Case Study: Energy Security v. Energy Independence Alexandra Thompson --- [email protected] Joel Eagle --- [email protected] --------------------------------------------------------

Case Study: Energy Security v. Energy

Independence

Alexandra Thompson --- [email protected] Eagle --- [email protected]

--------------------------------------------------------Energy Law, Spring 2007Chicago-Kent College of Law

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

…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

Consistent Theme

U.S “Addicted to Oil”

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.”

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.

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 and demand 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

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.

Energy Independence v. Energy Security

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.

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

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.


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.


From 1885-1913 Standard Oil controlled Continental


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


– 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.


– 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.


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.


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.


1931 – Phillips builds the first long-distance multi-product pipeline.

1951 – Phillips invents polypropylene plastics.

2001 – Phillips acquires Tosco Corporation.


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


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.


– 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.


– 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


– Investing in 4 emerging businesses

Technology solutions

Carbons-to-liquids

Power generation

Alternative energy and programs

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.

Main Themes of Conversations

1. Poor Communication in Oil Industry

2. Low Credibility in Oil Industry

3. 4 Steps to Energy Security

4. Need for Education

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.”

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

3. Energy Security

ConocoPhillips’ 4 Steps to Energy Security

1. Energy Source Diversification

2. Greater Energy Efficiency

3. More Innovation and R&D

4. Environmental Protection

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

Ethanol – Not a Silver Bullet

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

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?”

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.

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



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

Additional Ethanol Concerns

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

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.

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.

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.”

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.

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

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

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

1. ConocoPhillips & Tyson Foods

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

ConocoPhillips & Tyson Foods

Plan to use beef, pork and poultry by-product fat to create a transportation fuel


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.


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.


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.


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.


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.


Proprietary thermal depolymerization production technology.

Animal fats will be processed with hydrocarbon feedstocks to produce high-quality diesel fuel that meets all federal standards.

The addition of animal fat will improve the fuel’s ignition properties.

The processing steps will improve the fuel’s storage ability and handling characteristics.


Thermal depolymerization technology

– Process for the reduction of complex organic materials into light crude oil.

– Mimics the natural geological processes.

– Under pressure and heat, long-chain polymers of hydrogen, oxygen and carbon are decomposed into short-chain hydrocarbons with a maximum length of around 18 carbon atoms.


“ConocoPhillips believe the key to a secure energy future is the development and efficient use of diverse energy sources. This alliance will provide a new and significant contribution to our nation’s domestic renewable fuel supply. It also offers an excellent opportunity to use our company’s manufacturing expertise and advanced technology to help increase the supply of renewable fuels and to reduce greenhouse gas emissions.”

--Jim Mulva, ConocoPhillips Chairman & CEO



The processing technology was developed by a cross-functional team at ConocoPhillips and was tested successfully at the company’s Whitegate refinery in Cork, Ireland, in 2006.


Energy Policy Act of 2005

- Provides tax subsidies of 51 cents per gallon of ethanol and $1 per gallon of biodiesel


Early April, 2007, IRS issued Notice 2007-37

– Ruling interprets thermal depolymerization “generically.”

– The Energy Policy Act of 2005 and its legislative history do not specify whether a process that uses catalysts is a thermal depolymerization process.

– IRS said it was.– Upon this finding, ConocoPhillips and Tyson

foods announced their co-venture.


Rep. Lloyd Doggett, D-TX, plans to introduce legislation that would repeal the Treasury Department’s interpretation.

“There appears to be abuse that demands legislative correction.”

– Lloyd Doggett


In addition, the National Biodiesel Board, which represents companies primarily using soybean oil to make fuel, does not agree with ConocoPhillips’ and Tyson’s ability to use the tax incentive.

“We’re not opposed to refiners converting a portion of their capacity into renewable capacity. But we believe it’s bad public policy for taxpayers who are paying as much as $3 for a gallon of gasoline to have their taxes pay another dollar for this.”

--Joe Jobe, CEO of the National Biodiesel Board


Denying the companies the right to use the tax credit “will only serve to limit the expansion and availability of alternative fuels and also damage the ability of livestock farmers and ranchers to participate in the renewable energy business.”

--Gary Mickelson, spokesman for Tyson Foods


Cost of using animal fat as a feedstock: $2 per gallon, or about $84 per barrel.

Crude oil futures at above $63 per barrel on the NYME.

With the tax credit the cost of using animal fat as a feedstock:

$1 per gallon, or about $42 per barrel.


“Without the tax credit, it wouldn’t be commercial. With the tax credit, it’s just barely commercial.”

--Jim Mulva, CEO, ConocoPhillips


“If we’re trying . . . to reduce our dependence on foreign oil and have more homegrown energy sources, every bit of flexibility we can provide in getting bio-mass converted to usable forms of transportation is absolutely needed for this country.”

--Cal Hodge, President of A 2nd Opinion, a fuels consulting firm which supports the Treasury’s decision.


Several agricultural groups such as the National Cattlemen’s Beef Association, the National Chicken Council and the Texas Cattle Feeder Association support the broader interpretation.

Subsidy for Big Oil? Or helping farmers and ranchers and fostering production of alternative fuel?

2. ConocoPhillips & Iowa State University

April, 2007 – ConocoPhillips established a $22.5 million biofuels research program.

Initial grant of $1.5 million in 2007.

$3 million each year for 7 years thereafter.

ConocoPhillips & Iowa State University

Research will include converting biomass to fuel through fast pyrolysis

– Process that uses heat in absence of oxygen to decompose biomass into a liquid product.

– This bio-oil can be used as a heating oil or can be converted into transportation fuel at petroleum refineries.


COP will also sponsor studies of other thermochemical technologies that produce biofuels

Research to understand and support environmental sustainability and rural economies

– Emphasizing crop improvement and production

– Harvesting and transport of biomass

– Impacts of biofuels on economic policy and rural sociology


ConocoPhillips’ staff scientists will not work regularly on Iowa State's campus.

The university will own the rights to any inventions discovered with ConocoPhillips’ money, but the company will have first rights to an exclusive license.

ConocoPhillips will have a right to delay publication of scholarly findings for up to 45 days to ensure that none of its proprietary information is inadvertently released.


“ConocoPhillips is developing long-term relationships with respected academic institutions such as Iowa State to research extensions of traditional energy sources that ultimately will benefit consumers."

--Jim Mulva, Chairman & CEO

3. Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation Project

5-year program, began in 2004 Funded in part by DOE grant COP, automakers, CA universities, government

agencies Goal: continue to demonstrate and validate

advancements in hydrogen-based transportation infrastructure

COP will provide six of 24 CA fueling stations and will provide hydrogen produced from natural gas and renewable energy sources

4. Whitegate Refinery Cork, Ireland

Renewable diesel production

Uses soybeans and other vegetables to produce renewable diesel that meets European Union diesel fuel standards

Crude oil discharging

at Whitegate

Whitegate Refinery (cont.)

Tyson Project Process may be used to

convert animal fats and oils to renewable diesel

2006 – Developed the technology to co-process beef, pork and chicken fat with hydrocarbon feedstocks at Whitegate facility.

Aerial View of Whitegate

5. FreedomCAR and Fuel Partnership

Began in September 2003 Goal – Research technologies

for cars/light trucks and fueling infrastructure to reduce foreign oil import dependence – without sacrificing freedom and mobility and vehicle choice.

Promote hydrogen dialogue and research

DOE, BP America, Chevron Corporation, ConocoPhillips, Exxon Mobil Corporation, Shell Hydrogen LLC, and the United States Council for Automotive Research (USCAR)—a legal partnership among DaimlerChrysler Corporation, Ford Motor Company, and General Motors Corporation.

6. Clean Coal Technology

Wabash River Coal Gasification Repowering Plant in Indiana has been using ConocoPhillips’ E-Gas Technology on a commercial basis since 1995.

E-Gas Technology converts coal and petroleum coke, which may have a negative economic value, into a clean synthesis gas containing hydrogen. The process allows virtually all pollutant-forming impurities to be removed.

Clean Coal Technology

2004 – ConocoPhillips and Excelsior Energy announced plans for a technology licensing agreement for an IGCC facility using the E-Gas Technology, called the Mesaba Energy Project.

Being built in Minnesota and is expected to be operational by 2012.

Will be one of the cleanest and most efficient coal-fired power generating facilities in the world.

7. Liquid Natural Gas (LNG)

ConocoPhillips built the first LNG carrier used for international trade in 1959.

The company also built the first successful commercial liquefaction facility in 1969 in Kenai, Alaska, which it continues to safely operate today.

ConocoPhillips’ LNG technology is employed in Trinidad and planned for use in Egypt, Equatorial Guinea, Australia and Nigeria.

Construction has begun on a regasification terminal in Freeport, Texas

– Will connect with the Texas intrastate gas pipeline system. – Rights to approximately 1 billion cubic feet per day of the

terminal’s capacity. – Estimated startup: 2008.

Other COP Social Initiatives

1. Kuukpikmuit Subsistence Oversight Panel: Designed to identify and minimize conflict between COP and Native Alaskans

2. Indonesia Workforce Program: Aids in development of a skilled workforce

1. Kuukpikmuit Subsistence Oversight Board (KSOB)

ConocoPhillips operates the first production facility on Native Alaskan land at the Alpine field.

ConocoPhillips and Nuiqsut community developed the KSOB to help identify and minimize conflict between Alpine operations and traditional practices.

The KSOB consists of Nuiqsut residents and monitors the health of subsistence resources on Kuukpik lands and identifies any impact that exploration, development or production activities might have on those resources.

2. Indonesia Workforce Program

1-year new engineer training program.

Program teaching high school students about drilling and other skills for working in offshore operations.

Joined with a group of companies to create vocational training workshop in Natuna.

IV. Environmental Protection

Ties into everything ConocoPhillips does

Cannot operate without following all environmental laws & regulations

Must think about carbon emissions and climate change

ConocoPhillips and USCAP

U.S. Climate Action Partnership (USCAP) April 2007 – COP joined USCAP to support

mandatory national framework to address greenhouse gas emissions

Need businesses to step forward to provide solutions to climate change problem

COP building potential long-term cost of carbon into capital spending for major projects

Developing internal targets for GHG emissions from its operations

ConocoPhillips and USCAP

Requirements of Carbon Reduction Framework:

Transparent Clearly communicate cost of carbon to

consumers. Structured to avoid increasing energy price

volatility Encourage energy efficiency Paced to match speed of developing technology

Environmental Protection

Greater environmental responsibility (shrinking environmental footprint) = Broader discretion in operations

Sustainable Development

4 ‘A’s’ of Sustainable Development

1. Affordable to end user

2. Adequate returns to suppliers

3. Available any time

4. Acceptable impacts to society and environment

Sustainable Development

No single energy source completely satisfies all 4 “A’s”

Must strive for as many as possible

Leads to need for energy source diversification

Interdependence (a.k.a. Energy Security )

Ways to facilitate supplies outside of U.S.

1. Canadian oil sands (same size as Saudi Arabian fields)

2. Find partnerships in countries with the remaining 93% ownership (COP owns 20% of Russian oil co. LUKOIL)

3. Broker peaceful relations with Iraq, Iran, Venezuela – trade and appropriate agreements (not doing great job so far)

REALITY: So much reserves in foreign lands, we need them.

Interdependence (a.k.a. Energy Security )

4. Domestic supplies in coastal fields, Alaska (ANWR) – difficult for environmental reasons• Need to develop new technologies

- Only 25-30% accessible, need technological improvements to get hard-to-reach 70-75%

• No longer pursuing oil in ANWR

• Cut ties with Arctic Power

Interdependence (cont.)

5. Methane hydrates: Natural gas trapped in ice slush at bottom of the ocean Geographically well-distributed globally Contain 7% more NG than in traditional source areasAs oil/gas prices increase, these sources will become

more necessary

6. Stranded oil/gas reserves: using new technology to acquire new resources at old Texas fields

The Future of U.S. Oil Dependence

Is this the Future?

Some Opinions of Energy Independence

“The concept of ‘energy independent’ is ridiculous, unachievable, and perhaps not desirable”

-- Mark Mathis, Responsiblenergy.org

“Energy independence is not really possible in the U.S., and the public needs to shift to the more practical goal.”

-- Jim Mulva, CEO, ConocoPhillips

Rocky Mountain Institute

Winning the Oil End Game, RMI4 Steps to Energy Independence:

1. Double the Efficiency of Using Oil: Ultralight vehicle design

a. Advanced composite or lightweight-steel materials can nearly double the efficiency of today's popular hybrid-electric cars and light trucks while improving safety and performance.

b. The vehicle's total extra cost is repaid from fuel savings in about three years

Rocky Mountain Institute (cont.)

2. Apply creative business models and public policies to speed the profitable adoption of super-efficient light vehicles, heavy trucks, and airplanes.

3. Provide another one-fourth of U.S. oil needs through major domestic biofuels industry

4. Save half the projected 2025 use of natural gas

a. Use the saved gas instead of oil

b. Convert gas into hydrogen

The Future of the Oil Industry according to RMI

What happens to the oil industry? Shell, BP, ConocoPhillips already shifting from Oil

companies to Energy companies. “Done right, this shift can profitably redeploy their skills

and assets rather than lose market share.” Biofuels are already becoming a new product line that

leverages existing retail and distribution infrastructure and can attract another $90 billion in biofuels and biorefining investments.

Oil may, however, retain or even gain value as one of the competing sources of hydrogen.

IV. Educate the Youth

Educate young children on energy efficient lifestyle – need cultural changes– Carpooling– Consolidating car trips– Living closer to work– Utilize mass transit

Education at ConocoPhillips

Active in communities where there are COP facilities (refineries and research)

Community Outreach at grade schools and high schools

40-50% of ConocoPhillips’ 38,000 employees are within 5 years of retirement– Educate college students to be geo-scientists,

project managers, all types of jobs

Conclusion

1. Energy Source Diversification: biofuels, hydrogen, liquid natural gas

2. Greater Energy Efficiency: increasing facility efficiency by 10% by 2012

3. More Innovation and R&D: increased by 50% in 2007, partnerships with Tyson, Iowa State University, DOE, car manufacturers, & industry competitors

4. Environmental Protection at ConocoPhillips: shrink environmental footprint, be environmental stewards

QUESTIONS/COMMENTS?

Case Study: Energy Security v. Energy Independence Alexandra Thompson --- [email protected] Joel Eagle --- [email protected] --------------------------------------------------------

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