk to public health than gasoline (which already causes significant health damage) • Computer modeling: simulation of atmospheric conditions throughout U.S., especially L.A.

34. Health Risk of Ethanol According to the study, using ethanol-based fuel instead of gasoline would likely increase the ozone-related death rate in Los Angeles by 9 percent in 2020

35. Health Risk of Ethanol • Results: E85 vehicles reduced atmospheric levels of two carcinogens (benzene and butadiene) but increased two others (formaldehyde and acetaldehyde) • E85 may increase ozone, similar effects to lungs and immune system. • No difference what E85 is made of: corn, switchgrass, or other plant product. • Alternative? Battery-electric, plug-in hybrid, hydrogen fuel cell vehicles, wind or solar powered energy

36. Ethanol produced mainly in middle of the country Ethanol cannot be shipped by pipeline Must be shipped by truck or rail These sources use energy to ship Additional Ethanol Concerns

37. Competitors • BP announced in 2005 plans to invest $8 billion over 10 years into an alternative energy division focusing on wind, solar, natural gas and hydrogen power. • In February of 2007 BP announced a plan to give $500 million over 10 years to a consortium with UC – Berkeley. • Chevron Corp owns part of a biodiesel plant along the Houston Ship Channel and has earmarked $5 billion for alternative and renewable energy technologies from 2002 through 2009 • Last year, Chevron Corporation pledged $25-million to the University of California at Davis and $12-million to Georgia Institute of Technology, both awards over five years, for research into alternative fuels.

38. Competitors • Shell has spent more than $1 billion on biofuels, wind, solar and hydrogen since 2000 and distributed nearly 100 million gallons of biofuels last year. • Stanford announced in 2002 that it would receive $225-million over 10 years from the Exxon Mobil Corporation and two other sponsors for a variety of research on renewable research, including biofuels. • Exxon Mobil Corp. isn’t seeking to invest in renewables because they aren’t viable without subsidies. The company had unprofitable investments in solar and nuclear energies.

39. Is Conoco Doing Enough? • According to pro-environment investment firm Trillium Asset Management, a ConocoPhillips investor: • ConocoPhillips is ignoring zero-carbon technology • Behind the curve • BP, Shell, and Chevron will have market share before ConocoPhillips joins the market • May 9 Shareholder meeting will consider whether to prepare a report on COP response to rising competitive and regulatory pressure to “significantly develop renewable energy sources.”

40. II. Greater Energy Efficiency Great lifestyle changes are needed • Must be more efficient with energy use. U.S has 4% of world’s population but consumes 25% of world’s energy. • 5-7% of electricity demand comes from “Parasitic Load” (home computers left on during the day, devices/chargers left plugged in, unused lights left on…) • ConocoPhillips U.S. refineries will improve efficiency by 10% by 2012.

41. Greater Energy Efficiency • ConocoPhillips Billings refinery earned EPA ENERGY STAR for superior energy performance • Top 25% in country • Based on design, operations, and maintenance - captures and recycles thermal energy used to make fuel • heat-recovery system from crude tower for preheating cold crude • intensive steam trap maintenance program to separate condensed water from a steam system and returns hot water to the boilers to generate more steam

42. III. Increased Innovation and R&D • Increasing 2007 technology R&D budget by 50% - to $150 million. • Employs 250 scientists, engineers, and researchers – exploring alternative and renewable energy sources

43. Current ConocoPhillips Projects 1. ConocoPhillips and Tyson Foods 2. Iowa State University Biodiesel Research Program 3. Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation Project 4. Whitegate Refinery for renewable diesel 5. Freedom Car & Fuel Partnership for Hydrogen Research 6. Clean coal application 7. LNG initiatives

44. 1. ConocoPhillips & Tyson Foods On April 16, 2007 ConocoPhillips and Tyson Foods, Inc. announced a strategic alliance to produce and market renewable diesel fuel.

45. ConocoPhillips & Tyson Foods Plan to use beef, pork and poultry by-product fat to create a transportation fuel

46. ConocoPhillips & Tyson Foods • Renewable diesel • Similar to biodiesel in that they use similar feedstocks • Different from biodiesel in that they have different processing methods and create chemically different products. • Renewable diesel is chemically equivalent to conventional diesel fuel and can be shipped and distributed through existing pipelines to distribution terminals unlike other biofuels which must be transported by rail or trucks.

47. ConocoPhillips & Tyson Foods Benefits of renewable diesel: • Produces lower life-cycle carbon emissions. • Increases energy security by using a domestic and renewable energy source. • Can be used in today’s vehicles. • Can be produced and distributed with existing refineries and fuel distribution systems. • Refinery quality control systems ensure product quality.

48. ConocoPhillips & Tyson Foods • Tyson will make capital improvements this summer in order to begin pre-processing animal fat in some of its North American rendering facilities. • ConocoPhillips will also be making capital expenditures to enable it to produce the fuel in several of its refineries.

49. ConocoPhillips & Tyson Foods • By the fourth quarter of 2007, ConocoPhillips’ Borger refinery will be the first to process the renewable diesel from fat from Tyson’s Amarillo beef rendering plant about 50 miles away.

50. ConocoPhillips & Tyson Foods • They will produce renewable diesel fuel mixtures that meet all federal standards for ultra-low-sulfur diesel. • Production is expected to eventually reach as much as 175 million gallons (4.2 million barrels) per year, roughly 3% of ConocoPhillips’ entire diesel production.