10-K 1 d145414d10k.htm 10-K 10-K
Table of Contents

2015

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

[x]   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended         December 31, 2015                                             

OR

 

[  ]   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                  to                                 

Commission file number: 001-32395

ConocoPhillips

(Exact name of registrant as specified in its charter)

 

Delaware   01-0562944

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

600 North Dairy Ashford

Houston, TX 77079

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 281-293-1000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

     

Name of each exchange

on which registered

    Common Stock, $.01 Par Value     New York Stock Exchange
    6.65% Debentures due July 15, 2018     New York Stock Exchange
    7% Debentures due 2029     New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[x]  Yes    [  ]  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

[  ]  Yes    [x]  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[x]  Yes    [  ]  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[x]  Yes    [  ]  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [x]    Accelerated filer [  ]    Non-accelerated filer [  ]    Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ]  Yes    [x]  No

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $61.41, was $75.7 billion.

The registrant had 1,236,202,726 shares of common stock outstanding at January 31, 2016.

Documents incorporated by reference:

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2016 (Part III)

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item

       Page  
    PART I       

1 and 2.

 

Business and Properties

     1   
 

Corporate Structure

     1   
 

Segment and Geographic Information

     2   
 

Alaska

     4   
 

Lower 48

     6   
 

Canada

     9   
 

Europe and North Africa

     11   
 

Asia Pacific and Middle East

     14   
 

Other International

     19   
 

Competition

     22   
 

General

     23   

1A.

 

Risk Factors

     24   

1B.

 

Unresolved Staff Comments

     28   

3.

 

Legal Proceedings

     28   

4.

 

Mine Safety Disclosures

     29   
 

Executive Officers of the Registrant

     30   
 

 

PART II

 

  

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     32   

6.

 

Selected Financial Data

     33   

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     74   

8.

 

Financial Statements and Supplementary Data

     77   

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     173   

9A.

 

Controls and Procedures

     173   

9B.

 

Other Information

     173   
 

 

PART III

 

  

10.

 

Directors, Executive Officers and Corporate Governance

     174   

11.

 

Executive Compensation

     174   

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     174   

13.

 

Certain Relationships and Related Transactions, and Director Independence

     174   

14.

 

Principal Accounting Fees and Services

     174   
 

 

PART IV

 

  

15.

 

Exhibits, Financial Statement Schedules

     175   
 

Signatures

     184   


Table of Contents

PART I

Unless otherwise indicated, “the company,” “we,” “our,” “us” and “ConocoPhillips” are used in this report to refer to the businesses of ConocoPhillips and its consolidated subsidiaries. Items 1 and 2—Business and Properties, contain forward-looking statements including, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,” beginning on page 72.

Items 1 and 2. BUSINESS AND PROPERTIES

CORPORATE STRUCTURE

ConocoPhillips is the world’s largest independent exploration and production (E&P) company, based on proved reserves and production of liquids and natural gas. ConocoPhillips was incorporated in the state of Delaware on November 16, 2001, in connection with, and in anticipation of, the merger between Conoco Inc. and Phillips Petroleum Company. The merger between Conoco and Phillips was consummated on August 30, 2002.

In April 2012, the ConocoPhillips Board of Directors approved the separation of our downstream business into an independent, publicly traded energy company, Phillips 66. Each ConocoPhillips stockholder received one share of Phillips 66 stock for every two shares of ConocoPhillips stock held at the close of business on the record date of April 16, 2012. The separation was completed on April 30, 2012, and activities related to Phillips 66 have been treated as discontinued operations for all periods prior to the separation.

In 2012, we agreed to sell our interest in the North Caspian Sea Production Sharing Agreement (Kashagan) and our Nigeria and Algeria businesses (collectively, the “Disposition Group”). We sold our Nigeria business in the third quarter of 2014, and we sold Kashagan and our Algeria business in the fourth quarter of 2013. Results for the Disposition Group have been reported as discontinued operations in all periods presented. For additional information on all discontinued operations, see Note 3—Discontinued Operations, in the Notes to Consolidated Financial Statements.

Headquartered in Houston, Texas, we have operations and activities in 21 countries. Our key focus areas include safely operating producing assets, executing major developments and exploring for new resources in promising areas. Our portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; several major international developments; and an inventory of global conventional and unconventional exploration prospects.

At December 31, 2015, ConocoPhillips employed approximately 15,900 people worldwide.

We are marketing certain non-core assets across all of our segments. For additional information on asset sales, see the “Outlook” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 6—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements.

 

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SEGMENT AND GEOGRAPHIC INFORMATION

Effective November 1, 2015, the Other International and historically presented Europe segments were restructured to align with changes to our internal organization structure. The Libya business was moved from the Other International segment to the historically presented Europe segment, which is now renamed Europe and North Africa. Accordingly, results of operations for the Other International and Europe and North Africa segments have been revised in all periods presented. There was no impact on our consolidated financial statements, and the impact on our segment presentation is immaterial. For operating segment and geographic information, see Note 24—Segment Disclosures and Related Information, in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

We explore for, produce, transport and market crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids on a worldwide basis. At December 31, 2015, our continuing operations were producing in the United States, Norway, the United Kingdom, Canada, Australia, Timor-Leste, Indonesia, China, Malaysia, and Qatar.

The information listed below appears in the “Oil and Gas Operations” disclosures following the Notes to Consolidated Financial Statements and is incorporated herein by reference:

 

    Proved worldwide crude oil, natural gas liquids, natural gas and bitumen reserves.
    Net production of crude oil, natural gas liquids, natural gas and bitumen.
    Average sales prices of crude oil, natural gas liquids, natural gas and bitumen.
    Average production costs per barrel of oil equivalent (BOE).
    Net wells completed, wells in progress and productive wells.
    Developed and undeveloped acreage.

The following table is a summary of the proved reserves information included in the “Oil and Gas Operations” disclosures following the Notes to Consolidated Financial Statements. Approximately 84 percent of our proved reserves are located in politically stable countries that belong to the Organization for Economic Cooperation and Development. Natural gas reserves are converted to BOE based on a 6:1 ratio: six thousand cubic feet (MCF) of natural gas converts to one BOE. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of factors that will enhance the understanding of the following summary reserves table.

 

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     Millions of Barrels of Oil Equivalent  

Net Proved Reserves at December 31

                     2015                         2014                         2013   
  

 

 

 

Crude oil

        

Consolidated operations

     2,270         2,605         2,659    

Equity affiliates

     93         103         90    

 

 

Total Crude Oil

     2,363         2,708         2,749    

 

 

Natural gas liquids

        

Consolidated operations

     508         662         699    

Equity affiliates

     50         53         45    

 

 

Total Natural Gas Liquids

     558         715         744    

 

 

Natural gas

        

Consolidated operations

     1,988         2,543         2,710    

Equity affiliates

     878         874         688    

 

 

Total Natural Gas

     2,866         3,417         3,398    

 

 

Bitumen

        

Consolidated operations

     687         598         579    

Equity affiliates

     1,706         1,468         1,451    

 

 

Total Bitumen

     2,393         2,066         2,030    

 

 

Total consolidated operations

     5,453         6,408         6,647    

Total equity affiliates

     2,727         2,498         2,274    

 

 

Total company

     8,180         8,906         8,921    

 

 

Total production from continuing operations was 1,589 thousand barrels of oil equivalent per day (MBOED) in 2015, compared with 1,540 MBOED, including Libya, in 2014, an increase of 3 percent. The increase in total average production in 2015 primarily resulted from additional production from major developments, including tight oil plays in the Lower 48; Gumusut in Malaysia; APLNG in Australia; Greater Britannia projects and the J-Area in the U.K.; and the ramp-up of Foster Creek Phase F in Canada. Improved well performance, mostly in the Lower 48, western Canada and Norway, and lower turnaround activity also contributed to higher production in 2015. These increases were largely offset by normal field decline. Production from continuing operations was 1,589 MBOED in 2015, compared with 1,532 MBOED in 2014, excluding Libya, an increase of 57 MBOED, or 4 percent. Full-year production from assets sold or under agreement in 2015 was 64 MBOED.

Our total average realized price from continuing operations was $34.34 per BOE in 2015, a decrease of 47 percent compared with $64.59 per BOE in 2014, which reflected lower average realized prices across all commodities. Our worldwide annual average crude oil price from continuing operations decreased 48 percent in 2015, from $92.80 per barrel in 2014 to $48.26 per barrel in 2015. Additionally, our worldwide annual average natural gas liquids prices from continuing operations decreased 54 percent, from $38.99 per barrel in 2014 to $17.79 per barrel in 2015. Our worldwide annual average natural gas price from continuing operations decreased 40 percent, from $6.57 per MCF in 2014 to $3.96 per MCF in 2015. Average annual bitumen prices also decreased 66 percent, from $55.13 per barrel in 2014 to $18.72 per barrel in 2015.

 

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ALASKA

The Alaska segment primarily explores for, produces, transports and markets crude oil, natural gas liquids, natural gas and LNG. We are the largest crude oil and natural gas producer in Alaska and have major ownership interests in two of North America’s largest oil fields located on Alaska’s North Slope: Prudhoe Bay and Kuparuk. We also have a significant operating interest in the Alpine Field, located on the Western North Slope. Additionally, we are one of Alaska’s largest owners of state and federal exploration leases, with approximately 0.7 million net undeveloped acres at year-end 2015. Approximately 0.4 million of these acres are located in the National Petroleum Reserve—Alaska (NPRA) and the North Slope, and 0.3 million are located in the Chukchi Sea. In 2015, Alaska operations contributed 19 percent of our worldwide liquids production and 1 percent of our natural gas production.

 

       2015  
     Interest        Operator        
 
Liquids
MBD
  
   
 
Natural Gas
MMCFD
  
** 
   
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

           

Greater Prudhoe Area

     36.1     BP         90        10        92   

Greater Kuparuk Area

     52.2–55.5        ConocoPhillips         51        -        51   

Western North Slope

     78.0        ConocoPhillips         30        1        30   

Cook Inlet Area

     33.3–100.0        ConocoPhillips         -        31        5   

 

 

Total Alaska

          171        42        178   

 

 

*Thousands of barrels per day.

**Millions of cubic feet per day.

Greater Prudhoe Area

The Greater Prudhoe Area includes the Prudhoe Bay Field and five satellite fields, as well as the Greater Point McIntyre Area fields. Prudhoe Bay, the largest oil field on Alaska’s North Slope, is the site of a large waterflood and enhanced oil recovery operation, as well as a gas plant which processes natural gas to recover natural gas liquids before reinjection into the reservoir. Prudhoe Bay’s satellites are Aurora, Borealis, Polaris, Midnight Sun and Orion, while the Point McIntyre, Niakuk, Raven and Lisburne fields are part of the Greater Point McIntyre Area.

Greater Kuparuk Area

We operate the Greater Kuparuk Area, which consists of the Kuparuk Field and four satellite fields: Tarn, Tabasco, Meltwater and West Sak. Kuparuk is located 40 miles west of Prudhoe Bay. Field installations include three central production facilities which separate oil, natural gas and water, as well as a separate seawater treatment plant. Development drilling at Kuparuk consists of rotary-drilled wells and horizontal multi-laterals from existing well bores utilizing coiled-tubing drilling.

Drill Site 2S, in the southwestern area of the Kuparuk Field, was sanctioned in October 2014. First oil was achieved in October 2015 with net peak production estimated at 5 MBOED in 2016.

The 1H Northeast West Sak (NEWS) oil development targeting the West Sak reservoir in the Kuparuk River Unit, was sanctioned in March 2015. First production is anticipated in 2017.

Western North Slope

On the Western North Slope, we operate the Colville River Unit, which includes the Alpine Field and three satellite fields: Nanuq, Fiord and Qannik. Alpine is located 34 miles west of Kuparuk. In October 2015, first oil was achieved at Alpine West CD5, a new drill site which extends the Alpine reservoir west into the NPRA. Net peak production is estimated at 10 MBOED in 2016.

The Greater Mooses Tooth Unit, the first unit established entirely within the NPRA, was formed in 2008. In 2015, we received permit approvals and sanctioning from the regulatory agencies for the Greater Mooses Tooth #1 (GMT1) drill site. GMT1 is planned to be connected by road to the CD5 drill site, and production

 

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will be transported by pipeline to the existing Alpine facilities for processing. We are evaluating further exploration and development potential in the NPRA.

Cook Inlet Area

We operate the North Cook Inlet Unit, the Beluga River Unit, and the Kenai LNG Facility in the Cook Inlet Area. We have a 100 percent interest in the North Cook Inlet Unit and the Kenai LNG Facility, while we own 33.3 percent of the Beluga River Unit. Our share of production from the units is primarily sold to local utilities and is also used to supply feedstock to the Kenai LNG Plant.

The Kenai LNG Facility includes a 1.6 million-tons-per-year capacity plant, as well as docking and loading facilities for LNG tankers. LNG from the plant has historically been transported and sold to utility companies in Japan. The plant was idled in late-2012; however, due to a change in market conditions, including additional gas supplies, we were granted a two-year export license from the U.S. Department of Energy (DOE) in April 2014 to export up to 40 billion cubic feet of LNG from the facility. As a result, we shipped six cargoes of LNG from the Kenai Facility to Asia in 2015. In February 2016, our export license was renewed for an additional two years.

In the first quarter of 2016, we entered into an agreement to sell our interest in the Beluga River Unit natural gas field in the Cook Inlet Area. The transaction is expected to close in the second quarter of 2016.

Point Thomson

We own a 5 percent interest in the Point Thomson Unit, which is located approximately 60 miles east of Prudhoe Bay. An initial production system is anticipated to be online by second quarter 2016, which is estimated to send 400 net barrels of oil equivalent per day (BOED) of condensate through the Trans-Alaska Pipeline System (TAPS).

Alaska LNG (AKLNG)

During 2012, we, along with affiliates of Exxon Mobil Corporation, BP p.l.c. and TransCanada Corporation (collectively, the “AKLNG co-venturers”), began evaluating a potential LNG project which would liquefy and export natural gas from Alaska’s North Slope and deliver it to market. The AKLNG Project concept is an integrated LNG project consisting of a liquefaction plant, including marine terminal facilities and auxiliary marine vessels, located in south-central Alaska; a natural gas treatment plant, located on the North Slope; and an estimated 800-mile natural gas pipeline, which would connect the two plants.

The proposed AKLNG natural gas liquefaction plant and terminal would be located in the Nikiski area on the Kenai Peninsula, approximately 60 miles southwest of Anchorage, along the Cook Inlet. In January 2014, the AKLNG co-venturers, the Commissioners of the Alaska Departments of Revenue and Natural Resources, and the Alaska Gasline Development Corporation (AGDC), a state-owned corporation, signed a Heads of Agreement (HOA) for the AKLNG Project. The HOA provides a roadmap of how the parties intend to progress the project, including proposed terms for participation by the State of Alaska as an equity owner, proposed fiscal and regulatory terms, and proposed terms for expansion of project components. During 2014, general legislation was enacted by the State of Alaska, and a joint venture agreement for the preliminary front-end engineering and design phase of the project was executed. The AKLNG Project will require several major federal permits, and in July 2014, an application for an LNG export license was filed with the U.S. DOE to export up to 20 million metric tons a year of LNG for 30 years. In November 2014 and June 2015, the U.S. DOE authorized the export of LNG to free trade agreement (FTA) and non-FTA countries, respectively. In September 2014, the Federal Energy Regulatory Commission (FERC) accepted the project into pre-file status, which initiates the lengthy environmental and safety reviews required to design, permit, construct and operate the plants and pipeline. In March 2015, the FERC issued their Notice of Intent (NOI) to prepare the Environmental Impact Statement for AKLNG and begin the National Environmental Policy Act period to seek public comment. In October 2015, the Alaska Oil and Gas Conservation Commission (AOGCC) issued orders for gas offtake at Prudhoe Bay and Point Thomson. In December 2015, AGDC acquired the interest in the AKLNG Project previously held by TransCanada Corporation. On December 31, 2015 the HOA expired by its own terms. Commercial negotiations and planning for front-end engineering and design are ongoing.

 

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Significant engineering, technical, regulatory, fiscal, commercial and permitting issues would need to be resolved prior to a final investment decision on the potential $45 billion to $65 billion (gross) project.

Exploration

We plan to drill two to three exploration wells in 2016 in the NPRA.

Our plans to drill an exploration well in the Chukchi Sea have been cancelled due to the current market environment, regulatory uncertainty and expiry of the primary lease term in 2020. As a result, we recorded a $406 million after-tax charge for leasehold and capitalized interest impairment and dry hole expense in the fourth quarter of 2015.

Transportation

We transport the petroleum liquids produced on the North Slope to south central Alaska through an 800-mile pipeline that is part of TAPS. We have a 29.1 percent ownership interest in TAPS, and we also have ownership interests in the Alpine, Kuparuk and Oliktok pipelines on the North Slope.

Our wholly owned subsidiary, Polar Tankers, Inc., manages the marine transportation of our North Slope production, using five company-owned, double-hulled tankers, and charters third-party vessels as necessary. The tankers primarily deliver oil from Valdez, Alaska, to refineries on the west coast of the United States.

LOWER 48

The Lower 48 segment consists of operations located in the U.S. Lower 48 states and exploration activities in the Gulf of Mexico. The Lower 48 business is organized within three regions covering the Gulf Coast, Mid-Continent and Rockies. As a result of tight oil opportunities, we have directed our investments toward certain shorter cycle time, low cost-of-supply plays. In July 2015, we announced our plan to reduce future deepwater exploration spending and terminated our Gulf of Mexico deepwater drillship contract with Ensco. We hold 14.3 million net onshore and offshore acres in the Lower 48. In 2015, the Lower 48 contributed 33 percent of our worldwide liquids production and 36 percent of our natural gas production.

 

       2015  
             Interest                Operator        
 
        Liquids
MBD
  
  
    
 
        Natural Gas
MMCFD
  
  
    
 
Total 
        MBOED 
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Eagle Ford

     Various     Various         139         208         174    

Gulf of Mexico

     Various        Various         12         12         14    

Gulf Coast—Other

     Various        Various         8         182         38    

 

 

Total Gulf Coast

          159         402         226    

 

 

Permian

     Various        Various         42         122         62    

Barnett

     Various        Various         5         41         12    

Anadarko Basin

     Various        Various         6         109         24    

 

 

Total Mid-Continent

          53         272         98    

 

 

Bakken

     Various        Various         54         44         61    

Wyoming/Uinta

     Various        Various         -         95         16    

Niobrara

     Various        Various         5         2           

San Juan

     Various        Various         29         657         139    

 

 

Total Rockies

          88         798         221    

 

 

Total U.S. Lower 48

          300         1,472         545    

 

 

 

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Onshore

We hold 12.4 million net acres of onshore conventional and unconventional acreage in the Lower 48, the majority of which is either held by production or owned by the company. Our unconventional holdings total approximately 2.6 million net acres in the following areas:

 

    900,000 net acres in the San Juan Basin, located in northwestern New Mexico and southwestern Colorado.
    617,000 net acres in the Bakken, located in North Dakota and eastern Montana.
    216,000 net acres in the Eagle Ford, located in South Texas.
    109,000 net acres in the Niobrara, located in northeastern Colorado.
    102,000 net acres in the Permian, located in West Texas and southeastern New Mexico.
    61,000 net acres in the Barnett, located in north central Texas.
    553,000 net acres in other unconventional exploration plays.

The majority of our 2015 onshore production originated from the Eagle Ford, San Juan, Permian and Bakken. Onshore activities in 2015 were centered mostly on continued development of emerging and existing assets, with an emphasis on areas with low cost of supply, particularly in growing unconventional plays. The 2015 drilling activity levels declined relative to 2014 due to reduced capital spending in the low commodity price environment. Our major focus areas in 2015 included the following:

 

    Eagle Ford—The Eagle Ford continued full field development in 2015, with the majority of the development program being drilled on multi-well pads. We operated six rigs on average in 2015, resulting in 136 operated wells drilled and 150 operated wells brought online. In 2015, we also increased production by 12 percent compared with 2014 and achieved net peak production of 190 MBOED, compared with 179 MBOED in 2014.
    Bakken—We operated five rigs on average throughout the year in the Bakken. We continued our pad drilling efficiency, drilling 89 operated wells during the year and bringing 128 operated wells online. As a result, we achieved net peak production of 80 MBOED in 2015, compared with 63 MBOED in 2014.
    San Juan Basin—The San Juan Basin includes significant conventional gas production, which yields approximately 20 percent natural gas liquids, as well as the majority of our U.S. coalbed methane (CBM) production. We hold approximately 1.3 million net acres of oil and gas leases by production in San Juan, where we continue to pursue select conventional development opportunities. This also includes approximately 900,000 net unconventional acres of lease rights.
    Permian Basin—The Permian Basin is another area where we are leveraging our conventional legacy position by utilizing new technology to improve the ultimate recovery and value from these fields. This technology should also identify new, unconventional plays across the region. We hold approximately 1.0 million net acres in the Permian, which includes 102,000 net unconventional acres.

In the fourth quarter of 2015, we completed the sale of certain non-core assets in East Texas and North Louisiana and South Texas. Production from the assets sold was 33 MBOED, approximately 6 percent of the total Lower 48 segment production in 2015.

Gulf of Mexico

At year-end 2015, our portfolio of producing properties in the Gulf of Mexico primarily consisted of one operated field and three fields operated by co-venturers, including:

 

    75 percent operated working interest in the Magnolia Field in Garden Banks Blocks 783 and 784.
    15.9 percent nonoperated working interest in the unitized Ursa Field located in the Mississippi Canyon Area.
    15.9 percent nonoperated working interest in the Princess Field, a northern subsalt extension of the Ursa Field.
    12.4 percent nonoperated working interest in the unitized K2 Field, comprised of seven blocks in the Green Canyon Area.

 

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Exploration

 

    Conventional Exploration

In the third quarter of 2015, we decided not to conduct further activity on certain Gulf of Mexico leases. At December 31, 2015, we held approximately 1.8 million net acres in the deepwater Gulf of Mexico.

During 2015, we conducted appraisal drilling at Shenandoah, Tiber, and Gila. The nonoperated Gibson exploration and Tiber appraisal wells, and the ConocoPhillips operated Melmar exploration well are currently drilling.

We own a 30 percent nonoperated working interest in the Shenandoah discovery, which was announced in 2009. The third Shenandoah down dip appraisal well was spud in 2015, and planning is underway for the next appraisal well, which is expected to spud in the first half of 2016.

The operated Harrier and nonoperated Vernaccia wells were expensed as dry holes in 2015. The operator of the Gila prospect has elected to discontinue exploration and appraisal activity. Accordingly, we recorded $111 million in after-tax dry hole expense for a previously suspended well in the Gila prospect, and a $100 million charge for the impairment of undeveloped leasehold costs.

 

    Unconventional Exploration

Our onshore focus areas include the Niobrara in the Denver-Julesburg Basin and the Wolfcamp and Bone Springs in the Delaware Basin, as well as several emerging plays. In 2015, we drilled 21 unconventional wells in the Delaware Basin. We continue to assess and appraise this and other unconventional opportunities.

Facilities

Freeport LNG Terminal

In July 2013, we agreed with Freeport LNG Development, L.P. to terminate our long-term agreement to use 0.9 billion cubic feet per day of regasification capacity at Freeport’s 1.5 billion cubic-feet-per-day LNG receiving terminal in Quintana, Texas. The termination agreement conditions were satisfied in 2014. Our terminal regasification capacity has been reduced from 0.9 billion cubic feet per day to 0.4 billion cubic feet per day until July 1, 2016, at which time it will be reduced to zero. As a result of this transaction, we anticipate saving approximately $50 to $60 million per year in costs over the next 17 years. For additional information, see Note 7—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements.

Golden Pass LNG Terminal

We have a 12.4 percent ownership interest in the Golden Pass LNG Terminal and affiliated Golden Pass Pipeline, with a combined net book value of approximately $273 million at December 31, 2015. It is located adjacent to the Sabine-Neches Industrial Ship Channel northwest of Sabine Pass, Texas. The terminal became commercially operational in May 2011. We hold terminal and pipeline capacity for the receipt, storage and regasification of the LNG purchased from Qatar Liquefied Gas Company Limited (3) (QG3) and the transportation of regasified LNG to interconnect with major interstate natural gas pipelines. Utilization of the terminal has been and is expected to be limited, as market conditions currently favor the flow of LNG to European and Asian markets. As a result, we are evaluating opportunities to optimize the value of the terminal facilities.

Great Northern Iron Ore Properties Trust

We hold the interest in the Great Northern Iron Ore Properties trust (the Trust), a grantor trust that owns mineral and surface interests in the Mesabi Iron Range in northeastern Minnesota and certain other personal property. Pursuant to the terms of the Trust Agreement, the Trust terminated on April 6, 2015. At the end of the wind-down period, documents memorializing our ownership of certain Trust property, including all of the

 

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Trust’s mineral properties and active leases, will be delivered to us. The Trustees currently anticipate the wind-down process, final distribution and dissolution of the Trust will be completed by the end of 2016. At that time, we expect to recognize the fair value of the Trust’s net assets transferred to us.

Other

 

    San Juan Gas Plant—We operate and own a 50 percent interest in the San Juan Gas Plant, a 550 million cubic-feet-per-day capacity natural gas processing plant in Bloomfield, New Mexico.
    Lost Cabin Gas Plant—We operate and own a 46 percent interest in the Lost Cabin Gas Plant, a 313 million cubic-feet-per-day capacity natural gas processing facility in Lysite, Wyoming.
    Helena Condensate Processing Facility—We operate and own the Helena Condensate Processing Facility, a 90,000 barrel-per-day condensate processing plant located in Kenedy, Texas.
    Sugarloaf Condensate Processing Facility—We operate and own an 87.5 percent interest in the Sugarloaf Condensate Processing Facility, a 30,000 barrel-per-day condensate processing plant located near Pawnee, Texas.
    Bordovsky Condensate Processing Facility—We operate and own the Bordovsky Condensate Processing Facility, a 15,000 barrel-per-day condensate processing plant located in Kenedy, Texas.

CANADA

Our Canadian operations mainly consist of natural gas fields in western Canada and oil sands developments in the Athabasca Region of northeastern Alberta. In 2015, operations in Canada contributed 21 percent of our worldwide liquids production and 18 percent of our natural gas production.

 

       2015  
         Interest        Operator        
 
    Liquids
MBD
  
  
    
 
 
    Natural
Gas
MMCFD
  
  
  
    
 
    Bitumen
MBD
  
  
    
 
Total 
    MBOED 
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

                

Western Canada

     Various     Various         38         715         -         157    

Surmont

     50.0        ConocoPhillips         -         -         13         13    

Foster Creek

     50.0        Cenovus         -         -         65         65    

Christina Lake

     50.0        Cenovus         -         -         73         73    

 

 

Total Canada

          38         715         151         308    

 

 

Western Canada

Our operations in western Canada extend across Alberta and British Columbia. We operate or have ownership interests in approximately 50 natural gas processing plants in the region, and, as of December 31, 2015, held leasehold rights in 3.2 million net acres in western Canada. Our investments in 2015 were focused mainly on opportunities in the following three core development areas:

 

    Deep Basin—We hold leasehold rights in 1.4 million net acres in the Deep Basin, located in northwest Alberta and northeast British Columbia. In 2015, Deep Basin achieved average net production of 48 MBOED, and we drilled 13 horizontal wells.
    Kaybob-Edson—We hold leasehold rights in 0.8 million net acres in the Kaybob-Edson Area, located south of the Deep Basin in west central Alberta. Net production for Kaybob-Edson averaged 45 MBOED in 2015, and we drilled 15 horizontal wells.
    Clearwater—Located in west central Alberta, south of Kaybob-Edson, we hold 0.9 million net acres of leasehold rights. In 2015, average net production for Clearwater was 40 MBOED, and we drilled 11 horizontal wells.

 

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Assets located outside these development areas are focused on production optimization. In the fourth quarter of 2015, we finalized sales of certain non-core assets in British Columbia, Saskatchewan and Alberta. Production from the assets sold was 27 MBOED, approximately 9 percent of the total Canada segment production in 2015. At December 31, 2015, the company held 0.1 million net acres of leasehold rights in these areas.

Oil Sands

We hold approximately 0.9 million net acres of land in the Athabasca Region of northeastern Alberta. Our bitumen resources in Canada are produced via an enhanced thermal oil recovery method called steam-assisted gravity drainage (SAGD), whereby steam is injected into the reservoir, effectively liquefying the heavy bitumen, which is recovered and pumped to the surface for further processing.

 

    Surmont—The Surmont oil sands leases are located approximately 35 miles south of Fort McMurray, Alberta. Surmont is a 50/50 joint venture with Total S.A. Surmont 2 construction began in 2010, and achieved first production in the third quarter of 2015. Surmont’s gross production capacity is estimated to be 150 MBOED.
    FCCL— FCCL Partnership, a Canadian upstream general partnership, is a 50/50 heavy oil business venture with Cenovus Energy Inc. FCCL’s assets are operated by Cenovus and include the Foster Creek, Christina Lake and Narrows Lake SAGD bitumen developments. FCCL continues to progress development plans for each of these assets, including near-term completion of phase expansions as detailed below:

 

  ¡    Foster Creek

Foster Creek is located approximately 200 miles northeast of Edmonton, Alberta. There are six producing phases at Foster Creek, Phases A through F, with construction continuing on Phase G. Net production at Foster Creek increased approximately 12 MBOED, mainly as a result of a continued ramp up toward full capacity. In the fourth quarter of 2014, FCCL received regulatory approval for Phase J.

 

  ¡    Christina Lake

Christina Lake is located approximately 75 miles south of Fort McMurray, Alberta. There are five producing phases at Christina Lake, Phases A through E, with construction continuing on Phase F. In late 2015, an optimization project was completed at Christina Lake that increased gross production capacity to 160 MBOED, with incremental production expected to ramp up during 2016. In the fourth quarter of 2015, regulatory approval was received for Phase H development.

 

  ¡    Narrows Lake

Narrows Lake Phase A, was sanctioned in late 2012 and is expected to have 45 MBOED of production capacity; however, construction has been deferred.

Exploration

We hold exploration acreage in four areas of Canada: onshore western Canada, offshore eastern Canada, the Mackenzie Delta/Beaufort Sea Region and the Arctic Islands. Our primary exploration focus is on unconventional plays in western Canada and conventional exploration offshore eastern Canada.

 

    Conventional Exploration

During 2014, we entered into a farm-in agreement to acquire a 30 percent nonoperated interest in six exploration licenses covering approximately five million gross acres in the deepwater Shelburne Basin, offshore Nova Scotia. In the fourth quarter of 2015, we spudded the first of two exploration well commitments in offshore Nova Scotia. The second exploration well is anticipated to begin drilling in the second quarter of 2016. In December 2014, we participated in a successful bid for one

 

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exploration license covering 0.7 million gross acres located in the Flemish Pass Basin, offshore Newfoundland. In January 2015, we were awarded the license, in which we hold a 30 percent nonoperated interest. Seismic surveys of the subsurface were completed in 2015.

 

    Unconventional Exploration

We hold approximately 0.7 million net acres in the emerging Montney, Muskwa, Duvernay and Canol unconventional plays in Alberta, northeastern British Columbia and the Northwest Territories. During 2015, we completed a lease swap and continued to drill exploration and appraisal wells in the Montney play, which extends from British Columbia into Alberta.

In the fourth quarter of 2015, we recorded dry hole expense of $185 million after-tax associated with our Horn River, Northwest Territories, Thornbury and Saleski properties, and an impairment charge of $75 million after-tax for unproved properties in the Duvernay, Thornbury, Saleski and Crow Lake areas.

EUROPE AND NORTH AFRICA

The Europe and North Africa segment consists of operations and exploration activities in Norway, the United Kingdom and Libya. In 2015, operations in Europe and North Africa contributed 14 percent of our worldwide liquids production and 12 percent of natural gas production.

Norway

     2015   
       

 

 

 
             Interest                Operator        
 
        Liquids
MBD
  
  
    
 
Natural Gas
MMCFD
  
  
    
 
Total 
MBOED 
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Greater Ekofisk Area

     35.1     ConocoPhillips         57         51         66    

Alvheim

     20.0       
 
Det norske
oljeselskap
  
  
     9         9         11    

Heidrun

     24.0        Statoil         12         13         14    

Other

     Various        Statoil         15         80         28    

 

 

Total Norway

          93         153         119    

 

 

The Greater Ekofisk Area is located approximately 200 miles offshore Stavanger, Norway in the North Sea, and comprises three producing fields: Ekofisk, Eldfisk and Embla. Crude oil is exported to Teesside, England, and the natural gas is exported to Emden, Germany. Ekofisk South achieved first production in 2013, while Eldfisk II achieved startup in January 2015. Continued development drilling in the Greater Ekofisk Area will contribute additional production over the coming years, as additional wells come online.

The Alvheim development is located in the northern part of the North Sea and consists of a floating production, storage and offloading (FPSO) vessel and subsea installations. Produced crude oil is exported via shuttle tankers, and natural gas is transported to the Scottish Area Gas Evacuation (SAGE) terminal at St. Fergus, Scotland, through the SAGE pipeline.

The Heidrun Field is located in the Norwegian Sea. Produced crude oil is stored in a floating storage unit and exported via shuttle tankers. Part of the natural gas is currently injected into the reservoir for optimization of crude oil production, while the remainder is used as feedstock in a methanol plant in Norway, in which we own an 18 percent interest.

We also have varying ownership interests in five other producing fields in the Norway sector of the North Sea and in the Norwegian Sea, as well as the Aasta Hansteen development. The operator is targeting first gas for Aasta Hansteen by late 2018.

 

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Exploration

ConocoPhillips participated in four nonoperated exploration and appraisal wells in the Oseberg, Visund and Aasta Hansteen areas. Two wells in the Oseberg area were discoveries and were put on production; the others were discoveries currently undergoing evaluation. ConocoPhillips was awarded two new exploration licenses in early 2015, PL044C and PL782S with interests of 41.9 and 40.0 percent, respectively. Two more licenses were awarded in early 2016, PL845 and PL782SB, both with interests of 40.0 percent.

Transportation

We own a 35.1 percent interest in the Norpipe Oil Pipeline System, a 220-mile pipeline which carries crude oil from Ekofisk to a crude oil stabilization and natural gas liquids processing facility in Teesside, England. In November 2015, we sold our 1.9 percent interest in Norwegian Continental Shelf Gas Transportation (Gassled), which owns most of the Norwegian gas transportation infrastructure.

United Kingdom

 

     2015   
       

 

 

 
     Interest            Operator        
 
Liquids
MBD
  
  
    
 
 
Natural
Gas
MMCFD
  
  
  
    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Britannia

     58.7     ConocoPhillips         4         92         19   

Britannia Satellites

     50.0–83.5     ConocoPhillips         10         55         19   

J-Area

     32.5–36.5        ConocoPhillips         15         87         30   

Southern North Sea

     Various        Various         -         58         10   

East Irish Sea

     100.0        HRL         -         29         5   

Other

     Various        Various         5         1         5   

 

 

Total United Kingdom

          34         322         88   

 

 

* Does not include partner operated Alder project; first gas due 2016.

             

Britannia is one of the largest natural gas and condensate fields in the North Sea. We assumed operatorship of Britannia in August 2015, following the acquisition of third party equity in Britannia Operator Limited, which is now wholly owned by ConocoPhillips. Condensate is delivered through the Forties Pipeline to an oil stabilization and processing plant near the Grangemouth Refinery in Scotland, while natural gas is transported through Britannia’s line to St. Fergus, Scotland. The Britannia satellite fields, Callanish and Brodgar, produce via subsea manifolds and pipelines linked to the Britannia platform. Project startups for the Brodgar H3 susbsea tieback, and Enochdhu, a single well tie back to Callanish, were achieved in the first and second quarters of 2015, respectively. These projects increased Britannia’s production in 2015 by 13.8 MBOED net. We are continuing work to hook up the Alder module to the Britannia facilities and anticipate delivery of first gas in 2016. Alder is a high-pressure, high-temperature gas condensate reservoir located in the U.K. Continental Shelf, 17 miles west of the Britannia facilities.

The J-Area consists of the Judy/Joanne, Jade and Jasmine fields, located in the U.K. Central North Sea. The Jasmine Field is a high-pressure, high-temperature gas condensate reservoir located approximately six miles west of the Judy Platform. The development includes a 24-slot wellhead platform with a bridge-linked accommodation and utilities platform, a six-mile, 16-inch multi-phase pipeline bundle, and a riser and processing platform bridge-linked to the existing Judy Platform.

We have various ownership interests in several producing gas fields in the Rotliegendes and Carboniferous areas of the Southern North Sea. Decommissioning activity in the Southern North Sea is ongoing, with final production from the Viking transportation system and associated satellites achieved in early 2016. Our interests in the East Irish Sea include the Millom, Dalton and Calder fields, which are operated on our behalf by a third party.

 

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We own a 24 percent interest in the Clair Field, located in the Atlantic Margin. Clair Ridge is the second phase of development for the Clair Field and is comprised of a 36-slot drilling and production facility with a bridge-linked accommodation and utilities platform. The new facilities will tie into existing oil and gas export pipelines to the Shetland Islands. Initial production for Clair Ridge is targeted for 2018.

Exploration

During 2015, we participated in a nonoperated exploration/appraisal well in the Greater Clair area which was a discovery. The discovery is undergoing evaluations for future development. We also drilled one operated exploration well north of the Jasmine Field in the Central Graben which was a dry hole, and were awarded two new licenses in the East Irish Sea.

Transportation

We operate the Teesside oil and Theddlethorpe gas terminals in which we have 29.3 percent and 50 percent ownership interests, respectively. We also have a 100 percent ownership interest in the Rivers Gas Terminal, operated by a third party.

Greenland

Exploration

In 2015, we conducted field-based, metocean studies in Baffin Bay in Block 2011/11 of our operated Qamut license. Additionally, we participated in a 2-D seismic acquisition program and geological and geophysical studies as part of the work program obligation in the nonoperated Avinngaq license. In the fourth quarter of 2015, we initiated the process to assign our participating interest in the Avinngaq license. The process is pending Greenland government approval.

Libya

 

     2015   
       

 

 

 
     Interest                        Operator        
 
Liquids
MBD
  
  
    
 
 
Natural
Gas
MMCFD
  
  
  
    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Waha Concession

     16.3     Waha Oil Co.         -         1         -   

 

 

Total Libya

          -         1         -   

 

 

The Waha Concession consists of multiple concessions and encompasses nearly 13 million gross acres in the Sirte Basin. Our production operations in Libya and related oil exports were interrupted in mid-2013, as a result of the shutdown of the Es Sider crude oil export terminal at the end of July 2013. The Es Sider Terminal briefly reopened in the third quarter of 2014 and production and liftings resumed temporarily; however, further disruptions occurred in December 2014, and production was shut in again. The Es Sider Terminal remained shut in throughout 2015. The 2016 operating and drilling activity is uncertain as a result of the ongoing civil unrest.

 

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ASIA PACIFIC AND MIDDLE EAST

The Asia Pacific and Middle East segment has exploration and production operations in China, Indonesia, Malaysia and Australia; producing operations in Qatar and Timor-Leste; and exploration activities in Brunei. In 2015, operations in the Asia Pacific and Middle East segment contributed 13 percent of our worldwide liquids production and 33 percent of natural gas production.

Australia and Timor Sea

 

     2015   
  

 

 

 
     Interest        Operator        
 
Liquids
MBD
  
  
    
 
 
Natural
Gas
MMCFD
  
  
  
    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Australia Pacific LNG

     37.5    
 
ConocoPhillips/
Origin Energy
  
  
     -         267         45   

Bayu-Undan

     56.9        ConocoPhillips         15         253         57   

Athena/Perseus

     50.0        ExxonMobil         -         35         6   

 

 

Total Australia and Timor Sea

          15         555         108   

 

 

Australia Pacific LNG

Australia Pacific LNG Pty Ltd (APLNG), our joint venture with Origin Energy Limited and China Petrochemical Corporation (Sinopec), is focused on producing CBM from the Bowen and Surat basins in Queensland, Australia, and converting the CBM into LNG. Natural gas is sold to domestic customers, while LNG is exported. Origin operates APLNG’s upstream production and pipeline system, and we operate the downstream LNG facility, located on Curtis Island near Gladstone, Queensland, as well as the LNG export sales business.

Two fully subscribed 4.5 million tonnes-per-year LNG trains have been sanctioned. Approximately 3,900 net wells are ultimately envisioned to supply both the domestic gas market and the LNG sales contracts. The wells will be supported by gathering systems, central gas processing and compression stations, water treatment facilities, and a new export pipeline connecting the gas fields to the LNG facilities. APLNG Train 1 achieved first LNG in the fourth quarter of 2015 and the first cargo sailed in January 2016. Train 1 LNG is being sold to Sinopec under a 20-year sales agreement for up to 4.3 million metric tonnes of LNG per year. Start-up of the second LNG train is expected to occur in the second half of 2016. The resulting LNG exports from Train 2 will commence shortly thereafter. Sinopec has agreed to purchase an additional 3.3 million metric tonnes of LNG per year through 2035, and Japan-based Kansai Electric Power Co., Inc. has agreed to purchase approximately 1 million metric tonnes of LNG per year for 20 years.

APLNG has an $8.5 billion project finance facility, of which $8.4 billion had been drawn from the facility at December 31, 2015. In connection with the execution of the project financing, we provided a completion guarantee for our pro-rata share of the project finance facility until the project achieves financial completion. For additional information, see Note 4—Variable Interest Entities (VIEs), Note 7—Investments, Loans and Long-Term Receivables, and Note 12—Guarantees, in the Notes to Consolidated Financial Statements.

Bayu-Undan

The Bayu-Undan gas condensate field is located in the Timor Sea Joint Petroleum Development Area between Timor-Leste and Australia. We also operate and own a 56.9 percent interest in the associated Darwin LNG Facility, located at Wickham Point, Darwin.

The Bayu-Undan natural gas recycle facility processes wet gas; separates, stores and offloads condensate, propane and butane; and re-injects dry gas back into the reservoir. In addition, a 310-mile natural gas pipeline connects the facility to the 3.5 million tonnes-per-year capacity Darwin LNG Facility. Produced natural gas is

 

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piped to the Darwin LNG Plant, where it is converted into LNG before being transported to international markets. In 2015, we sold 174 billion gross cubic feet of LNG primarily to utility customers in Japan.

The Bayu-Undan Phase Three Development consists of two standalone, subsea horizontal wells tied back to the existing drilling, production and processing platform. The first subsea, horizontal well commenced production in the first quarter of 2015. The well was tied back to the existing drilling, production, and processing platform. A second subsea, horizontal well was drilled, completed, then suspended due to insufficient deliverability to the platform. There are no plans to remediate nor re-drill the well in the near

future. A continuation of Phase Three development is being evaluated, and is currently in the preliminary front-end engineering and design phase.

ConocoPhillips served a Notice of Arbitration on the Timor-Leste Minister of Finance in October 2012 for outstanding disputes related to a series of tax assessments. The arbitration hearing was conducted in June 2014. In January 2016, the Government of Timor-Leste and ConocoPhillips reached a settlement of several significant tax disputes. However, we await the Tribunal’s decision with respect to certain unresolved matters. For additional information, see Note 13—Contingencies and Commitments, in the Notes to Consolidated Financial Statements.

Athena/Perseus

The Athena production license (WA-17-L) is located offshore Western Australia and contains part of the Perseus Field which straddles the boundary with WA-1-L, an adjoining license area. Natural gas is produced from these licenses.

Greater Sunrise

We have a 30 percent interest in the Greater Sunrise gas and condensate field located in the Timor Sea. In May 2013, the Timor-Leste Government referred a dispute with the Australian Government relating to the treaty on Certain Maritime Arrangements in the Timor Sea (CMATS) to international arbitration. The CMATS arbitration does not directly impact our underlying interests in Sunrise; however, we and the Sunrise co-venturers are unable to commit to further commercial and technical work activities due to the uncertainty created by the lack of government alignment. Accordingly, current activities are restricted to compliance and social investment, as well as maintaining relationships and development options for Sunrise.

Exploration

 

    Conventional Exploration

We operate two exploration permits in the Browse Basin, offshore northwest Australia, in which we own a 40 percent interest in permits WA-315-P and WA-398-P, of the Greater Poseidon Area. Phase I of the Browse Basin drilling campaign in 2009/2010 resulted in three discoveries in the Greater Poseidon Area: Poseidon-1, Poseidon-2 and Kronos-1. Phase II of the drilling campaign resulted in five additional discoveries: Boreas-1, Zephyros-1, Proteus-1 SD2, Poseidon-North-1 and Pharos-1. All wells have been completed, plugged and abandoned.

We operate two retention leases in the Bonaparte Basin, offshore northern Australia, where we own a 37.5 percent interest in leases NT/RL5 and NT/RL6, containing the Barossa and Caldita discoveries. Three appraisal wells have been drilled to further evaluate the Barossa Field’s potential. The first two wells encountered hydrocarbons and the third was not commercially viable.

 

    Unconventional Exploration

In 2015, regulatory approval was received to withdraw from the four exploration permits within the Canning Basin in Western Australia. Prior to withdrawal, we owned a 46 percent working interest in each of the four permits.

 

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Indonesia

 

     2015   
  

 

 

 
     Interest        Operator        

 

Liquids

MBD

  

  

    

 

 

Natural

Gas

MMCFD

  

  

  

    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

South Natuna Sea Block B

     40.0     ConocoPhillips         8         89         23   

South Sumatra

     45.0–54.0        ConocoPhillips         3         332         58   

 

 

Total Indonesia

          11         421         81   

 

 

We operate four production sharing contracts (PSCs) in Indonesia: the offshore South Natuna Sea Block B and three onshore PSCs, the Corridor Block and South Jambi “B”, both located in South Sumatra, and Kualakurun in Central Kalimantan. Currently there is production from two of these PSCs: the Corridor Block and South Natuna Sea Block B.

South Natuna Sea Block B

The offshore South Natuna Sea Block B PSC has 3 producing oil fields and 16 natural gas fields in various stages of development. Natural gas production is sold under international sales agreements to Malaysia and Singapore, and liquefied petroleum gas is sold locally for domestic consumption.

South Sumatra

The Corridor PSC consists of five oil fields and seven natural gas fields in various stages of development. Natural gas is supplied from the Grissik and Suban gas processing plants to the Duri steamflood in central Sumatra and to markets in Singapore, Batam and West Java. Production from the South Jambi “B” PSC has reached depletion and field development has been suspended.

Exploration

In 2015, we drilled and subsequently recorded dry hole expense for one exploration well in the Palangkaraya PSC. This PSC was relinquished in the third quarter of 2015. We are also in the process of relinquishing our 80 percent interest in the Warim Block PSC. We have a 60 percent working interest in the new Kualakurun PSC, located in Central Kalimantan, which was signed in May 2015. This block has an area of approximately 2 million gross acres.

Transportation

We are a 35 percent owner of a consortium company that has a 40 percent ownership in PT Transportasi Gas Indonesia, which owns and operates the Grissik to Duri and Grissik to Singapore natural gas pipelines.

China

 

     2015   
  

 

 

 
             Interest                Operator        

 

Liquids

MBD

  

  

    

 

 

Natural

Gas

MMCFD

  

  

  

    

 

Total

MBOED

  

  

  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Penglai

     49.0     CNOOC         34         2         34   

Panyu

     24.5        CNOOC         11         -         11   

 

 

Total China

          45         2         45   

 

 

The Penglai 19-3, 19-9 and 25-6 fields are located in Bohai Bay Block 11/05. Production from the Phase 1 development of the Penglai 19-3 Field began in 2002. Phase 2 included six additional wellhead platforms and an FPSO vessel, and was fully operational by 2009.

 

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Currently, a project to add a new wellhead platform and up to 62 wells for the development of Penglai 19-9 is progressing per schedule, with first oil expected in 2017.

We sanctioned the Penglai 19-3/19-9 Phase 3 Project in December 2015. This project will consist of three new wellhead platforms and a central processing platform. First oil from Phase 3 is expected in 2018.

The Panyu development, located in Block 15/34 in the South China Sea, is comprised of three oil fields: Panyu 4-2, Panyu 5-1 and Panyu 11-6. The PSC for the block is scheduled to expire in September 2018, at which time we will relinquish all working interest in the block.

Exploration

In 2015, we participated in two successful appraisal wells in the Penglai fields, which will be used to support future development plans.

Malaysia

 

     2015   
  

 

 

 
     Interest        Operator        
 
Liquids
MBD
  
  
    
 
 
Natural
Gas
MMCFD
  
  
  
    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Siakap North-Petai

     21.0     Murphy         4         2         4   

Gumusut

     29.0        Shell         25         -         25   

KBB

     30.0        KPOC         -         4         1   

 

 

Total Malaysia

          29         6         30   

 

 

We own interests in four deepwater PSCs in Malaysia. Three are located off the eastern Malaysian state of Sabah: Block G, Block J and the Kebabangan Cluster (KBBC). Our fourth PSC, deepwater Block 3E, is located off the Malaysian state of Sarawak.

Block G

We have a 21 percent interest in the unitized Siakap North-Petai oil field, which began producing in the first quarter of 2014 and reached its estimated net annual peak production of 5 MBOED in 2015. Development of the Malikai oil field is underway with first production anticipated in 2017. We own a 35 percent interest in the Malikai and Pisagan discoveries.

Block J

First production for Gumusut occurred from an early production system in 2012. Production from a permanent, semi-submersible floating production vessel was achieved in October 2014, with estimated net annual peak production of 32 MBOED anticipated in 2016. Unitization of the Gumusut Field with Brunei was recorded in 2014 and reduced our ownership interest from 33 percent to an initial 29 percent. A final ownership split is expected to be agreed in 2016.

We own a 40 percent interest in the Limbayong discovery. The Limbayong-2 appraisal well, located approximately seven miles from Gumusut, was drilled in 2013 and resulted in an oil discovery. Development options are being evaluated.

KBBC

We own a 30 percent interest in the KBBC PSC. Development of the KBB gas field commenced in 2011, and first production was achieved in November 2014. Gas sales are currently constrained due to repairs on a third party pipeline. Estimated net annual peak production of 26 MBOED is expected in 2018. Kamunsu East is being evaluated for development options.

 

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Exploration

We relinquished our 40 percent operating interest in SB-311, an exploration block encompassing 259,000 gross acres offshore Sabah, in December 2015. Both wells drilled in 2015 as part of our two-well commitment program were expensed as dry holes in the second and third quarters of 2015.

We own a 50 percent operating interest in deepwater Block 3E, which encompasses approximately 480,000 gross acres offshore Sarawak. Seismic processing was completed in 2015 and drilling is planned for 2016-2017.

Bangladesh

Exploration

In 2014, we relinquished our interest in two deepwater blocks in the Bay of Bengal, Blocks 10 and 11. In 2015, we also opted not to pursue our interest in three adjoining deepwater blocks and exited operations in Bangladesh.

Brunei

Exploration

We have a 6.25 percent working interest in the deepwater Block CA-2 PSC, which has an exploration period through December 2018. Exploration has been ongoing since September 2011, with natural gas discovered at the Kelidang NE-1 and Keratau-1 wells in 2013 and at the Keratau SW-1 well in 2015. Evaluation of the results is ongoing.

Myanmar

Exploration

In 2014, we were awarded deepwater Block AD-10 in the 2013 Myanmar offshore oil and gas bidding round. We signed the PSC in the second quarter of 2015, and in the third quarter we initiated the process to assign our participating interest to the operator, pending Myanmar government approval.

Qatar

 

     2015   
       

 

 

 
             Interest        Operator        
 
Liquids
MBD
  
  
    
 
 
Natural
Gas
MMCFD
  
  
  
    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             
       Qatargas Operating            

QG3

     30.0     Company Limited         21         371         83   

 

 

Total Qatar

          21         371         83   

 

 

QG3 is an integrated development jointly owned by Qatar Petroleum (68.5 percent), ConocoPhillips (30 percent) and Mitsui & Co., Ltd. (1.5 percent). QG3 consists of upstream natural gas production facilities, which produce approximately 1.4 billion gross cubic feet per day of natural gas from Qatar’s North Field over a 25 year life, in addition to a 7.8 million gross tonnes-per-year LNG facility. LNG is shipped in leased LNG carriers destined for sale globally.

QG3 executed the development of the onshore and offshore assets as a single integrated development with Qatargas 4 (QG4), a joint venture between Qatar Petroleum and Royal Dutch Shell plc. This included the joint development of offshore facilities situated in a common offshore block in the North Field, as well as the construction of two identical LNG process trains and associated gas treating facilities for both the QG3 and QG4 joint ventures. Production from the LNG trains and associated facilities is combined and shared.

 

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OTHER INTERNATIONAL

The Other International segment includes exploration activities in Colombia, Angola and Senegal. In the fourth quarter of 2015, we exited our operations in Russia. During 2015, operations in Other International contributed less than 1 percent of our worldwide liquids production.

Russia

 

     2015   
       

 

 

 
             Interest        Operator        
 
Liquids
MBD
  
  
    
 
 
Natural
Gas
MMCFD
  
  
  
    
 
Total
MBOED
  
  
  

 

 

   

 

 

    

 

 

 

Average Daily Net Production

             

Polar Lights

     50.0     Polar Lights Co.         4         -         4   

 

 

Total Russia

          4         -         4   

 

 

Polar Lights

In the fourth quarter of 2015, we completed the sale of our 50 percent interest in the Polar Lights Company, an entity which has developed several fields in the Timan-Pechora Basin in northern Russia.

Angola

Exploration

We have a 50 percent operating interest in Block 36 and a 30 percent operating interest in Block 37, both of which are located in Angola’s subsalt play trend. The two blocks total approximately 2.5 million gross acres and each block was awarded with a two-well work program commitment. We secured a rig for a four-well commitment program and commenced drilling in the second quarter of 2014. In November 2014, we plugged and abandoned the Kamoxi-1 exploration well, located in Block 36 offshore Angola, as a dry hole. We also subsequently plugged and abandoned the Omosi-1 and Vali-1 wells as dry holes in adjacent Block 37 in the first and second quarters of 2015, respectively, and recorded an after-tax impairment of $75 million associated with our Angola Block 37 leasehold in the second quarter of 2015. In the fourth quarter of 2015, we recorded $335 million in after-tax charges for the impairment, dry hole costs and future potential obligations associated with our Angola Block 36 leasehold. The Athena drilling rig, secured for our four-well commitment program, was mobilized to Senegal in October.

Senegal

Exploration

We have a 35 percent working interest in three exploration blocks offshore Senegal. In October 2014, we discovered a working petroleum system at the FAN-1 exploration well. In addition, in November 2014 we confirmed oil was discovered in the SNE-1 well, the second of the two-well program. We spud the SNE-2 and SNE-3 appraisal wells in the fourth quarter of 2015. We have the option to become operator of the project if it advances to development.

Azerbaijan

Transportation

The Baku-Tbilisi-Ceyhan (BTC) Pipeline transports crude oil from the Caspian Region through Azerbaijan, Georgia and Turkey for tanker loadings at the port of Ceyhan. In the fourth quarter of 2015, we finalized the sale of our 2.5 percent interest in BTC.

Poland

Exploration

In the second quarter of 2015, we decided not to conduct further activity on our three Baltic Basin concessions, which encompassed approximately 500,000 gross acres. As a result, we recorded an after-tax impairment of $32 million, net of other deductions.

 

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Colombia

Unconventional Exploration

We have an 80 percent operated interest in the Middle Magdalena Basin block VMM-3. The block extends over 66,649 net acres and contains the Picoplata-1, which completed drilling in 2015. Continued evaluation and testing of the well is planned in 2016.

We hold 70 percent nonoperated interests in the deep rights in the Santa Isabel Block in the Middle Magdalena Basin, which covers approximately 71,000 net acres. We also hold a 30 percent nonoperated interest in the VMM27 and VMM28 blocks, in the Middle Magdalena Basin, which are currently in the process of being relinquished.

Chile

Exploration

In the fourth quarter of 2015, we received approval from the Chilean government to become a 5 percent interest holder in the Coiron Block. Empresa Nacional del Petroleo holds the remaining 95 percent interest and is the operator of the block.

Venezuela

In October 2014, we filed for arbitration under the rules of the International Chamber of Commerce (ICC) against Petroleos de Venezuela (PDVSA), the Venezuela state oil company, for contractual compensation related to the Petrozuata and Hamaca heavy crude oil projects. The ICC arbitration is a separate and independent legal action from the investment treaty arbitration against the government of Venezuela, which is currently proceeding before an arbitral tribunal under the World Bank’s International Centre for Settlement for Investment Disputes (ICSID). The ICSID Tribunal is determining the damages owed to ConocoPhillips as a result of Venezuela’s unlawful expropriation of ConocoPhillips’ significant oil investments in the Petrozuata and Hamaca heavy crude oil projects and the offshore Corocoro development project in June 2007. For additional information, see Note 13—Contingencies and Commitments, in the Notes to Consolidated Financial Statements.

Ecuador

In December 2012, an ICSID Tribunal issued a decision on liability in favor of Burlington Resources, Inc., a wholly owned subsidiary of ConocoPhillips, finding that Ecuador’s seizure of Blocks 7 and 21 was an unlawful expropriation in violation of the Ecuador-U.S. Bilateral Investment Treaty. An additional arbitration phase to determine the damages owed to ConocoPhillips for Ecuador’s actions and to address Ecuador’s counterclaims followed the decision on liability and we are now waiting for the Tribunal’s award. For additional information, see Note 13—Contingencies and Commitments, in the Notes to Consolidated Financial Statements.

Discontinued Operations

See Note 3—Discontinued Operations, in the Notes to Consolidated Financial Statements, for information regarding our discontinued operations.

 

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OTHER

Marketing Activities

Our Commercial organization manages our worldwide commodity portfolio, which mainly includes natural gas, crude oil, bitumen, natural gas liquids and LNG. Marketing activities are performed through offices in the United States, Canada, Europe and Asia. In marketing our production, we attempt to minimize flow disruptions, maximize realized prices and manage credit-risk exposure. Commodity sales are generally made at prevailing market prices at the time of sale. We also purchase and sell third-party volumes to better position the company to satisfy customer demand while fully utilizing transportation and storage capacity.

Natural Gas

Our natural gas production, along with third-party purchased gas, is primarily marketed in the United States, Canada, Europe and Asia. Our natural gas is sold to a diverse client portfolio which includes local distribution companies; gas and power utilities; large industrials; independent, integrated or state-owned oil and gas companies; as well as marketing companies. To reduce our market exposure and credit risk, we also transport natural gas via firm and interruptible transportation agreements to major market hubs.

Crude Oil, Bitumen and Natural Gas Liquids

Our crude oil, bitumen and natural gas liquids revenues are derived from production in the United States, Canada, Australia, Asia, Africa and Europe. These commodities are primarily sold under contracts with prices based on market indices, adjusted for location, quality and transportation.

LNG

LNG marketing efforts are focused on equity LNG production facilities located in Alaska, Australia, and Qatar. LNG is primarily sold under long-term contracts with prices based on market indices.

Energy Partnerships

Marine Well Containment Company

We are a founding member of the Marine Well Containment Company (MWCC), a non-profit organization formed in 2010, which provides well containment equipment and technology in the deepwater U.S. Gulf of Mexico. In January 2015, MWCC announced acceptance of its expanded containment system (ECS). The ECS complements the capabilities and capacities put into place with its interim containment system, which the industry has been relying on since 2011. Equipment from both systems has been combined to form MWCC’s containment system, which meets the U.S. Bureau of Safety and Environmental Enforcement requirements for a subsea well containment system that can respond to a deepwater well control incident in the U.S. Gulf of Mexico.

Subsea Well Response Project

In 2011, we, along with several leading oil and gas companies, launched the Subsea Well Response Project (SWRP), a non-profit organization based in Stavanger, Norway, which was created to enhance the industry’s capability to respond to international subsea well control incidents. Through collaboration with Oil Spill Response Limited, a non-profit organization in the United Kingdom, subsea well intervention equipment is available for the industry to use in the event of a subsea well incident. This complements the work being undertaken in the United States by MWCC.

Oil Spill Response Removal Organizations (OSROs)

We maintain memberships in several OSROs across the globe as a key element of our preparedness program in addition to internal response resources. Many of the OSROs are not-for-profit cooperatives owned by the member companies wherein we may actively participate as a member of the board of directors, steering committee, work group or other supporting role. Globally, our primary OSRO is Oil Spill Response Ltd. based in the U.K., with facilities in several other countries and the ability to respond anywhere in the world. In North America, our primary OSROs include the Marine Spill Response Corporation for the continental U.S. and Alaska Clean Seas and Ship Escort/Response Vessel System for the Alaska North Slope and Prince

 

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William Sound, respectively. We are also a member of the Cook Inlet Spill Prevention and Response, Inc. Internationally, we maintain memberships in various regional OSROs including the Norwegian Clean Seas Association for Operating Companies, Australian Marine Oil Spill Center and Petroleum Industry of Malaysia Mutual Aid Group.

Technology

Our Technology organization has several technology programs, which focus on areas to support our business growth plans: developing unconventional reservoirs, producing oil sands and heavy oil economically with fewer emissions, improving the economic efficiency of our LNG and other gas solutions technologies, increasing recoveries from our legacy fields, and implementing sustainability measures.

Our Optimized Cascade® LNG liquefaction technology business continues to be successful with the demand for new LNG plants. The technology has been licensed for use in 25 LNG trains around the world, with feasibility studies ongoing for additional trains.

RESERVES

We have not filed any information with any other federal authority or agency with respect to our estimated total proved reserves at December 31, 2015. No difference exists between our estimated total proved reserves for year-end 2014 and year-end 2013, which are shown in this filing, and estimates of these reserves shown in a filing with another federal agency in 2015.

DELIVERY COMMITMENTS

We sell crude oil and natural gas from our producing operations under a variety of contractual arrangements, some of which specify the delivery of a fixed and determinable quantity. Our Commercial organization also enters into natural gas sales contracts where the source of the natural gas used to fulfill the contract can be the spot market or a combination of our reserves and the spot market. Worldwide, we are contractually committed to deliver approximately 2.5 trillion cubic feet of natural gas, including approximately 430 billion cubic feet related to the noncontrolling interests of consolidated subsidiaries, and 230 million barrels of crude oil in the future. These contracts have various expiration dates through the year 2028. We expect to fulfill the majority of these delivery commitments with proved developed reserves. In addition, we anticipate using proved undeveloped reserves and spot market purchases to fulfill any remaining commitments. See the disclosure on “Proved Undeveloped Reserves” in the “Oil and Gas Operations” section following the Notes to Consolidated Financial Statements, for information on the development of proved undeveloped reserves.

COMPETITION

We compete with private, public and state-owned companies in all facets of the E&P business. Some of our competitors are larger and have greater resources. Each of our segments is highly competitive, with no single competitor, or small group of competitors, dominating.

We compete with numerous other companies in the industry, including state-owned companies, to locate and obtain new sources of supply and to produce oil, bitumen, natural gas liquids and natural gas in an efficient, cost-effective manner. Based on statistics published in the September 7, 2015, issue of the Oil and Gas Journal, we were the third-largest U.S.-based oil and gas company in worldwide liquids and natural gas production and reserves in 2014. We deliver our production into the worldwide commodity markets. Principal methods of competing include geological, geophysical and engineering research and technology; experience and expertise; economic analysis in connection with portfolio management; and safely operating oil and gas producing properties.

 

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GENERAL

At the end of 2015, we held a total of 1,012 active patents in 58 countries worldwide, including 387 active U.S. patents. During 2015, we received 46 patents in the United States and 85 foreign patents. Our products and processes generated licensing revenues of $271 million in 2015. The overall profitability of any business segment is not dependent on any single patent, trademark, license, franchise or concession.

Company-sponsored research and development activities charged against earnings were $222 million, $263 million and $258 million in 2015, 2014 and 2013, respectively.

Health, Safety and Environment

Our Health, Safety and Environment (HSE) organization provides tools and support to our business units and staff groups to help them ensure world class health, safety and environmental performance. The framework through which we safely manage our operations, the HSE Management System Standard, emphasizes process safety, risk management, emergency preparedness and environmental performance, with an intense focus on process and occupational safety. In support of the goal of zero incidents, HSE milestones and criteria are established annually to drive strong safety performance. Progress toward these milestones and criteria are measured and reported. HSE audits are conducted on business functions periodically, and improvement actions are established and tracked to completion. We also have detailed processes in place to address sustainable development in our economic, environmental and social performance. Our processes, related tools and requirements focus on water, biodiversity and climate change, as well as social and stakeholder issues.

The environmental information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 62 through 66 under the captions “Environmental” and “Climate Change” is incorporated herein by reference. It includes information on expensed and capitalized environmental costs for 2015 and those expected for 2016 and 2017.

Website Access to SEC Reports

Our internet website address is www.conocophillips.com. Information contained on our internet website is not part of this report on Form 10-K.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). Alternatively, you may access these reports at the SEC’s website at www.sec.gov.

 

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Item 1A. RISK FACTORS

You should carefully consider the following risk factors in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.

Our operating results, our future rate of growth and the carrying value of our assets are exposed to the effects of changing commodity prices.

Prices for crude oil, bitumen, natural gas, natural gas liquids and LNG can fluctuate widely. Globally, prices for crude oil, bitumen, natural gas, natural gas liquids and LNG have recently experienced significant declines from their historic levels during 2013 and 2014, with continued global production increases that have outpaced demand growth, leading to a large observed rise in global inventory. Prices for Brent crude oil, WTI crude oil, Henry Hub natural gas and natural gas liquids in the fourth quarter of 2015 have all declined more than 40 percent when compared with prices in the fourth quarter of 2014, and there are no indications the price declines will reverse themselves in the immediate future.

Our revenues, operating results and future rate of growth are highly dependent on the prices we receive for our crude oil, bitumen, natural gas, natural gas liquids and LNG. The factors influencing these prices are beyond our control. Lower crude oil, bitumen, natural gas, natural gas liquids and LNG prices may have a material adverse effect on our revenues, operating income, cash flows and liquidity and on the amount of dividends we elect to declare and pay on our common stock. Lower prices may also limit the amount of reserves we can produce economically, adversely affecting our ability to maintain our reserve replacement ratio and accelerating the reduction in our existing reserve levels as we continue production from upstream fields.

Significant reductions in crude oil, bitumen, natural gas, natural gas liquids and LNG prices could also require us to reduce our capital expenditures or impair the carrying value of our assets. During 2015, we recognized several impairments, which are described in Note 9—Impairments, in the Notes to Consolidated Financial Statements. If commodity prices remain low relative to their historic levels, and as we continue to optimize our investments and exercise capital flexibility, it is reasonably likely we will incur future impairments to long-lived assets used in operations, investments in nonconsolidated entities accounted for under the equity method and unproved properties. Although it is not reasonably practicable to quantify the impact of any future impairments at this time, our results of operations could be adversely affected as a result.

Our ability to declare and pay dividends is subject to certain considerations.

Dividends are authorized and determined by our Board of Directors in its sole discretion and depend upon a number of factors, including:

 

    Cash available for distribution.
    Our results of operations and anticipated future results of operations.
    Our financial condition, especially in relation to the anticipated future capital needs of our properties.
    The level of reserves we establish for future capital expenditures.
    The level of distributions paid by comparable companies.
    Our operating expenses.
    Other factors our Board of Directors deems relevant.

We expect to continue to pay quarterly distributions to our stockholders; however, we bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. Any downward revision in our distribution could have a material adverse effect on the market price of our common stock.

 

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We may need additional capital in the future, and it may not be available on acceptable terms.

We have historically relied primarily upon cash generated by our operations to fund our operations and strategy, however we have also relied from time to time on access to the debt and equity capital markets for funding. There can be no assurance that additional debt or equity financing will be available in the future on acceptable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance, investor sentiment and our ability to incur additional debt in compliance with agreements governing our then-outstanding debt. If we are unable to generate sufficient funds from operations or raise additional capital, our growth could be impeded.

In addition, we are regularly evaluated by the major rating agencies based on a number of factors, including our financial strength and conditions affecting the oil and gas industry generally. Due to the significant recent decline in prices for crude oil, bitumen, natural gas, natural gas liquids and LNG, and the expectation that these prices could remain depressed in the near future, the major ratings agencies have indicated they will be conducting a review of the oil and gas industry and the debt ratings for some companies operating in the industry may be downgraded. The results of these actions, including any downgrade in our credit rating, could increase the cost associated with any additional indebtedness we incur.

Our business may be adversely affected by deterioration in the credit quality of, or defaults under our contracts with, third parties with whom we do business.

The operation of our business requires us to engage in transactions with numerous counterparties operating in a variety of industries, including other companies operating in the oil and gas industry. These counterparties may default on their obligations to us as a result of operational failures or a lack of liquidity, or for other reasons, including bankruptcy. Market speculation about the credit quality of these counterparties, or their ability to continue performing on their existing obligations, may also exacerbate any operational difficulties or liquidity issues they are experiencing, particularly as it relates to other companies in the oil and gas industry as a result of the recent significant declines in commodity prices. Any default by any of our counterparties may result in our inability to perform obligations under agreements we have made with third parties or may otherwise adversely affect our business or results of operations. In addition, our rights against any of our counterparties as a result of a default may not be adequate to compensate us for the resulting harm caused or may not be enforceable at all in some circumstances.

Unless we successfully add to our existing proved reserves, our future crude oil, bitumen, natural gas and natural gas liquids production will decline, resulting in an adverse impact to our business.

The rate of production from upstream fields generally declines as reserves are depleted. Except to the extent that we conduct successful exploration and development activities, or, through engineering studies, optimize production performance or identify additional or secondary recovery reserves, our proved reserves will decline materially as we produce crude oil, bitumen, natural gas and natural gas liquids. Accordingly, to the extent we are unsuccessful in replacing the crude oil, bitumen, natural gas and natural gas liquids we produce with good prospects for future production, our business will experience reduced cash flows and results of operations. Any cash conservation efforts we may undertake as a result of commodity price declines may further limit our ability to replace depleted reserves.

Any material change in the factors and assumptions underlying our estimates of crude oil, bitumen, natural gas and natural gas liquids reserves could impair the quantity and value of those reserves.

Our proved reserve information included in this annual report has been derived from engineering estimates prepared by our personnel. Reserve estimation is a process that involves estimating volumes to be recovered from underground accumulations of crude oil, bitumen, natural gas and natural gas liquids that cannot be directly measured. As a result, different petroleum engineers, each using industry-accepted geologic and engineering practices and scientific methods, may produce different estimates of reserves and future net cash flows based on the same available data. Any significant future price changes could have a material effect on the quantity and present value of our proved reserves. Any material changes in the factors and assumptions

 

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underlying our estimates of these items could result in a material negative impact to the volume of reserves reported or could cause us to incur impairment expenses on property associated with the production of those reserves. Future reserve revisions could also result from changes in, among other things, governmental regulation. In addition to changes in the quantity and value of our proved reserves, the amount of crude oil, bitumen, natural gas and natural gas liquids that can be obtained from any proved reserve may ultimately be different from those estimated prior to extraction.

We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing and future environmental laws and regulations. Likewise, future environmental laws and regulations, such as limitations on greenhouse gas emissions, may impact or limit our current business plans and reduce demand for our products.

Our businesses are subject to numerous laws and regulations relating to the protection of the environment. These laws and regulations continue to increase in both number and complexity and affect our operations with respect to, among other things:

 

    The discharge of pollutants into the environment.
    Emissions into the atmosphere, such as nitrogen oxides, sulfur dioxide, mercury and greenhouse gas emissions.
    Carbon taxes.
    The handling, use, storage, transportation, disposal and cleanup of hazardous materials and hazardous and nonhazardous wastes.
    The dismantlement, abandonment and restoration of our properties and facilities at the end of their useful lives.
    Exploration and production activities in certain areas, such as offshore environments, arctic fields, oil sands reservoirs and tight oil plays.

We have incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of these laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected.

Although our business operations are designed and operated to accommodate expected climatic conditions, to the extent there are significant changes in the Earth’s climate, such as more severe or frequent weather conditions in the markets we serve or the areas where our assets reside, we could incur increased expenses, our operations could be materially impacted, and demand for our products could fall. Demand for our products may also be adversely affected by conservation plans and efforts undertaken in response to global climate change, including plans developed in connection with the recent Paris climate conference in December 2015. Many governments also provide, or may in the future provide, tax advantages and other subsidies to support the use and development of alternative energy technologies. Our operations and the demand for our products could be materially impacted by the development and adoption of these technologies.

Domestic and worldwide political and economic developments could damage our operations and materially reduce our profitability and cash flows.

Actions of the U.S., state, local and foreign governments, through tax and other legislation, executive order and commercial restrictions, could reduce our operating profitability both in the United States and abroad. In certain locations, governments have imposed or proposed restrictions on our operations; special taxes or tax assessments; and payment transparency regulations that could require us to disclose competitively sensitive information or might cause us to violate non-disclosure laws of other countries. U.S. federal, state and local legislative and regulatory agencies’ initiatives regarding the hydraulic fracturing process could result in operating restrictions or delays in the completion of our oil and gas wells.

 

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The U.S. government can also prevent or restrict us from doing business in foreign countries. These restrictions and those of foreign governments have in the past limited our ability to operate in, or gain access to, opportunities in various countries. Actions by host governments have affected operations significantly in the past, such as the expropriation of our oil assets by the Venezuelan government, and may continue to do so in the future. Changes in domestic and international regulations may affect our ability to obtain or maintain permits, including those necessary for drilling and development of wells or for construction of LNG terminals or regasification facilities in various locations.

Local political and economic factors in international markets could have a material adverse effect on us. Approximately 54 percent of our hydrocarbon production from continuing operations was derived from production outside the United States in 2015, and 61 percent of our proved reserves, as of December 31, 2015, was located outside the United States. We are subject to risks associated with operations in international markets, including changes in foreign governmental policies relating to crude oil, natural gas, bitumen, natural gas liquids or LNG pricing and taxation, other political, economic or diplomatic developments, changing political conditions and international monetary fluctuations. In particular, some countries where we operate lack well-developed legal systems or have not adopted clear legal and regulatory frameworks for oil and gas exploration and production. This lack of legal certainty exposes our operations to increased risks, including increased difficulty in enforcing our agreements in those jurisdictions and increased risks of adverse actions by local government authorities, such as expropriations.

Changes in governmental regulations may impose price controls and limitations on production of crude oil, bitumen, natural gas and natural gas liquids.

Our operations are subject to extensive governmental regulations. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of crude oil, bitumen, natural gas and natural gas liquids wells below actual production capacity. Because legal requirements are frequently changed and subject to interpretation, we cannot predict the effect of these requirements.

Our investments in joint ventures decrease our ability to manage risk.

We conduct many of our operations through joint ventures in which we may share control with our joint venture partners. There is a risk our joint venture participants may at any time have economic, business or legal interests or goals that are inconsistent with those of the joint venture or us, or our joint venture partners may be unable to meet their economic or other obligations and we may be required to fulfill those obligations alone. Failure by us, or an entity in which we have a joint venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and, in turn, our business and operations.

We do not insure against all potential losses; therefore, we could be harmed by unexpected liabilities and increased costs.

We maintain insurance against many, but not all, potential losses or liabilities arising from operating risks. As such, our insurance coverage may not be sufficient to fully cover us against potential losses arising from such risks. Uninsured losses and liabilities arising from operating risks could reduce the funds available to us for capital, exploration and investment spending and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our operations present hazards and risks that require significant and continuous oversight.

The scope and nature of our operations present a variety of significant hazards and risks, including operational hazards and risks such as explosions, fires, crude oil spills, severe weather, geological events, labor disputes, terrorist attacks, sabotage, civil unrest or cyber attacks. Our operations may also be adversely affected by unavailability, interruptions or accidents involving services or infrastructure required to develop, produce, process or transport our production, such as contract labor, drilling rigs, pipelines, railcars, tankers, barges or other infrastructure. Our operations are subject to the additional hazards of pollution, releases of toxic gas and

 

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other environmental hazards and risks. Activities in deepwater areas may pose incrementally greater risks because of complex subsurface conditions such as higher reservoir pressures, water depths and metocean conditions. All such hazards could result in loss of human life, significant property and equipment damage, environmental pollution, impairment of operations, substantial losses to us and damage to our reputation. Further, our business and operations may be disrupted if we do not respond, or are perceived not to respond, in an appropriate manner to any of these hazards and risks or any other major crisis or if we are unable to efficiently restore or replace affected operational components and capacity.

Our technologies, systems and networks may be subject to cybersecurity breaches. Although we have experienced occasional, actual or attempted breaches of our cybersecurity, none of these breaches has had a material effect on our business, operations or reputation. If our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by having our business systems compromised, our proprietary information altered, lost or stolen, or our business operations disrupted. As cyber attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information systems and related infrastructure security vulnerabilities.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

Item 3. LEGAL PROCEEDINGS

The following is a description of reportable legal proceedings, including those involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment for this reporting period. The following proceedings include those matters that arose during the fourth quarter of 2015, as well as matters previously reported in our 2014 Form 10-K and our first-, second- and third-quarter 2015 Form 10-Qs that were not resolved prior to the fourth quarter of 2015. Material developments to the previously reported matters have been included in the descriptions below. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceedings were to be decided adversely to ConocoPhillips, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to SEC regulations.

On April 30, 2012, the separation of our downstream business was completed, creating two independent energy companies: ConocoPhillips and Phillips 66. In connection with the separation, we entered into an Indemnification and Release Agreement, which provides for cross-indemnities between Phillips 66 and us and established procedures for handling claims subject to indemnification and related matters, such as legal proceedings. We have included matters where we remain a party to a proceeding relating to Phillips 66, in accordance with SEC regulations. We do not expect any of those matters to result in a net claim against us.

Matters Previously Reported—Phillips 66

In October 2007, ConocoPhillips received a Complaint from the U.S. Environmental Protection Agency (EPA) alleging violations of the Clean Water Act related to a 2006 oil spill at the Phillips 66 Bayway Refinery and proposing a penalty of $156,000.

On May 19, 2010, the Phillips 66 Lake Charles Refinery received a Consolidated Compliance Order and Notice of Potential Penalty from the Louisiana Department of Environmental Quality (LDEQ) alleging various violations of applicable air emission regulations, as well as certain provisions of the consent decree in Civil Action No. H-01-4430. In July 2014, Phillips 66 resolved the consent decree issues and in January 2016, an agreement was reached with LDEQ to resolve the remaining allegations.

 

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On October 15, 2012, the Bay Area Air Quality Management District (Bay Area AQMD) issued a $313,000 demand to settle 13 other Notice of Violation (NOV) issued in 2010 and 2011 with respect to alleged violations of regulatory and/or permit requirements at the Phillips 66 Rodeo Refinery.

In May 2012, the Illinois Attorney General’s office filed and notified ConocoPhillips of a complaint with respect to operations at the Phillips 66 WRB Wood River Refinery alleging violations of the Illinois groundwater standards and a third-party’s hazardous waste permit. The complaint seeks as relief remediation of area groundwater; compliance with the hazardous waste permit; enhanced pipeline and tank integrity measures; additional spill reporting; and yet-to-be specified amounts for fines and penalties.

On July 7, 2014, Phillips 66 received an NOV from the U.S. EPA alleging various flaring-related violations between 2009 and 2013 at the Phillips 66 Wood River Refinery. ConocoPhillips is not a named party in the NOV and we will therefore no longer report this matter.

On July 8, 2014, the Bay Area AQMD issued a $175,000 demand to settle 18 NOVs issued in 2010 with respect to alleged violations of regulatory and/or permit requirements at the Phillips 66 Rodeo Refinery.

On July 8, 2014, the Bay Area AQMD issued a $259,000 demand to settle 20 NOVs issued in 2011 with respect to alleged violations of regulatory and/or permit requirements at the Phillips 66 Rodeo Refinery.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

 

Name

  

Position Held

   Age*  

Janet L. Carrig

   Senior Vice President, Legal, General Counsel and Corporate Secretary      58   

Ellen R. DeSanctis

   Vice President, Investor Relations and Communications      59   

Matt J. Fox

   Executive Vice President, Exploration and Production      55   

Alan J. Hirshberg

   Executive Vice President, Technology and Projects      54   

Ryan M. Lance

   Chairman of the Board of Directors and Chief Executive Officer      53   

Andrew D. Lundquist

   Senior Vice President, Government Affairs      55   

James D. McMorran

   Vice President, Human Resources, Real Estate and Facilities Services      58   

Glenda M. Schwarz

   Vice President and Controller      50   

Jeff W. Sheets

   Executive Vice President, Finance and Chief Financial Officer      58   

Don E. Wallette, Jr.

   Executive Vice President, Commercial, Business Development and Corporate Planning      57   

 

*On February 15, 2016.

There are no family relationships among any of the officers named above. Each officer of the company is elected by the Board of Directors at its first meeting after the Annual Meeting of Stockholders and thereafter as appropriate. Each officer of the company holds office from the date of election until the first meeting of the directors held after the next Annual Meeting of Stockholders or until a successor is elected. The date of the next annual meeting is May 10, 2016. Set forth below is information about the executive officers.

Janet L. Carrig was appointed Senior Vice President, Legal, General Counsel and Corporate Secretary in 2007.

Ellen R. DeSanctis was appointed Vice President, Investor Relations and Communications in May 2012. She was previously employed by Petrohawk Energy Corp. and served as Senior Vice President, Corporate Communications since 2010. Prior to that she was employed by Rosetta Resources Inc. and served as Executive Vice President of Strategy and Development from 2008 to 2010.

Matt J. Fox was appointed Executive Vice President, Exploration and Production in May 2012. Prior to that, he was employed by Nexen, Inc. and served as Executive Vice President, International since 2010. He was previously employed by ConocoPhillips and served as President, ConocoPhillips Canada from 2009 to 2010.

Alan J. Hirshberg was appointed Executive Vice President, Technology and Projects in May 2012. Prior to that, he served as Senior Vice President, Planning and Strategy since 2010.

Ryan M. Lance was appointed Chairman of the Board of Directors and Chief Executive Officer in May 2012, having previously served as Senior Vice President, Exploration and Production—International since May 2009.

Andrew D. Lundquist was appointed Senior Vice President, Government Affairs in 2013. Prior to that, he served as managing partner of BlueWater Strategies LLC, since 2002.

James D. McMorran was appointed Vice President, Human Resources, Real Estate and Facilities Services in August 2015. Prior to that, he served as Manager, Compensation and Benefits, since 2004.

Glenda M. Schwarz was appointed Vice President and Controller in 2009.

 

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Jeff W. Sheets was appointed Executive Vice President, Finance and Chief Financial Officer in May 2012, having previously served as Senior Vice President, Finance and Chief Financial Officer since 2010.

Don E. Wallette, Jr. was appointed Executive Vice President, Commercial, Business Development and Corporate Planning in May 2012. Prior to that, he served as President, Asia Pacific since 2010 and President, Russia/Caspian from 2006 to 2010.

On February 16, 2016, Jeff W. Sheets announced his decision to retire as Executive Vice President, Finance and Chief Financial Officer. Mr. Sheets will remain in his position as Executive Vice President, Finance and Chief Financial Officer until April 1, 2016, and following that will remain an employee through May 31, 2016, to provide support during the transition of his responsibilities.

In connection with Mr. Sheets’ retirement, at a meeting held on February 16 and 17, 2016, the Board of Directors approved the following changes to our executive leadership team to become effective April 1, 2016:

 

    Don E. Wallette, Jr. will become Executive Vice President, Finance, Commercial and Chief Financial Officer.
    Al J. Hirshberg will become Executive Vice President, Production, Drilling and Projects.
    Matt Fox will become Executive Vice President, Strategy, Exploration and Technology.

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Common Stock Prices and Cash Dividends Per Share

ConocoPhillips’ common stock is traded on the New York Stock Exchange, under the symbol “COP.”

 

     Stock Price         
     High                 Low             Dividends   
  

 

 

    

 

 

 

2015

        

First

   $             70.11         60.57         0.73   

Second

     69.72         60.86         0.73   

Third

     61.51         41.10         0.74   

Fourth

     57.24         44.56         0.74   

 

 

2014

        

First

   $ 70.99         62.74         0.69   

Second

     86.43         69.33         0.69   

Third

     87.09         75.92         0.73   

Fourth

     76.52         60.84         0.73   

 

 

Closing Stock Price at December 31, 2015

  

   $ 46.69   

Closing Stock Price at January 31, 2016

  

   $ 39.08   

Number of Stockholders of Record at January 31, 2016*

  

     52,394   

 

 

*In determining the number of stockholders, we consider clearing agencies and security position listings as one stockholder for each agency listing.

The declaration of dividends is subject to the discretion of our Board of Directors, and may be affected by various factors, including our future earnings, financial condition, capital requirements, levels of indebtedness, credit ratings and other considerations our Board of Directors deems relevant. Our Board of Directors has adopted a quarterly dividend declaration policy providing that the declaration of any dividends will be determined quarterly by the Board of Directors taking into account such factors as our business model, prevailing business conditions and our financial results and capital requirements, without a predetermined annual net income payout ratio.

On February 4, 2016, we announced that our Board of Directors approved a reduction in the quarterly dividend to $0.25 per share, compared with the previous quarterly dividend of $0.74 per share. The dividend is payable on March 1, 2016 to stockholders of record at the close of business on February 16, 2016.

Issuer Purchases of Equity Securities

During 2015, there were no active share repurchase programs and no repurchases of common stock from employees in connection with the company’s broad-based employee incentive programs.

 

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Item 6.     SELECTED FINANCIAL DATA

 

     Millions of Dollars Except Per Share Amounts  
     2015     2014      2013      2012      2011  
  

 

 

 

Sales and other operating revenues

   $ 29,564        52,524         54,413         57,967         64,196   

Income (loss) from continuing operations

     (4,371     5,807         8,037         7,481         7,188   

Per common share

             

Basic

     (3.58     4.63         6.47         5.95         5.18   

Diluted

     (3.58     4.60         6.43         5.91         5.14   

Income from discontinued operations

     -        1,131         1,178         1,017         5,314   

Net income (loss)

     (4,371     6,938         9,215         8,498         12,502   

Net income (loss) attributable to ConocoPhillips

     (4,428     6,869         9,156         8,428         12,436   

Per common share

             

Basic

     (3.58     5.54         7.43         6.77         9.04   

Diluted

     (3.58     5.51         7.38         6.72         8.97   

Total assets

     97,484        116,539         118,057         117,144         153,230   

Long-term debt

     23,453        22,383         21,073         20,770         21,610   

Joint venture acquisition obligation—

             

long-term

     -        -         -         2,810         3,582   

Cash dividends declared per common share

     2.94        2.84         2.70         2.64         2.64   

 

 

Net income (loss) and Net income (loss) attributable to ConocoPhillips for all periods presented includes income from discontinued operations as a result of the separation of the downstream business, the sale of our interest in Kashagan, and the sales of our Algeria and Nigeria businesses. These factors impact the comparability of this information. For additional information, see Note 3—Discontinued Operations, in the Notes to Consolidated Financial Statements.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Notes to Consolidated Financial Statements for a discussion of factors that will enhance an understanding of this data.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is the company’s analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the financial statements and notes, and supplemental oil and gas disclosures included elsewhere in this report. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,” beginning on page 72.

Due to discontinued operations reporting, income (loss) from continuing operations is more representative of ConocoPhillips’ earnings. The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to income (loss) from continuing operations. For additional information, see Note 3—Discontinued Operations, in the Notes to Consolidated Financial Statements.

BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

ConocoPhillips is the world’s largest independent exploration and production (E&P) company, based on proved reserves and production of liquids and natural gas. Headquartered in Houston, Texas, we have operations and activities in 21 countries. At December 31, 2015, we employed approximately 15,900 people worldwide and had total assets of $97.5 billion. Our stock is listed on the New York Stock Exchange under the symbol “COP.”

Basis of Presentation

Effective November 1, 2015, the Other International and historically presented Europe segments were restructured to align with changes to our internal organization structure. The Libya business was moved from the Other International segment to the historically presented Europe segment, which is now renamed Europe and North Africa. Accordingly, results of operations for the Other International and Europe and North Africa segments have been revised in all periods presented. There was no impact on our consolidated financial statements, and the impact on our segment presentation is immaterial. For additional information, see Note 24—Segment Disclosures and Related Information, in the Notes to Consolidated Financial Statements.

Overview

We are an independent E&P company focused on exploring for, developing and producing crude oil and natural gas globally. Our diverse portfolio primarily includes resource-rich North American unconventional assets and oil sands assets in Canada; lower-risk legacy assets in North America, Europe, Asia and Australia; several major international developments; and an inventory of global conventional and unconventional exploration prospects.

The energy landscape changed dramatically in the past year. Increased supply caused commodity prices to decline substantially. In December 2015, we announced a 2016 operating plan based on $7.7 billion of capital expenditures. This represented a reduction of 24 percent, compared to 2015 actual expenditures, sourced from the completion of several major projects, as well as deferrals, deflation capture and efficiencies across the portfolio.

 

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In response to an outlook of lower prices in 2016 compared to 2015, as well as credit tightening across the industry, we revised our 2016 operating plan in February 2016, reducing our capital expenditures guidance by 17 percent, from $7.7 billion to $6.4 billion. We also reduced our quarterly dividend by 66 percent, to $0.25 per share. These actions, taken to maintain a strong balance sheet, will enable us to continue to deliver an investment offering of a competitive dividend, disciplined growth and financial strength. We also believe these actions position the company for success in a lower, more volatile price environment, with the flexibility to adjust to commodity price movements in the future.

Key Operating and Financial Summary

Significant items during 2015 included the following:

 

    Achieved full-year production of 1,589 MBOED; 5 percent production growth from continuing operations, adjusted for Libya, downtime and dispositions.
    Lowered operating costs year over year.
    Reduced 2015 capital by 41 percent compared with 2014.
    Achieved major project startups at APLNG and Surmont 2.
    Completed additional startups at Eldfisk II, CD5, Drill Site 2S, Enochdhu and the Brodgar H3 subsea tie-back.
    Announced phased exit from deepwater exploration.
    Completed approximately $2 billion of non-core asset dispositions across the portfolio.
    Ended the year with $2.4 billion of cash and cash equivalents.

We accomplished several strategic milestones in 2015. Excluding Libya, our production from continuing operations was 1,589 MBOED, compared with 1,532 MBOED in 2014, a 57 MBOED increase. The production increase was driven by growth from major projects and development programs, as well as improved well performance, partially offset by normal field decline. In 2015, we generated $2 billion from the disposition of certain non-core assets in our portfolio. The full-year 2015 production impact of completed dispositions was 64 MBOED.

In 2015, we reviewed our cost structure and took decisive actions to achieve sustainable operating cost reductions across the company. We targeted a $1 billion reduction in operating costs in 2016, compared with 2014. We reduced headcount, including management positions, to streamline decision-making, increased the autonomy in our business units, captured deflation and adjusted our activity levels, which resulted in achieving our stated target in 2015, a year ahead of schedule. Operating costs include production and operating expense; selling, general and administrative expense; and exploration expense excluding dry hole and leasehold impairment expense.

We generated $7.6 billion in cash from continuing operations in 2015, paid dividends on our common stock of $3.7 billion and ended the year with $2.4 billion in cash and cash equivalents.

Business Environment

In the first half of 2014, strong crude oil prices were supported by geopolitical tensions impacting supplies, as well as global oil demand growth. This was followed by an abrupt decline in prices during the fourth quarter of 2014, as surging production growth from U.S. tight oil and the decision by the Organization of Petroleum Exporting Countries (OPEC) to maintain production outweighed fears of supply disruptions. These developments, combined with slowing global oil demand growth, caused crude oil prices to plummet to near five-year lows at the end of 2014. Prices remained significantly lower throughout 2015, reaching a ten-year quarterly low of $43.67 for Brent crude oil, in the fourth quarter of 2015. Lower 2015 prices contributed to higher demand growth which was overwhelmed by continued production increase and supply surplus. Brent crude oil was $30.69 in January 2016, reflecting an ongoing decline in prices.

 

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The energy industry has periodically experienced this type of extreme volatility due to fluctuating supply-and-demand conditions. Commodity prices are the most significant factor impacting our profitability and related reinvestment of operating cash flows into our business. Among other dynamics that could influence world energy markets and commodity prices are global economic health, supply disruptions or fears thereof caused by civil unrest or military conflicts, actions taken by OPEC, environmental laws, tax regulations, governmental policies and weather-related disruptions. North America’s energy landscape has been transformed from resource scarcity to an abundance of supply, primarily due to advances in technology responsible for the rapid growth of tight oil production, successful exploration and rising production from the Canadian oil sands. Our strategy is to sustainably lower our cost structure and maintain a strong balance sheet and a diverse low cost-of-supply portfolio that can provide the financial flexibility to withstand challenging business cycles.

Operating and Financial Priorities

Other important factors we must continue to manage well in order to be successful include:

 

    Maintaining a relentless focus on safety and environmental stewardship. Safety and environmental stewardship, including the operating integrity of our assets, remain our highest priorities, and we are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. We strive to conduct our business with respect and care for both the local and global environment and systematically manage risk to drive sustainable business growth. Our sustainability efforts in 2015 focused on updating action plans for climate change, biodiversity, water and human rights, as well as revamping public reporting to be more informative, searchable and responsive to common questions. We are committed to building a learning organization using human performance principles as we relentlessly pursue improved Health, Safety and Environment (HSE) and operational performance.

We are a founding member of the Marine Well Containment Company LLC (MWCC), a non-profit organization formed in 2010 to improve industry spill response in the U.S. Gulf of Mexico. MWCC developed a containment system, which meets the U.S. Bureau of Safety and Environmental Enforcement requirements for a subsea well containment system that can respond to a deepwater well control incident in the U.S. Gulf of Mexico. To complement this work internationally, we and several leading oil and gas companies established the Subsea Well Response Project in Norway, which enhances the oil industry’s ability to respond to subsea well-control incidents in international waters.

 

    Exercising our capital flexibility. We participate in a commodity price-driven and capital-intensive industry, with varying lead times from when an investment decision is made to the time an asset is operational and generates cash flow. As a result, we must invest significant capital dollars to explore for new oil and gas fields, develop newly discovered fields, maintain existing fields, and construct pipelines and liquefied natural gas (LNG) facilities. Given our view of greater price volatility, we see benefit in having an inventory of value-preserving, shorter cycle time and low cost-of-supply opportunities in our resource base. In response to weakening commodity prices, we have slowed the pace of certain discretionary investments, including the Eagle Ford and the Bakken, as well as emerging unconventional plays in the Permian, Niobrara and Montney, and plan to fund additional cash calls in our equity affiliates. We retain the flexibility to increase or decrease investment activity without loss of opportunity, and will reassess our near-term investment decisions as necessary. We use a disciplined approach, focused on value maximization, to set our capital plans.

In February 2016, we announced a revised capital budget of $6.4 billion for 2016, a reduction of 37 percent compared with actual capital expenditures of $10.1 billion in 2015. The $3.7 billion reduction primarily reflects lower spending on major projects, deferral of activity primarily in the Lower 48, deflation capture and efficiencies across the portfolio.

 

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    Portfolio optimization. We continue to optimize our asset portfolio by focusing on low cost-of-supply assets which strategically fit our development plans. In the third quarter of 2015, we announced plans to reduce future capital spending in our deepwater exploration program. As a result, we terminated our Gulf of Mexico deepwater drillship contract with Ensco and impaired certain Gulf of Mexico leases where we decided not to conduct further activity. Additionally, in the fourth quarter of 2015, we recorded dry hole expense and impaired additional leases in the Canada segment due to streamlined capital plans.

In 2015, we generated approximately $2 billion in proceeds from non-core asset dispositions, including the sales of certain western Canadian properties, producing properties in East Texas and North Louisiana, producing properties in South Texas, a certain pipeline and gathering assets in South Texas, and our 50 percent equity method investment in the Russian joint venture, Polar Lights Company. We will continue to evaluate our assets to determine whether they fit our strategic direction and will optimize the portfolio as necessary, directing our capital investments to areas that align with our objectives.

 

    Controlling costs and expenses. Controlling operating and overhead costs, without compromising safety and environmental stewardship, is a high priority. We monitor these costs using various methodologies that are reported to senior management monthly, on both an absolute-dollar basis and a per-unit basis. Managing operating and overhead costs is critical to maintaining a competitive position in our industry, particularly in a low commodity price environment.

 

    Adding to our proved reserve base. We primarily add to our proved reserve base in three ways:

 

  ¡    Successful exploration, exploitation and development of new and existing fields.
  ¡    Application of new technologies and processes to improve recovery from existing fields.
  ¡    Acquisition of existing fields.

Proved reserve estimates require economic production based on historical 12-month, first-of-month, average prices and current costs. Therefore, our proved reserves generally decrease as prices decline and increase as prices rise. Additionally, as we undertake cash conservation efforts, our reserve replacement efforts could be delayed thus limiting our ability to replace depleted reserves. Low commodity prices and reduced capital expenditures in 2015 adversely affected our reported year-end proved reserves. In 2015, our organic reserve replacement excluding the impact of sales and purchases was 10 percent. In the five years ended December 31, 2015, our organic reserve replacement was 117 percent, excluding the impact of sales and purchases.

Access to additional resources has become increasingly difficult as commodity prices can make projects uneconomic or unattractive. In addition, prohibition of direct investment in some nations, national fiscal terms, political instability, competition from national oil companies, and lack of access to high-potential areas due to environmental or other regulation may negatively impact our ability to increase our reserve base. As such, the timing and level at which we add to our reserve base may, or may not, allow us to replace our production over subsequent years.

 

    Applying technical capability. We leverage our knowledge and technology to create value and safely deliver on our plans. Technical strength is part of our heritage, and we are evolving our technical approach to optimally apply best practices. Companywide, we continue to evaluate potential solutions to leverage knowledge of technological successes across all of our operations. Such innovations enable us to economically convert additional resources to reserves, achieve greater operating efficiencies and reduce our environmental impact.

 

   

Developing and retaining a talented work force. We strive to attract, train, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and ethics. To this end, we offer university internships across multiple disciplines to attract the

 

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best talent and, as needed, recruit experienced hires to maintain a broad range of skills and experience. We promote continued learning, development and technical training through structured development programs designed to enhance the technical and functional skills of our employees.

Other significant factors that can affect our profitability include:

 

    Commodity prices. Our earnings and operating cash flows generally correlate with industry price levels for crude oil and natural gas, the prices of which are subject to factors external to the company and over which we have no control. The following graph depicts the average benchmark prices for West Texas Intermediate (WTI) crude oil, Dated Brent crude oil and U.S. Henry Hub natural gas:

 

LOGO

Crude oil prices have remained under pressure throughout 2015 due to continued global production increase that has outpaced demand growth, leading to a large observed rise in global inventory. Brent crude oil prices averaged $43.67 per barrel in the fourth quarter of 2015, a decrease of 43 percent compared with $76.27 per barrel in the fourth quarter of 2014. Similarly, WTI crude oil prices declined 43 percent from $73.41 per barrel in the fourth quarter of 2014 to $42.10 per barrel in the same period of 2015.

Henry Hub natural gas prices averaged $2.27 per million British thermal units (MMBTU) in the fourth quarter of 2015, a decrease of 44 percent compared with $4.04 per MMBTU in the fourth quarter of 2014. Natural gas prices remained under pressure as production growth continued and U.S. underground gas storage inventories rose to the top of the five-year range in late 2015.

Natural gas liquids prices were also lower in 2015. Our realized natural gas liquids prices averaged $16.42 per barrel in the fourth quarter of 2015, a decrease of 47 percent compared with $31.07 per barrel in the same quarter of 2014. The expansion in tight oil production has also helped boost supplies of natural gas liquids, resulting in continued downward pressure on natural gas liquids prices in the United States.

Declining global crude oil prices have resulted in the Western Canada Select benchmark price experiencing a 52 percent decline, from $73.60 per barrel in 2014 to $35.21 per barrel in 2015. Consequently, our realized bitumen price experienced a decrease relative to 2014 price levels. Our realized bitumen price was $18.72 per barrel in 2015, a decrease of 66 percent compared with $55.13 in the same period of 2014.

 

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Our total average realized price from continuing operations was $34.34 per barrel of oil equivalent (BOE) in 2015, a decrease of 47 percent compared with $64.59 per BOE in 2014. Our total average realized price was $28.54 per BOE in the fourth quarter of 2015, a decrease of 46 percent compared with $52.88 per BOE in the fourth quarter of 2014. The reduction in the prices reflects lower average realized prices across all commodities.

In recent years, the use of hydraulic fracturing and horizontal drilling in tight oil formations has led to increased industry actual and forecasted crude oil and natural gas production in the United States. Although providing significant short- and long-term growth opportunities for our company, the increased abundance of crude oil and natural gas due to development of tight oil plays could also have adverse financial implications to us, including: an extended period of low commodity prices; production curtailments; delay of plans to develop areas such as unconventional fields or Alaska North Slope natural gas fields; and underutilization of LNG regasification facilities. Should one or more of these events occur, our revenues would be reduced and additional asset impairments might be possible.

Going forward, domestic crude prices should reach a market equilibrium with global crude prices due to the recent overturn of the U.S. crude export bans.

 

    Impairments. As mentioned above, we participate in capital-intensive industries. At times, our properties, plants and equipment and investments become impaired when, for example, commodity prices decline significantly for long periods of time, our reserve estimates are revised downward, or a decision to dispose of an asset leads to a write-down to its fair value. We may also invest large amounts of money in exploration which, if exploratory drilling proves unsuccessful, could lead to a material impairment of leasehold values. In 2015, we recorded pre-tax impairments of $2.2 billion for proved properties and an equity method investment and $1.9 billion for unproved properties, compared with $856 million and $562 million in 2014. For additional information on our impairments in 2015, 2014 and 2013, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

 

    Effective tax rate. Our operations are located in countries with different tax rates and fiscal structures. Accordingly, even in a stable commodity price and fiscal/regulatory environment, our overall effective tax rate can vary significantly between periods based on the “mix” of pretax earnings within our global operations.

 

    Fiscal and regulatory environment. Our operations can be affected by changing economic, regulatory and political environments in the various countries in which we operate, including the United States. Civil unrest or strained relationships with governments may impact our operations or investments. These changing environments have generally negatively impacted our results of operations, and further changes to government fiscal take could have a negative impact on future operations. Our production operations in Libya and related oil exports have been suspended or significantly curtailed since July 2013 due to the closure of the Es Sider crude oil export terminal, and they were also suspended in 2011 during Libya’s period of civil unrest. In 2015, the United Kingdom government enacted tax legislation which reduced our U.K. corporate tax rate by 12 percent, while the Alberta provincial government enacted legislation increasing our overall Canadian corporate tax rate by 2 percent. Our assets in Venezuela and Ecuador were expropriated in 2007 and 2009, respectively. Our management carefully considers these events when evaluating projects or determining the level of activity in such countries.

 

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Outlook

Consistent with our revised 2016 operating plan announced in February 2016, our full-year 2016 production from continuing operations is expected to be flat with 2015 production of 1,525 MBOED, which excludes 64 MBOED for the full-year impact of completed dispositions. First-quarter 2016 production from continuing operations is expected to be 1,540 MBOED to 1,580 MBOED.

Marketing Activities

In line with our objective to continuously optimize our portfolio, we are currently marketing certain non-core assets. We expect to generate up to $1 billion in proceeds annually from asset sales.

Impairments

As a result of lower commodity prices, and as we optimize our investments and exercise capital flexibility, it is reasonably likely we may incur future impairment charges to long-lived assets used in operations, investments in nonconsolidated entities accounted for under the equity method, and unproved properties. Although it is not reasonably practicable to quantify the impact of future impairment charges at this time, our results of operations could be materially adversely affected for the period in which impairment charges are incurred.

Operating Segments

We manage our operations through six operating segments, which are primarily defined by geographic region: Alaska, Lower 48, Canada, Europe and North Africa, Asia Pacific and Middle East, and Other International.

Corporate and Other represents costs not directly associated with an operating segment, such as most interest expense, corporate overhead, certain technology activities, as well as licensing revenues received.

Our key performance indicators, shown in the statistical tables provided at the beginning of the operating segment sections that follow, reflect results from our continuing operations, including commodity prices and production.

 

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RESULTS OF OPERATIONS

Consolidated Results

A summary of the company’s income (loss) from continuing operations by business segment follows:

 

                 Millions of Dollars               
Years Ended December 31                2015                 2014                 2013  
  

 

 

 

Alaska

   $ 4        2,041        2,274   

Lower 48

     (1,932     (22     754   

Canada

     (1,044     940        718   

Europe and North Africa

     409        814        1,297   

Asia Pacific and Middle East

     (406     3,008        3,591   

Other International

     (593     (100     223   

Corporate and Other

     (809     (874     (820

 

 

Income (loss) from continuing operations

   $ (4,371     5,807        8,037   

 

 

2015 vs. 2014

Earnings for ConocoPhillips decreased 175 percent in 2015. The decrease was mainly due to lower commodity prices.

In addition, earnings were negatively impacted by:

 

    Higher proved property and equity investment impairments, including a $1.5 billion before- and after-tax impairment of our equity investment in APLNG.
    Higher exploration expenses. Exploration expenses increased mainly as a result of higher unproved property impairments, dry hole costs and other exploration expenses. The increase included after-tax unproved property impairments of $368 million for our Alaska Chukchi Sea leasehold and capitalized interest, $310 million for our Angola Block 36 and 37 Production Sharing Contracts (PSCs), $154 million for multiple Gulf of Mexico leases, and $100 million for various Gila Prospect blocks. Additional after-tax dry hole costs and other expenses resulted from a $185 million charge for several properties in Canada, $137 million for two dry holes in Angola, $111 million for a dry hole in the Gila Prospect in deepwater Gulf of Mexico, and $246 million related to the termination of our drilling contract with Ensco.
    Higher depreciation, depletion and amortization (DD&A), mainly from increased production and commodity price-driven reserve revisions.
    Higher restructuring charges and pension settlement expense.

These reductions to earnings were partly offset by higher sales volumes, lower production taxes due to reduced commodity prices, lower operating expenses, a $555 million net deferred tax benefit resulting from a change in the U.K. tax rate in the first quarter of 2015, the absence of a $540 million after-tax loss resulting from the Freeport LNG termination agreement, gain on sale of assets, and higher licensing revenue.

2014 vs. 2013

Earnings for ConocoPhillips decreased 28 percent in 2014. The decrease was mainly due to:

 

    Lower crude oil prices.
    Lower gains from asset sales. Gains realized in 2014 were approximately $70 million after-tax, compared with gains realized in 2013 of $1,132 million after-tax.
    Higher operating expenses, which included the 2014 recognition of a $540 million after-tax loss resulting from the Freeport LNG termination agreement.

 

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    Higher impairments. Noncash impairments in 2014 totaled $662 million after-tax, compared with $289 million after-tax in 2013.
    Higher DD&A expenses, mainly due to higher volumes in the Lower 48 and the United Kingdom, partly offset by lower unit-of-production rates in Canada related to reserve bookings.
    Higher exploration expenses.

These reductions to earnings were partially offset by higher volumes; lower production taxes, which mainly resulted from higher capital spending, lower prices and lower production volumes in Alaska; and higher natural gas and LNG prices.

Income Statement Analysis

2015 vs. 2014

Sales and other operating revenues decreased 44 percent in 2015, mainly as a result of lower prices across all commodities. Lower prices were partly offset by higher crude oil and LNG sales volumes.

Equity in earnings of affiliates decreased 74 percent in 2015. The decrease was primarily due to lower earnings from FCCL Partnership and Qatar Liquefied Gas Company Limited (3) (QG3), given lower commodity prices, partly offset by higher volumes and lower operational costs.

Gain on dispositions increased by $493 million in 2015. The increase resulted from a $583 million gain from the sales of producing properties in East Texas and North Louisiana, South Texas, and a certain pipeline and gathering assets in South Texas. Gains realized were partly offset by a net loss from the disposition of non-core assets in western Canada. For additional information on gains on dispositions, see Note 6—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements.

Other income decreased 66 percent in 2015, mainly due to the absence of 2014 income related to the resolution of a contingent liability in the Other International segment and a legal arbitration settlement in Asia Pacific and Middle East, respectively.

Purchased commodities decreased 44 percent in 2015, largely as a result of lower natural gas prices and the absence of a $130 million loss in the Lower 48 related to transportation and storage capacity agreements recognized in 2014.

Production and operating expenses decreased 21 percent in 2015, largely due to lower operating expense activity, including reduced turnarounds at our Bayu-Undan Field and Darwin LNG facility, favorable foreign exchange-related impacts, and the absence of an $849 million charge resulting from the Freeport LNG termination agreement in 2014. The decrease in expense was partially offset by restructuring expenses of $206 million in 2015.

Selling, general and administrative (SG&A) expenses increased 30 percent in 2015, primarily due to $407 million in restructuring and pension settlement expenses in 2015, partially offset by lower staff and compensation plan costs.

Exploration expenses increased 105 percent in 2015, mainly as a result of higher unproved property impairments, primarily in Alaska, Angola and the Lower 48. Higher dry hole and other exploration costs, including a $253 million pre-tax expense for wells charged to dry hole in Canada, a $383 million expense related to the termination of our Gulf of Mexico deepwater drillship contract, and a $176 million charge for two wells charged to dry hole in the Gila prospect in the deepwater Gulf of Mexico, also contributed to the increase in exploration expenses. For additional information on leasehold impairments and other exploration expenses, see Note 8—Suspended Wells and Other Exploration Expenses, and Note 9—Impairments, in the Notes to Consolidated Financial Statements.

 

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DD&A increased 9 percent in 2015. The increase was mainly associated with higher production volumes in the Lower 48 and Asia Pacific and Middle East and commodity price-related reserve revisions. The increase was partly offset by reserve additions in the Lower 48.

Impairments increased 162 percent in 2015. For additional information, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

Taxes other than income taxes decreased 57 percent in 2015, mainly due to lower production taxes from reduced commodity prices in the Lower 48, Alaska and Asia Pacific and Middle East.

Interest and debt expense increased 42 percent in 2015, primarily due to lower capitalized interest on projects and increased average debt levels in 2015.

See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rate.

2014 vs. 2013

Sales and other operating revenues decreased 3 percent in 2014, mainly as a result of lower crude oil prices, partly offset by higher crude oil and bitumen volumes and higher natural gas prices.

Equity in earnings of affiliates increased 14 percent in 2014, primarily as a result of higher earnings from FCCL Partnership due to higher bitumen volumes and prices. This increase was partially offset by lower earnings from APLNG, mostly as a result of higher operating expenses and DD&A.

Gain on dispositions decreased $1,144 million in 2014. Gains realized in 2014 mostly resulted from the disposition of certain properties in western Canada. For additional information on gains realized in prior years, see Note 6—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements.

Production and operating expenses increased 23 percent in 2014, largely due to the $849 million charge resulting from the Freeport LNG termination agreement. Higher drilling and maintenance activity, mostly in the Lower 48, Australia, Alaska and Europe, in addition to the absence of the 2013 benefit of a $142 million accrual reduction related to the Federal Energy Regulatory Commission (FERC) approval of cost allocation (pooling) agreements with the remaining owners of the Trans-Alaska Pipeline System (TAPS), also contributed to the increase. These increases were partly offset by the absence of a $155 million charge in 2013 related to Bohai Bay. For additional information on the Freeport LNG transaction, see Note 7—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements.

SG&A expenses decreased 14 percent in 2014, mainly due to the absence of pension settlement expenses.

Exploration expenses increased 66 percent in 2014, mainly as a result of higher impairments of undeveloped leasehold costs, primarily in the Lower 48 and Canada, and higher dry hole costs, mostly associated with the Gulf of Mexico and Angola. For additional information on the leasehold impairments, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

DD&A increased 12 percent in 2014. This increase was mostly associated with higher production volumes in the United Kingdom and the Lower 48, partly offset by lower unit-of-production rates in Canada associated with year-end 2013 price-related reserve revisions and lower natural gas production volumes.

Impairments increased 62 percent in 2014. For additional information, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

 

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Taxes other than income taxes decreased 28 percent in 2014, mainly due to lower production taxes, which resulted from higher capital spending, lower crude oil prices and lower production volumes in Alaska.

Interest and debt expense increased 6 percent in 2014, primarily due to lower capitalized interest on projects, partly offset by lower interest expense from lower average debt levels and a $28 million benefit associated with interest on a favorable tax settlement.

See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rate.

 

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Summary Operating Statistics         
     2015         2014         2013   
  

 

 

 

Average Net Production

        

Crude oil (MBD)*

     605         595         581    

Natural gas liquids (MBD)

     156         159         156    

Bitumen (MBD)

     151         129         109    

Natural gas (MMCFD)**

     4,060         3,943         3,939    

 

 

Total Production (MBOED)***

     1,589         1,540         1,502    

 

 
     Dollars Per Unit   
  

 

 

 

Average Sales Prices

        

Crude oil (per barrel)

   $           48.26         92.80         103.32    

Natural gas liquids (per barrel)

     17.79         38.99         41.42    

Bitumen (per barrel)

     18.72         55.13         53.27    

Natural gas (per thousand cubic feet)

     3.96         6.57         6.11    

 

 
     Millions of Dollars   
  

 

 

 

Worldwide Exploration Expenses

        

General and administrative; geological and geophysical; and lease rentals

   $ 1,127         879         789    

Leasehold impairment

     1,924         562         175    

Dry holes

     1,141         604         268    

 

 
   $ 4,192         2,045         1,232    

 

 

Excludes discontinued operations.

        *Thousands of barrels per day.
    **Millions of cubic feet per day. Represents quantities available for sale and excludes gas equivalent of natural gas liquids included above.
***Thousands of barrels of oil equivalent per day.

We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and natural gas liquids on a worldwide basis. At December 31, 2015, our continuing operations were producing in the United States, Norway, the United Kingdom, Canada, Australia, Timor-Leste, Indonesia, China, Malaysia and Qatar.

Total production from continuing operations, including Libya, increased 3 percent in 2015. The increase in total average production in 2015 primarily resulted from additional production from major developments, including tight oil plays in the Lower 48; Gumusut in Malaysia; APLNG in Australia; Greater Britannia projects and the J-Area in the U.K.; and the ramp-up of Foster Creek Phase F in Canada. Improved well performance, mostly in the Lower 48, western Canada and Norway, and lower turnaround activity also contributed to higher production in 2015. These increases were largely offset by normal field decline. Adjusted for downtime and dispositions of 13 MBOED, our production from continuing operations, excluding Libya, increased by 70 MBOED, or 5 percent, compared with 2014. Full-year 2015 production from assets sold or under agreement was 64 MBOED.

In 2014, average production from continuing operations increased 3 percent compared with 2013, while average liquids production increased 4 percent. The increase in total average production in 2014 primarily resulted from additional production from major developments, mainly from tight oil plays in the Lower 48 and the ramp up of production from Jasmine in the United Kingdom and Christina Lake in Canada, and increased drilling programs, mostly in the Lower 48, western Canada and Norway. These increases were largely offset by normal field decline, higher planned downtime, shut-in Libya production due to the closure of the Es Sider crude oil export terminal, and unfavorable market impacts. Adjusted for Libya, production from continuing operations increased by 60 MBOED, or 4 percent, compared with 2013.

 

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Alaska

 

     2015         2014         2013   
  

 

 

 

Income from Continuing Operations (millions of dollars)

   $ 4         2,041         2,274    

 

 

Average Net Production

        

Crude oil (MBD)

     158         162         178    

Natural gas liquids (MBD)

     13         13         15    

Natural gas (MMCFD)

     42         49         43    

 

 

Total Production (MBOED)

     178         183         200    

 

 

Average Sales Prices

        

Crude oil (per barrel)

   $           51.61         97.68         107.83    

Natural gas (per thousand cubic feet)

     4.33         5.42         4.35    

 

 

The Alaska segment primarily explores for, produces, transports and markets crude oil, natural gas liquids, natural gas and LNG. In 2015, Alaska contributed 19 percent of our worldwide liquids production and 1 percent of our natural gas production.

2015 vs. 2014

Alaska reported earnings of $4 million in 2015, compared with earnings of $2,041 million in 2014, mainly due to lower commodity prices and a $368 million after-tax charge in the fourth quarter of 2015 for the impairment of our Chukchi Sea leasehold and capitalized interest. The earnings decrease was partly offset by reduced production taxes resulting from lower commodity prices.

Average production decreased 3 percent in 2015 compared with 2014, primarily due to normal field decline, partly offset by lower planned downtime activity and new production from the Western North Slope, Greater Prudhoe and Greater Kuparuk areas.

2014 vs. 2013

Alaska earnings decreased 10 percent in 2014 compared with 2013 earnings. The decrease was largely due to lower crude oil prices and volumes; the absence of a $97 million after-tax benefit associated with a FERC ruling in 2013, more fully described below; higher operating expenses; and a $36 million after-tax impairment related to a cancelled project. These reductions to earnings were partly offset by lower production taxes, which resulted from higher 2014 capital spending and lower crude oil prices and volumes. Higher LNG sales volumes and prices also partially offset the decrease in 2014 earnings.

In 2012, the major owners of TAPS filed a proposed settlement with FERC to resolve pooling disputes prior to August 2012 and establish a voluntary pooling agreement to pool costs prospectively from August 2012. In July 2013, FERC approved the proposed settlement and pooling agreement without modification. As a result, we reduced a related accrual in the second quarter of 2013, which decreased our production and operating expenses by $97 million after-tax.

Average production decreased 9 percent in 2014 compared with 2013, mainly as a result of normal field decline and higher planned maintenance, partly offset by lower unplanned downtime.

 

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Lower 48

 

     2015           2014           2013   
  

 

 

 

Income (Loss) from Continuing Operations (millions of dollars)

   $ (1,932)           (22)           754    

 

 

Average Net Production

            

Crude oil (MBD)

     206           188           152    

Natural gas liquids (MBD)

     94           97           91    

Natural gas (MMCFD)

     1,472           1,491           1,490    

 

 

Total Production (MBOED)

     545           533           491    

 

 

Average Sales Prices

            

Crude oil (per barrel)

   $           42.62           84.18           93.79    

Natural gas liquids (per barrel)

     14.01           30.74           31.48    

Natural gas (per thousand cubic feet)

     2.43           4.29           3.50    

 

 

The Lower 48 segment consists of operations located in the U.S. Lower 48 states and exploration activities in the Gulf of Mexico. During 2015, the Lower 48 contributed 33 percent of our worldwide liquids production and 36 percent of our natural gas production.

2015 vs. 2014

Lower 48 reported a loss of $1,932 million after-tax in 2015, compared with a loss of $22 million after-tax in 2014. The decrease in earnings was primarily due to:

 

    Lower crude oil, natural gas and natural gas liquids prices.
    Higher DD&A, mostly due to increased crude oil production.
    Higher exploration expenses
  ¡    Increased impairment expense in 2015, including after-tax charges of $154 million for certain leases in the Gulf of Mexico and $100 million for various blocks in the Gila Prospect, where we ceased further activity.
  ¡    A $246 million charge to exploration expense related to the termination of our Gulf of Mexico deepwater drillship contract with Ensco.
  ¡    Higher dry hole costs, including $111 million associated with two wells in the Gila Prospect in the deepwater Gulf of Mexico.

These decreases were partly offset by the absence of a $545 million after-tax charge resulting from the Freeport LNG termination agreement in 2014; a $368 million after-tax gain from the disposition of certain properties in South Texas, East Texas and Northern Louisiana; higher volumes; lower production taxes; and the absence of a $151 million after-tax impairment charge resulting from reduced volume forecasts on proved properties and the associated undeveloped leasehold costs.

Our average realized prices in the Lower 48 have historically correlated with WTI prices; however, beginning in the second half of 2013, our Lower 48 crude differential versus WTI began to widen. Our 2015 average realized crude oil price of $42.62 per barrel was 13 percent less than WTI of $48.72 per barrel. The differential is driven primarily by local market dynamics in the Gulf Coast, Bakken and the Permian Basin, and may remain relatively wide in the near-term.

Total average production increased 2 percent in 2015 compared with 2014, while average crude oil production increased 10 percent across the same period. The increase was mainly attributable to new production, primarily from Eagle Ford, Bakken and the Permian Basin, partially offset by normal field decline.

 

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2014 vs. 2013

The Lower 48 reported a loss of $22 million after-tax in 2014, compared with earnings of $754 million after-tax in 2013. The decrease in earnings was primarily attributable to:

 

    Higher operating expenses, which included the $545 million after-tax charge to earnings due to the Freeport LNG termination agreement.
    Lower crude oil prices.
    Higher DD&A, mostly due to higher crude oil production.
    Higher impairments. Earnings in 2014 were impacted by impairments of approximately $290 million after-tax. Property impairments were not material in 2013. For additional information, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.
    Higher dry hole costs. Dry hole costs in 2014 were approximately $180 million after-tax, primarily for the nonoperated Coronado wildcat and appraisal wells, the Shenandoah appraisal well and the Deep Nansen wildcat well, all located in the Gulf of Mexico. Dry hole costs in 2013 were approximately $130 million after-tax and mainly consisted of the Ardennes and Thorn wells, also located in the Gulf of Mexico.
    An $83 million after-tax loss recognized upon the release of underutilized transportation and storage capacity at rates below our contractual rates.

These reductions to earnings were partially offset by higher crude oil and natural gas liquids volumes, higher natural gas prices and a benefit to earnings of approximately $150 million after-tax from marketing third-party natural gas volumes.

Total average production in the Lower 48 increased 9 percent in 2014, while average crude oil production increased 24 percent. The increase was mainly attributable to new production, primarily from the Eagle Ford and Bakken, and improved drilling and well performance, partially offset by normal field decline.

 

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Canada

 

     2015           2014           2013   
  

 

 

 

Income (Loss) from Continuing Operations (millions of dollars)

   $           (1,044)           940           718    

 

 

Average Net Production

            

Crude oil (MBD)

     12           13           13    

Natural gas liquids (MBD)

     26           23           25    

Bitumen (MBD)

     13           12           13    

Consolidated operations

            

Equity affiliates

     138           117           96    

 

 

Total bitumen

     151           129           109    

 

 

Natural gas (MMCFD)

     715           711           775    

 

 

Total Production (MBOED)

     308           284           276    

 

 

Average Sales Prices

            

Crude oil (per barrel)

   $ 39.52           77.87           79.73    

Natural gas liquids (per barrel)

     17.02           46.23           47.19    

Bitumen (dollars per barrel)

     20.13           60.03           55.25    

Consolidated operations

            

Equity affiliates

     18.58           54.62           53.00    

Total bitumen

     18.72           55.13           53.27    

Natural gas (per thousand cubic feet)

     1.91           4.13           2.92    

 

 

Our Canadian operations mainly consist of natural gas fields in western Canada and oil sands developments in the Athabasca Region of northeastern Alberta. In 2015, Canada contributed 21 percent of our worldwide liquids production and 18 percent of our worldwide natural gas production.

2015 vs. 2014

Canada operations reported a loss of $1,044 million in 2015, a reduction of $1,984 million compared with 2014. The decrease in earnings was primarily due to:

 

    Lower bitumen and natural gas prices.
    Higher exploration expenses
  ¡    Higher dry hole costs, including an after-tax charge of $185 million associated with our Horn River, Northwest Territories, Thornbury and Saleski properties.
  ¡    An after-tax impairment charge of $75 million for undeveloped leasehold in the Duvernay, Thornbury, Saleski and Crow Lake areas.
    A 2 percent increase in Alberta corporate tax rates on deferred taxes.
    A $103 million net after-tax loss realized on the disposition of non-core assets in western Canada.

The earnings decrease was partly offset by higher bitumen production volumes; lower operating expenses and DD&A, both primarily from favorable foreign currency impacts; and the absence of the $109 million after-tax impairment of undeveloped leasehold costs associated with the offshore Amauligak discovery, Arctic Islands and other Beaufort properties in 2014.

Total average production increased 8 percent in 2015 compared with 2014, while bitumen production increased 17 percent over the same periods. The increases in total production were mainly attributable to strong well performance in western Canada, lower royalty impacts, strong plant performance at Foster Creek

 

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and Christina Lake and the continued ramp-up of production from Foster Creek Phase F. These increases were partly offset by normal field decline and increased unplanned downtime, including the precautionary shut down of Foster Creek for nearby forest fires in the second quarter of 2015.

2014 vs. 2013

Canada earnings increased 31 percent in 2014 compared with 2013, primarily as a result of higher natural gas and bitumen prices, lower DD&A from western Canada and higher bitumen volumes. The lower DD&A mainly resulted from lower unit-of-production rates related to year-end 2013 price-related reserve revisions and lower natural gas production volumes. Earnings in 2014 also included a $47 million tax benefit resulting from a favorable tax settlement. These increases were partly offset by lower gains from asset sales, mainly as a result of the $461 million after-tax gain from the disposition of our Clyden undeveloped oil sands leasehold in 2013, as well as the 2013 recognition of a $224 million tax benefit, related to the favorable tax resolution associated with the sale of certain western Canada properties. Lower natural gas volumes also partially offset the increase in 2014 earnings.

In addition, earnings in 2014 benefitted from lower impairments. Impairments in 2014 were $138 million after-tax and consisted primarily of the $109 million after-tax impairment of unproved properties associated with the offshore Amauligak discovery, Arctic Islands and other Beaufort properties. Impairments in 2013 consisted of the $162 million after-tax impairment of mature natural gas assets in western Canada.

For additional information on asset sales, see Note 6—Assets Held for Sale or Sold, and for additional information on impairments, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

Total average production increased 3 percent in 2014 compared with 2013, while bitumen production increased 18 percent over the same period. The continued ramp-up of production from Christina Lake Phase E in FCCL and improved drilling and well performance were partly offset by normal field decline and higher royalty impacts.

Europe and North Africa

 

     2015         2014         2013   
  

 

 

 

Income from Continuing Operations (millions of dollars)

   $ 409         814         1,297   

 

 

Average Net Production

        

Crude oil (MBD)

     120         134         139   

Natural gas liquids (MBD)

     7         8         6   

Natural gas (MMCFD)

     476         464         441   

 

 

Total Production (MBOED)

     207         219         219   

 

 

Average Sales Prices

        

Crude oil (dollars per barrel)

   $         52.75                   98.98                   109.96   

Natural gas liquids (per barrel)

     27.56         52.65         58.36   

Natural gas (per thousand cubic feet)

     7.14         9.28         10.41   

 

 

The Europe and North Africa segment consists of producing and exploration operations principally located in the Norwegian and U.K. sectors of the North Sea, the Norwegian Sea, as well as in Libya. In 2015, our Europe and North Africa operations contributed 14 percent of our worldwide liquids production and 12 percent of our natural gas production.

 

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2015 vs. 2014

Earnings for Europe and North Africa operations decreased 50 percent in 2015. The decrease in earnings was primarily due to lower crude oil and natural gas prices. Earnings further decreased due to higher property impairments in the U.K., given lower natural gas prices and increases to asset retirement obligations. The earnings decrease was partly offset by a $555 million net deferred tax benefit as a result of a change in the U.K. tax rate, effective at the beginning of 2015, and an after-tax gain of $49 million realized on the sale of our 1.9 percent interest in Norwegian Continental Shelf Gas Transportation (Gassled).

For additional information on the impairments, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

Average production decreased 5 percent in 2015, compared with 2014. The decrease in production was mostly due to normal field decline and lower volumes from Libya, partly offset by the new production from the Greater Britannia Area, the J-Area and the Greater Ekofisk Area, as well as improved well performance in Norway.

The Es Sider Terminal in Libya remained shut in throughout 2015. The 2016 operating and drilling activity in Libya is uncertain as a result of the ongoing civil unrest.

2014 vs. 2013

Earnings for Europe and North Africa decreased 37 percent in 2014 compared with 2013. The reduction in earnings was primarily due to higher DD&A, which mainly resulted from increased production volumes from Jasmine, lower crude oil and natural gas prices, higher taxes, higher impairments, and lower volumes from Libya. Impairments in 2014 were $192 million after-tax, compared with impairments in 2013 of $118 million after-tax. Lower gains from asset dispositions, mostly due to the absence of the $83 million after-tax gain on the disposition of our interest in the Interconnector Pipeline in 2013, also contributed to the decrease in 2014 earnings. These decreases were partly offset by higher volumes, primarily in the U.K., and a $48 million after-tax benefit from a pension-related settlement.

For additional information on the impairments, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

Average production was flat in 2014 compared with 2013, as the continued ramp-up of production from Jasmine, the Rivers Acid Plant in the East Irish Sea and Ekofisk South, improved drilling and well performance in Norway and lower planned downtime, were equally offset by normal field decline and the shutdown of the Es Sider crude oil export terminal in Libya.

 

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Asia Pacific and Middle East

 

     2015         2014         2013   
  

 

 

 

Income (Loss) from Continuing Operations (millions of dollars)

   $ (406)         3,008         3,591   

 

 

Average Net Production

        

Crude oil (MBD)

        

Consolidated operations

     91         79         80   

Equity affiliates

     14         15         15   

 

 

Total crude oil

     105         94         95   

 

 

Natural gas liquids (MBD)

        

Consolidated operations

     9         10         12   

Equity affiliates

     7         8         7   

 

 

Total natural gas liquids

     16         18         19   

 

 

Natural gas (MMCFD)

        

Consolidated operations

     717         723         709   

Equity affiliates

     638         505         481   

 

 

Total natural gas

     1,355         1,228         1,190   

 

 

Total Production (MBOED)

     347         317         312   

 

 

Average Sales Prices

        

Crude oil (dollars per barrel)

        

Consolidated operations

   $         49.70                 95.32                 104.78   

Equity affiliates

     53.12         99.01         105.44   

Total crude oil

     50.16         95.92         104.88   

Natural gas liquids (dollars per barrel)

        

Consolidated operations

     37.78         69.36         73.82   

Equity affiliates

     35.79         67.20         73.31   

Total natural gas liquids

     36.88         68.46         73.63   

Natural gas (dollars per thousand cubic feet)

        

Consolidated operations

     6.23         9.80         10.61   

Equity affiliates

     4.83         9.79         8.98   

Total natural gas

     5.58         9.80         9.95   

 

 

The Asia Pacific and Middle East segment has operations in China, Indonesia, Malaysia, Australia, Timor-Leste and Qatar, as well as exploration activities in Brunei. During 2015, Asia Pacific and Middle East contributed 13 percent of our worldwide liquids production and 33 percent of our natural gas production.

2015 vs. 2014

Asia Pacific and Middle East reported a loss of $406 million in 2015, compared with income of $3,008 million in 2014. The decrease in earnings was mainly due to lower prices across all commodities. Earnings in 2015 were further decreased by a $1,502 million before- and after-tax charge for the impairment of our APLNG investment, higher DD&A expense from increased volumes, primarily in Malaysia, and a $41 million after-tax charge for the impairment of our relinquished Palangkaraya PSC. The earnings decrease was partially offset by lower production taxes, increased volumes, as well as lower feedstock costs and reduced turnarounds at our Bayu-Undan Field and Darwin LNG facility.

 

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See the “APLNG” section of Note 7—Investments, Loans and Long-Term Receivables, in the Notes to Consolidated Financial Statements, for information on the impairment of our APLNG investment included within the Asia Pacific and Middle East segment.

Average production increased 9 percent in 2015, compared with 2014. The production increase was mainly attributable to new production from Gumusut, in Malaysia, which came online in the fourth quarter of 2014; the ramp-up of APLNG production due to additional gas processing facilities online; and infill drilling in China. Production increases were partly offset by normal field decline.

2014 vs. 2013

Asia Pacific and Middle East earnings decreased 16 percent in 2014 compared with 2013. The reduction in earnings was largely due to lower crude oil and natural gas prices; higher operating expenses, mostly as a result of major planned maintenance at our Bayu-Undan Field and Darwin LNG facility in Australia; lower equity earnings, mainly due to increased activity at APLNG in preparation for startup in 2015; and lower sales volumes, primarily crude oil and LNG. These decreases were partially offset by higher LNG prices, higher natural gas volumes and lower taxes. The 2014 benefits from the absence of the $116 million after-tax charge in 2013 related to Bohai Bay and a $30 million after-tax legal settlement in 2014 were offset by the absence of a $146 million after-tax insurance settlement received in 2013, also associated with the Bohai Bay seepage incidents.

Average production increased 2 percent in 2014 compared with 2013. Increased production, mainly from Indonesia, China and Malaysia, was largely offset by normal field decline and major planned maintenance at Bayu-Undan and Darwin LNG.

Other International

 

     2015           2014           2013   
  

 

 

 

Income (Loss) from Continuing Operations (millions of dollars)

   $         (593)           (100)           223    

 

 

Average Net Production

            

Crude oil (MBD)

            

Equity affiliates

     4           4             

 

 

Total Production (MBOED)

     4           4             

 

 

Average Sales Prices

            

Crude oil (dollars per barrel)

            

Equity affiliates

     37.21           64.14           72.43    

 

 

The Other International segment includes exploration activities in Colombia, Angola and Senegal. In 2015, Other International contributed less than 1 percent of our worldwide liquids production. In the fourth quarter of 2015, we completed the sale of our 50 percent interest in the Polar Lights Company.

2015 vs. 2014

Other International operations reported a loss of $593 million in 2015, compared with a loss of $100 million in 2014. The decrease in earnings was primarily due to after-tax charges of $235 million, $75 million and $32 million net for property impairments on our Angola Block 36, Angola Block 37 and Poland leasehold, respectively. Earnings were also reduced due to increased dry hole expenses for the Omosi-1 and Vali-1 wells in Angola and the absence of other income of $154 million after-tax associated with the favorable resolution of

 

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a contingent liability. The reduction in earnings was partly offset by the absence of the $136 million after-tax charge in 2014 for the Kamoxi-1 exploration well, located offshore Angola; and a $53 million after-tax gain from the disposition of our interest in the Polar Lights Company.

For additional information on the impairments, see Note 9—Impairments, in the Notes to Consolidated Financial Statements.

Average production was flat in 2015 compared with 2014.

2014 vs. 2013

Other International operations reported a loss of $100 million in 2014, compared with earnings of $223 million in 2013. The decrease was primarily due to the lower gains from asset dispositions, mainly from the absence of the $288 million after-tax gain recognized on the 2013 disposition of our equity investment in Phoenix Park Processors Limited, located in Trinidad and Tobago and higher dry hole expenses, mostly due to the $136 million after-tax charge for the Kamoxi-1 exploration well, located offshore Angola. These reductions were partially offset by the recognition of other income of $154 million after-tax associated with the favorable resolution of a contingent liability.

Average production was flat in 2014 compared with 2013.

Corporate and Other

 

     Millions of Dollars  
     2015                     2014                     2013   
  

 

 

 

Income (Loss) from Continuing Operations

        

Net interest

   $           (518)         (502)         (530)    

Corporate general and administrative expenses

     (246)         (194)         (213)    

Technology

     122          (93)         (6)    

Other

     (167)         (85)         (71)    

 

 
   $ (809)         (874)         (820)    

 

 

2015 vs. 2014

Net interest consists of interest and financing expense, net of interest income and capitalized interest, as well as premiums incurred on the early retirement of debt. Net interest increased 3 percent in 2015 compared with 2014, primarily as a result of lower capitalized interest on projects completed or sold and increased debt. The 2015 net interest expense increase was largely offset by a $148 million net tax benefit for electing the fair market value method of apportioning interest expense in the United States for prior years.

Corporate general and administrative expenses increased 27 percent in 2015, mainly due to $143 million in after-tax pension settlement expense, partially offset by lower staff and compensation plan costs.

Technology includes our investment in new technologies or businesses, as well as licensing revenues received. Activities are focused on heavy oil and oil sands, unconventional reservoirs, LNG, and subsurface, arctic and deepwater technologies, with an underlying commitment to environmental responsibility. Earnings from Technology were $122 million in 2015, compared with losses of $93 million in 2014. The increase in earnings primarily resulted from higher licensing revenues.

The category “Other” includes certain foreign currency transaction gains and losses, environmental costs associated with sites no longer in operation, and other costs not directly associated with an operating segment. “Other” expenses increased by $82 million in 2015, mainly due to $142 million after-tax in restructuring charges and foreign currency translation impacts, partially offset by lower environmental expenses.

 

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2014 vs. 2013

Net interest decreased 5 percent in 2014 compared with 2013, primarily as a result of a $93 million tax benefit associated with the election of the fair market value method of apportioning interest expense in the United States, as well as a $28 million after-tax benefit associated with interest on a favorable tax settlement. These improvements were largely offset by lower capitalized interest on projects sold or completed.

Corporate general and administrative expenses decreased 9 percent in 2014, mainly due to lower pension settlement expense, partly offset by higher benefit-related expenses. Pension settlement expense incurred in 2013 was $41 million after-tax. We did not incur pension settlement expense in 2014.

Losses from Technology were $93 million in 2014, compared with losses of $6 million in 2013. The reduction in earnings primarily resulted from lower licensing revenues and higher research and development expenses.

 

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CAPITAL RESOURCES AND LIQUIDITY

Financial Indicators

 

    

Millions of Dollars

Except as Indicated

 
  

 

 

 
     2015           2014           2013   
  

 

 

 

Net cash provided by continuing operating activities

   $           7,572           16,412           15,856   

Net cash provided by discontinued operations

     -           157           285   

Cash and cash equivalents

     2,368           5,062           6,246   

Short-term debt

     1,427           182           589   

Total debt

     24,880           22,565           21,662   

Total equity

     40,082           52,273           52,492   

Percent of total debt to capital*

     38         30           29   

Percent of floating-rate debt to total debt**

            5           8   

 

 

    *Capital includes total debt and total equity.

  **Includes effect of interest rate swaps in 2013.

To meet our short- and long-term liquidity requirements, we look to a variety of funding sources. Cash generated from continuing operating activities is the primary source of funding. In addition, during 2015 we received $1,952 million in proceeds from asset sales and issued $2,498 million of new fixed and floating rate notes. The primary uses of our available cash were $10,050 million to support our ongoing capital expenditures and investments program; $3,664 million to pay dividends on our common stock; and $103 million to repay debt. During 2015, cash and cash equivalents decreased by $2,694 million, to $2,368 million.

In addition to cash flows from operating activities and proceeds from asset sales, we rely on our commercial paper and credit facility programs and our shelf registration statement to support our short- and long-term liquidity requirements. We believe current cash balances and cash generated by operations, together with access to external sources of funds as described below in the “Significant Sources of Capital” section, will be sufficient to meet our funding requirements in the near and long term, including our capital spending program, dividend payments and required debt payments.

Significant Sources of Capital

Operating Activities

During 2015, cash provided by continuing operating activities was $7,572 million, a 54 percent decrease from 2014. The decrease was primarily due to lower prices across all commodities and the absence of the $1.3 billion distribution from FCCL in the first quarter of 2014, partly offset by year-over-year production growth. The distribution from FCCL resulted from our $2.8 billion prepayment of the remaining joint venture acquisition obligation in 2013, which substantially increased the financial flexibility of our 50 percent owned FCCL Partnership. We do not expect this individually significant distribution to recur in the future under current economic conditions. During 2014, cash provided by continuing operations was $16,412 million, compared with $15,856 million in 2013.

While the stability of our cash flows from operating activities benefits from geographic diversity, our short- and long-term operating cash flows are highly dependent upon prices for crude oil, bitumen, natural gas, LNG and natural gas liquids. Prices and margins in our industry have historically been volatile and are driven by market conditions over which we have no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows.

The level of absolute production volumes, as well as product and location mix, impacts our cash flows. Our 2015 production averaged 1,589 MBOED. We expect 2016 production to be flat with 2015 production of 1,525 MBOED, which excludes 64 MBOED for the full-year impact of completed dispositions. Future production is subject to numerous uncertainties, including, among others, the volatile crude oil and natural gas

 

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price environment, which may impact investment decisions; the effects of price changes on production sharing and variable-royalty contracts; acquisition and disposition of fields; field production decline rates; new technologies; operating efficiencies; timing of startups and major turnarounds; political instability; weather-related disruptions; and the addition of proved reserves through exploratory success and their timely and cost-effective development. While we actively manage these factors, production levels can cause variability in cash flows, although generally this variability has not been as significant as that caused by commodity prices.

To maintain or grow our production volumes, we must continue to add to our proved reserve base. Our total reserve replacement in 2015 was negative 19 percent. Excluding the impact of sales and purchases, the organic reserve replacement was 10 percent of 2015 production. Over the five-year period ended December 31, 2015, our reserve replacement was 96 percent (including 54 percent from consolidated operations) reflecting the impact of asset dispositions. Excluding these items and purchases, our five-year organic reserve replacement was 117 percent. The total reserve replacement amount above is based on the sum of our net additions (revisions, improved recovery, purchases, extensions and discoveries, and sales) divided by our production, as shown in our reserve table disclosures. In the event we undertake any cash conservation efforts, our reserve replacement efforts could be delayed thus limiting our ability to replace depleted reserves. For additional information about our 2016 capital budget, see the “2016 Capital Budget” section within “Capital Resources and Liquidity” and for additional information on proved reserves, including both developed and undeveloped reserves, see the “Oil and Gas Operations” section of this report.

As discussed in the “Critical Accounting Estimates” section, engineering estimates of proved reserves are imprecise; therefore, each year reserves may be revised upward or downward due to the impact of changes in commodity prices or as more technical data becomes available on reservoirs. In 2015, revisions decreased reserves, while in 2014 and 2013, revisions increased reserves. It is not possible to reliably predict how revisions will impact reserve quantities in the future.

Investing Activities

Proceeds from asset sales in 2015 were $2.0 billion, primarily from the sales of certain western Canadian properties; producing properties in East Texas and North Louisiana and in South Texas; a certain pipeline and gathering assets in South Texas; and our 50 percent equity method investment in the Russian joint venture, Polar Lights Company. This compares with proceeds of $1.6 billion in 2014, primarily from the sale of our Nigeria upstream affiliates for net proceeds of $1.4 billion, after customary adjustments, inclusive of deposits previously received. For additional information, see Note 3—Discontinued Operations, and Note 6—Assets Held for Sale or Sold, in the Notes to Consolidated Financial Statements. We continue to optimize our asset portfolio by focusing on assets which offer the highest returns and growth potential, while selling non-core assets. For additional information regarding marketing activities, see the “Outlook” section within Management’s Discussion and Analysis.

In May 2015, we liquidated certain deferred compensation investments for proceeds of $267 million, which is included in the “Other” line within “Cash Flows From Investing Activities” on our consolidated statement of cash flows. We do not expect further material liquidations associated with deferred compensation investments. For additional information, see Note 15—Fair Value Measurement, in the Notes to Consolidated Financial Statements. Cash flows from investing activities in 2014 were impacted by the $454 million receipt of the Freeport LNG loan repayment.

Commercial Paper and Credit Facilities

During 2015, we had a revolving credit facility totaling $7.0 billion expiring in June 2019. Our revolving credit facility may be used for direct bank borrowings, for the issuance of letters of credit totaling up to $500 million, or as support for our commercial paper programs. The revolving credit facility is broadly syndicated among financial institutions and does not contain any material adverse change provisions or any covenants requiring maintenance of specified financial ratios or credit ratings. The facility agreement contains a cross-default provision relating to the failure to pay principal or interest on other debt obligations of $200 million or more by ConocoPhillips or any of its consolidated subsidiaries.

 

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Credit facility borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at a margin above the overnight federal funds rate or prime rates offered by certain designated banks in the United States. The agreement calls for commitment fees on available, but unused, amounts. The agreement also contains early termination rights if our current directors or their approved successors cease to be a majority of the Board of Directors.

Our primary funding source for short-term working capital needs is the ConocoPhillips $6.1 billion commercial paper program. Commercial paper maturities are generally limited to 90 days. We also have the ConocoPhillips Qatar Funding Ltd. $900 million commercial paper program, which is used to fund commitments relating to QG3. At both December 31, 2015 and 2014, we had no direct borrowings or letters of credit issued under the revolving credit facility. Under the ConocoPhillips Qatar Funding Ltd. commercial paper programs, $803 million of commercial paper was outstanding at December 31, 2015, compared with $860 million at December 31, 2014. Since we had $803 million of commercial paper outstanding and had issued no letters of credit, we had access to $6.2 billion in borrowing capacity under our revolving credit facility at December 31, 2015.

In August 2015, Moody’s Investors Service downgraded our senior long-term debt ratings to “A2” from “A1”, with a stable outlook. In February 2016, Standard and Poor’s placed our long-term and short-term corporate credit ratings on CreditWatch with Negative Implications. Due to the recent significant decline in commodity prices and the expectation these prices could remain depressed in the near future, the major ratings agencies have indicated they will be conducting a review of the oil and gas industry. During the first quarter of 2016, the credit ratings for several companies in the oil and gas industry were downgraded, and we expect further downgrades may broadly impact the industry during the first half of 2016. We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, in the event of a further downgrade of our credit rating. If our credit rating were to deteriorate to a level prohibiting us from accessing the commercial paper market, we would still be able to access funds under our revolving credit facility.

Certain of our project-related contracts and derivative instruments contain provisions requiring us to post collateral. Many of these contracts and instruments permit us to post either cash or letters of credit as collateral. At December 31, 2015 and December 31, 2014, we had direct bank letters of credit of $340 million and $802 million, respectively, which secured performance obligations related to various purchase commitments incident to the ordinary conduct of business.

Shelf Registration

We have a universal shelf registration statement on file with the U.S. Securities and Exchange Commission under which we, as a well-known seasoned issuer, have the ability to issue and sell an indeterminate amount of various types of debt and equity securities.

Off-Balance Sheet Arrangements

As part of our normal ongoing business operations and consistent with normal industry practice, we enter into numerous agreements with other parties to pursue business opportunities, which share costs and apportion risks among the parties as governed by the agreements.

For information about guarantees, see Note 12—Guarantees, in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Capital Requirements

For information about our capital expenditures and investments, see the “Capital Expenditures” section.

Our debt balance at December 31, 2015, was $24.9 billion, an increase of $2.3 billion from the balance at December 31, 2014, primarily as a result of the May 2015 issuance of $2.5 billion in new fixed and floating rate notes. Our short-term debt balance at December 31, 2015, increased $1.2 billion compared with

 

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December 31, 2014, primarily as a result of the timing of scheduled maturities. We expect to pursue financing options in 2016 to provide additional capital to finance our operations and to partially refinance some of our long-term borrowings, which may include offerings of additional notes from time to time depending on market conditions. For more information, see Note 11—Debt, in the Notes to Consolidated Financial Statements.

We were obligated to contribute $7.5 billion, plus interest, over a 10-year period that began in 2007, to our 50 percent owned FCCL Partnership. In December 2013, we paid the remaining balance of the obligation, which totaled $2,810 million and is included in the “Other” line in the financing activities section of our consolidated statement of cash flows.

In October 2015, we announced a dividend of 74 cents per share. The dividend was paid December 1, 2015, to stockholders of record at the close of business on October 19, 2015. On February 4, 2016, we announced a reduction in the quarterly dividend to 25 cents per share, compared with the previous quarterly dividend of 74 cents per share. We believe this effort will allow us to preserve our balance sheet strength and provide financial flexibility through the current downturn. The dividend will be paid March 1, 2016, to stockholders of record at the close of business on February 16, 2016.

Contractual Obligations 

The following table summarizes our aggregate contractual fixed and variable obligations of our continuing

operations as of December 31, 2015:

 

     Millions of Dollars  
  

 

 

 
     Payments Due by Period   
  

 

 

 
     Total        
 
Up to 1
Year
  
  
    
 
Years
2–3
  
  
    
 
Years
4–5
  
  
    
 
After
5 Years
  
  
  

 

 

 

Debt obligations (a)

   $         24,062         1,365         2,841         4,484         15,372   

Capital lease obligations (b)

     818         62         99         106         551   

 

 

Total debt

     24,880         1,427         2,940         4,590         15,923   

 

 

Interest on debt and other obligations

     15,120         1,185         2,209         1,792         9,934   

Operating lease obligations (c)

     2,157         671         575         530         381   

Purchase obligations (d)

     12,359         5,043         2,040         1,324         3,952   

Other long-term liabilities

              

Pension and postretirement benefit contributions (e)

     1,999         414         892         693         -   

Asset retirement obligations (f)

     9,911         553         1,101         1,006         7,251   

Accrued environmental costs (g)

     258         39         51         35         133   

Unrecognized tax benefits (h)

     46         46         (h)         (h)         (h)   

 

 

Total

   $ 66,730         9,378         9,808         9,970         37,574   

 

 

 

(a) Includes $284 million of net unamortized premiums, discounts and debt issuance costs. See Note 11—Debt, in the Notes to Consolidated Financial Statements, for additional information.

 

(b) Capital lease obligations are presented on a discounted basis.

 

(c) Operating lease obligations are presented on an undiscounted basis.

 

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(d) Represents any agreement to purchase goods or services that is enforceable and legally binding and that specifies all significant terms, presented on an undiscounted basis. Does not include purchase commitments for jointly owned fields and facilities where we are not the operator.

The majority of the purchase obligations are market-based contracts related to our commodity business. Product purchase commitments with third parties totaled $3,986 million.

Purchase obligations of $6,664 million are related to agreements to access and utilize the capacity of third-party equipment and facilities, including pipelines and LNG and product terminals, to transport, process, treat and store commodities. The remainder is primarily our net share of purchase commitments for materials and services for jointly owned fields and facilities where we are the operator.

 

(e) Represents contributions to qualified and nonqualified pension and postretirement benefit plans for the years 2016 through 2020. For additional information related to expected benefit payments subsequent to 2020, see Note 18—Employee Benefit Plans, in the Notes to Consolidated Financial Statements.

 

(f) Represents estimated discounted costs to retire and remove long-lived assets at the end of their operations.

 

(g) Represents estimated costs for accrued environmental expenditures presented on a discounted basis for costs acquired in various business combinations and an undiscounted basis for all other accrued environmental costs.

 

(h) Excludes unrecognized tax benefits of $413 million because the ultimate disposition and timing of any payments to be made with regard to such amounts are not reasonably estimable. Although unrecognized tax benefits are not a contractual obligation, they are presented in this table because they represent potential demands on our liquidity.

Capital Expenditures

 

     Millions of Dollars  
  

 

 

 
     2015         2014         2013   
  

 

 

 

Alaska

   $ 1,352         1,564         1,140   

Lower 48

     3,765         6,054         5,210   

Canada

     1,255         2,340         2,232   

Europe and North Africa

     1,573         2,540         3,126   

Asia Pacific and Middle East

     1,812         3,877         3,382   

Other International

     173         520         265   

Corporate and Other

     120         190         182   

 

 

Capital expenditures and investments from continuing operations

     10,050         17,085         15,537   

 

 

Discontinued operations in Kashagan, Nigeria and Algeria

     -         59         609   

Joint venture acquisition obligation (principal)—Canada*

     -         -         772   

 

 

Capital Program

   $         10,050                 17,144                 16,918   

 

 
*Excludes $2,810 million prepayment in the fourth quarter of 2013.

Working capital changes associated with investing activities increased cash used in investing activities by $968 million for the year ended December 31, 2015, compared with a decrease of $180 million for the corresponding period of 2014, and an increase of $55 million for the corresponding period of 2013. The increase in cash used in investing activities as of December 31, 2015, is attributable to reduced capital accruals, as compared with December 31, 2014, from lower activity levels in 2015, primarily in the Lower 48 and Canada.

 

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Our capital expenditures and investments from continuing operations for the three-year period ended December 31, 2015, totaled $42.7 billion. The 2015 expenditures supported key exploration and developments, primarily:

 

    Oil and natural gas development and exploration activities in the Lower 48, including Eagle Ford, Bakken, and the Permian Basin.
    Major project expenditures associated with the APLNG joint venture in Australia.
    Oil sands development, notably at Surmont 2, and ongoing liquids-rich plays in Canada.
    Alaska activities related to development in the Greater Kuparuk Area, Greater Prudhoe Area and the Western North Slope.
    In Europe, development activities in the Greater Ekofisk, Aasta Hansteen, Clair Ridge, Jasmine and Greater Britannia areas, and exploration and appraisal activities in the Jasmine and Greater Clair areas.
    Exploration and appraisal drilling in deepwater Gulf of Mexico.
    Continued development in Malaysia, Indonesia, China, Timor-Leste and offshore Australia, and exploration and appraisal activity in Malaysia, Indonesia, China and offshore Australia.
    Exploration activities in Angola and Senegal.

2016 CAPITAL BUDGET

In anticipation of ongoing weak commodity prices in 2016, our capital budget was reduced in February 2016 from the previously announced $7.7 billion to $6.4 billion, a decrease of 37 percent compared with 2015 capital expenditures of $10.1 billion. The reduction in capital relative to 2015 primarily reflects lower major project spending, deflation capture, deferral of activity and efficiency improvements.

We are planning to allocate approximately:

 

    34 percent of our 2016 capital expenditures budget to development drilling programs. These funds will focus predominantly on the Lower 48 unconventionals including the Eagle Ford and Bakken, as well as development drilling in Canada, Alaska, the Greater Ekofisk Area, and in legacy assets within Asia Pacific and Middle East.
    31 percent of our 2016 capital expenditures budget to major projects. These funds will focus on startup of APLNG Train 2, as well as major projects in Alaska, Europe, Malaysia and China.
    18 percent of our 2016 capital expenditures budget to exploration and appraisal activity. These funds will primarily target the Gulf of Mexico, Senegal, Nova Scotia, and Alaska.
    17 percent of our 2016 capital expenditures budget to maintain base production and corporate expenditures.

For information on proved undeveloped reserves and the associated costs to develop these reserves, see the “Oil and Gas Operations” section.

Contingencies

A number of lawsuits involving a variety of claims arising in the ordinary course of business have been made against ConocoPhillips. We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active and inactive sites. We regularly assess the need for accounting recognition or disclosure of these contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. With respect to income tax related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.

 

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Based on currently available information, we believe it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our consolidated financial statements. For information on other contingencies, see “Critical Accounting Estimates” and Note 13—Contingencies and Commitments, in the Notes to Consolidated Financial Statements.

Legal and Tax Matters

We are subject to various lawsuits and claims including but not limited to matters involving oil and gas royalty and severance tax payments, gas measurement and valuation methods, contract disputes, environmental damages, personal injury, and property damage. Our primary exposures for such matters relate to alleged royalty underpayments on certain federal, state and privately owned properties and claims of alleged environmental contamination from historic operations. We will continue to defend ourselves vigorously in these matters.

Our legal organization applies its knowledge, experience and professional judgment to the specific characteristics of our cases, employing a litigation management process to manage and monitor the legal proceedings against us. Our process facilitates the early evaluation and quantification of potential exposures in individual cases. This process also enables us to track those cases that have been scheduled for trial and/or mediation. Based on professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization regularly assesses the adequacy of current accruals and determines if adjustment of existing accruals, or establishment of new accruals, is required. See Note 19—Income Taxes, in the Notes to Consolidated Financial Statements, for additional information about income tax related contingencies.

Environmental

We are subject to the same numerous international, federal, state and local environmental laws and regulations as other companies in our industry. The most significant of these environmental laws and regulations include, among others, the:

 

    U.S. Federal Clean Air Act, which governs air emissions.
    U.S. Federal Clean Water Act, which governs discharges to water bodies.
    European Union Regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (REACH).
    U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur.
    U.S. Federal Resource Conservation and Recovery Act (RCRA), which governs the treatment, storage and disposal of solid waste.
    U.S. Federal Oil Pollution Act of 1990 (OPA90), under which owners and operators of onshore facilities and pipelines, lessees or permittees of an area in which an offshore facility is located, and owners and operators of vessels are liable for removal costs and damages that result from a discharge of oil into navigable waters of the United States.
    U.S. Federal Emergency Planning and Community Right-to-Know Act (EPCRA), which requires facilities to report toxic chemical inventories with local emergency planning committees and response departments.
    U.S. Federal Safe Drinking Water Act, which governs the disposal of wastewater in underground injection wells.
    U.S. Department of the Interior regulations, which relate to offshore oil and gas operations in U.S. waters and impose liability for the cost of pollution cleanup resulting from operations, as well as potential liability for pollution damages.
    European Union Trading Directive resulting in European Emissions Trading Scheme.

These laws and their implementing regulations set limits on emissions and, in the case of discharges to water, establish water quality limits. They also, in most cases, require permits in association with new or modified operations. These permits can require an applicant to collect substantial information in connection with the

 

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application process, which can be expensive and time consuming. In addition, there can be delays associated with notice and comment periods and the agency’s processing of the application. Many of the delays associated with the permitting process are beyond the control of the applicant.

Many states and foreign countries where we operate also have, or are developing, similar environmental laws and regulations governing these same types of activities. While similar, in some cases these regulations may impose additional, or more stringent, requirements that can add to the cost and difficulty of marketing or transporting products across state and international borders.

The ultimate financial impact arising from environmental laws and regulations is neither clearly known nor easily determinable as new standards, such as air emission standards, water quality standards and stricter fuel regulations, continue to evolve. However, environmental laws and regulations, including those that may arise to address concerns about global climate change, are expected to continue to have an increasing impact on our operations in the United States and in other countries in which we operate. Notable areas of potential impacts include air emission compliance and remediation obligations in the United States and Canada.

An example is the use of hydraulic fracturing, an essential completion technique that facilitates production of oil and natural gas otherwise trapped in lower permeability rock formations. A range of local, state, federal or national laws and regulations currently govern hydraulic fracturing operations, with hydraulic fracturing currently prohibited in some jurisdictions. Although hydraulic fracturing has been conducted for many decades, a number of new laws, regulations and permitting requirements are under consideration by the U.S. Environmental Protection Agency (EPA), the U.S. Department of the Interior, and others which could result in increased costs, operating restrictions, operational delays and/or limit the ability to develop oil and natural gas resources. Governmental restrictions on hydraulic fracturing could impact the overall profitability or viability of certain of our oil and natural gas investments. We have adopted operating principles that incorporate established industry standards designed to meet or exceed government requirements. Our practices continually evolve as technology improves and regulations change.

We also are subject to certain laws and regulations relating to environmental remediation obligations associated with current and past operations. Such laws and regulations include CERCLA and RCRA and their state equivalents. Longer-term expenditures are subject to considerable uncertainty and may fluctuate significantly.

We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging we are a potentially responsible party under CERCLA or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain wastes attributable to our past operations. As of December 31, 2015, there were 14 sites around the United States in which we were identified as a potentially responsible party under CERCLA and comparable state laws.

For most Superfund sites, our potential liability will be significantly less than the total site remediation costs because the percentage of waste attributable to us, versus that attributable to all other potentially responsible parties, is relatively low. Although liability of those potentially responsible is generally joint and several for federal sites and frequently so for state sites, other potentially responsible parties at sites where we are a party typically have had the financial strength to meet their obligations, and where they have not, or where potentially responsible parties could not be located, our share of liability has not increased materially. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the state agencies concerned. Prior to actual cleanup, those potentially responsible normally assess site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or attain a settlement of liability. Actual cleanup costs generally occur after the parties obtain EPA or equivalent state agency approval. There are relatively few sites where we are a major participant, and given the timing and amounts of anticipated expenditures, neither the cost of remediation at those sites nor such costs at all CERCLA sites, in the aggregate, is expected to have a material adverse effect on our competitive or financial condition.

 

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Expensed environmental costs were $485 million in 2015 and are expected to be about $478 million per year in 2016 and 2017. Capitalized environmental costs were $303 million in 2015 and are expected to be about $250 million per year in 2016 and 2017.

Accrued liabilities for remediation activities are not reduced for potential recoveries from insurers or other third parties and are not discounted (except those assumed in a purchase business combination, which we do record on a discounted basis).

Many of these liabilities result from CERCLA, RCRA and similar state or international laws that require us to undertake certain investigative and remedial activities at sites where we conduct, or once conducted, operations or at sites where ConocoPhillips-generated waste was disposed. The accrual also includes a number of sites we identified that may require environmental remediation, but which are not currently the subject of CERCLA, RCRA or other agency enforcement activities. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the future, we may incur significant costs under both CERCLA and RCRA.

Remediation activities vary substantially in duration and cost from site to site, depending on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, and the presence or absence of potentially liable third parties. Therefore, it is difficult to develop reasonable estimates of future site remediation costs.

At December 31, 2015, our balance sheet included total accrued environmental costs of $258 million, compared with $344 million at December 31, 2014, for remediation activities in the U.S., Canada and the U.K. We expect to incur a substantial amount of these expenditures within the next 30 years.

Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in our operations and products, and there can be no assurance that material costs and liabilities will not be incurred. However, we currently do not expect any material adverse effect upon our results of operations or financial position as a result of compliance with current environmental laws and regulations.

Climate Change

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws, if enacted, could have a material impact on our results of operations and financial condition. Examples of legislation or precursors for possible regulation that do or could affect our operations include:

 

    European Emissions Trading Scheme (ETS), the program through which many of the European Union (EU) member states are implementing the Kyoto Protocol. Our cost of compliance with the EU ETS in 2015 was approximately $0.4 million (net share pre-tax).
    In Canada during 2015, the Alberta government amended the regulations of the Climate Change and Emissions Act. The regulations now require any existing facility with emissions equal to or greater than 100,000 metric tonnes of carbon dioxide or equivalent per year to reduce its net emissions intensity from its baseline. The reduction is increasing from the current 12 percent in 2015, to 15 percent in 2016 and to 20 percent in 2017. We also incur a carbon tax for emissions from fossil fuel combustion in our British Columbia operations. The total cost of compliance with these regulations in 2015 was approximately $4.7 million.
    The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S.Ct. 1438 (2007), confirming that the EPA has the authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act.

 

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    The U.S. EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act, may trigger more climate-based claims for damages, and may result in longer agency review time for development projects.
    The U.S. EPA’s announcement on January 14, 2015, outlining a series of steps it plans to take to address methane and smog-forming volatile organic compound emissions from the oil and gas industry. The current U.S. administration has established a goal of reducing the 2012 levels in methane emissions from the oil and gas industry by 40 to 45 percent by 2025.
    Carbon taxes in certain jurisdictions. Our cost of compliance with Norwegian carbon tax legislation in 2015 was approximately $31 million (net share pre-tax).
    The agreement reached in Paris in December 2015 at the 21st Conference of the Parties to the United Nations Framework on Climate Change, setting out a new process for achieving global emission reductions.

In the United States, some additional form of regulation may be forthcoming in the future at the federal and state levels with respect to GHG emissions. Such regulation could take any of several forms that may result in the creation of additional costs in the form of taxes, the restriction of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances. We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations.

Compliance with changes in laws and regulations that create a GHG emission trading scheme or GHG reduction policies could significantly increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources, including natural gas. The ultimate impact on our financial performance, either positive or negative, will depend on a number of factors, including but not limited to:

 

    Whether and to what extent legislation or regulation is enacted.
    The timing of the introduction of such legislation or regulation.
    The nature of the legislation (such as a cap and trade system or a tax on emissions) or regulation.
    The price placed on GHG emissions (either by the market or through a tax).
    The GHG reductions required.
    The price and availability of offsets.
    The amount and allocation of allowances.
    Technological and scientific developments leading to new products or services.
    Any potential significant physical effects of climate change (such as increased severe weather events, changes in sea levels and changes in temperature).
    Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services.

 

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The company has responded by putting in place a corporate Climate Change Action Plan, together with individual business unit climate change management plans in order to undertake actions in four major areas:

 

    Equipping the company for a low emission world, for example by integrating GHG forecasting and reporting into company procedures; utilizing GHG pricing in planning economics; developing systems to handle GHG market transactions.
    Reducing GHG emissions—In 2014, the company reduced or avoided GHG emissions by approximately 900,000 metric tonnes by carrying out a range of programs across a number of business units.
    Evaluating business opportunities such as the creation of offsets and allowances; carbon capture and storage; the use of low carbon energy and the development of low carbon technologies.
    Engaging externally—The company is a sponsor of MIT’s Joint Program on the Science and Policy of Global Change; constructively engages in the development of climate change legislation and regulation; and discloses our progress and performance through the Carbon Disclosure Project and the Dow Jones Sustainability Index.

The company uses an estimated market cost of GHG emissions in the range of $8 to $35 per tonne depending on the timing and country or region to evaluate future opportunities.

Other

We have deferred tax assets related to certain accrued liabilities, loss carryforwards and credit carryforwards. Valuation allowances have been established to reduce these deferred tax assets to an amount that will, more likely than not, be realized. Based on our historical taxable income, our expectations for the future, and available tax-planning strategies, management expects the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as offsets to the tax consequences of future taxable income.

 

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. See Note 1—Accounting Policies, in the Notes to Consolidated Financial Statements, for descriptions of our major accounting policies. Certain of these accounting policies involve judgments and uncertainties to such an extent there is a reasonable likelihood materially different amounts would have been reported under different conditions, or if different assumptions had been used. These critical accounting estimates are discussed with the Audit and Finance Committee of the Board of Directors at least annually. We believe the following discussions of critical accounting estimates, along with the discussions of contingencies and of deferred tax asset valuation allowances in this report, address all important accounting areas where the nature of accounting estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change.

Oil and Gas Accounting

Accounting for oil and gas exploratory activity is subject to special accounting rules unique to the oil and gas industry. The acquisition of geological and geophysical seismic information, prior to the discovery of proved reserves, is expensed as incurred, similar to accounting for research and development costs. However, leasehold acquisition costs and exploratory well costs are capitalized on the balance sheet pending determination of whether proved oil and gas reserves have been discovered on the prospect.

Property Acquisition Costs

For individually significant leaseholds, management periodically assesses for impairment based on exploration and drilling efforts to date. For relatively small individual leasehold acquisition costs, management exercises judgment and determines a percentage probability that the prospect ultimately will fail to find proved oil and gas reserves and pools that leasehold information with others in the geographic area. For prospects in areas with limited, or no, previous exploratory drilling, the percentage probability of ultimate failure is normally judged to be quite high. This judgmental percentage is multiplied by the leasehold acquisition cost, and that product is divided by the contractual period of the leasehold to determine a periodic leasehold impairment charge that is reported in exploration expense.

This judgmental probability percentage is reassessed and adjusted throughout the contractual period of the leasehold based on favorable or unfavorable exploratory activity on the leasehold or on adjacent leaseholds, and leasehold impairment amortization expense is adjusted prospectively. At year-end 2015, the book value of the pools of property acquisition costs, that individually are relatively small and thus subject to the above-described periodic leasehold impairment calculation, was $515 million and the accumulated impairment reserve was $191 million. The weighted-average judgmental percentage probability of ultimate failure was approximately 74 percent, and the weighted-average amortization period was approximately three years. If that judgmental percentage were to be raised by 5 percent across all calculations, pre-tax leasehold impairment expense in 2016 would increase by approximately $7 million. At year-end 2015, the remaining $4,501 million of net capitalized unproved property costs consisted primarily of individually significant leaseholds, mineral rights held in perpetuity by title ownership, exploratory wells currently being drilled, suspended exploratory wells, and capitalized interest. Of this amount, approximately $3 billion is concentrated in 12 major development areas, the majority of which are not expected to move to proved properties in 2016. Management periodically assesses individually significant leaseholds for impairment based on the results of exploration and drilling efforts and the outlook for commercialization.

Exploratory Costs

For exploratory wells, drilling costs are temporarily capitalized, or “suspended,” on the balance sheet, pending a determination of whether potentially economic oil and gas reserves have been discovered by the drilling effort to justify completion of the find as a producing well.

 

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If exploratory wells encounter potentially economic quantities of oil and gas, the well costs remain capitalized on the balance sheet as long as sufficient progress assessing the reserves and the economic and operating viability of the project is being made. The accounting notion of “sufficient progress” is a judgmental area, but the accounting rules do prohibit continued capitalization of suspended well costs on the expectation future market conditions will improve or new technologies will be found that would make the development economically profitable. Often, the ability to move into the development phase and record proved reserves is dependent on obtaining permits and government or co-venturer approvals, the timing of which is ultimately beyond our control. Exploratory well costs remain suspended as long as we are actively pursuing such approvals and permits, and believe they will be obtained. Once all required approvals and permits have been obtained, the projects are moved into the development phase, and the oil and gas reserves are designated as proved reserves. For complex exploratory discoveries, it is not unusual to have exploratory wells remain suspended on the balance sheet for several years while we perform additional appraisal drilling and seismic work on the potential oil and gas field or while we seek government or co-venturer approval of development plans or seek environmental permitting. Once a determination is made the well did not encounter potentially economic oil and gas quantities, the well costs are expensed as a dry hole and reported in exploration expense.

Management reviews suspended well balances quarterly, continuously monitors the results of the additional appraisal drilling and seismic work, and expenses the suspended well costs as a dry hole when it determines the potential field does not warrant further investment in the near term. Criteria utilized in making this determination include evaluation of the reservoir characteristics and hydrocarbon properties, expected development costs, ability to apply existing technology to produce the reserves, fiscal terms, regulations or contract negotiations, and our expected return on investment.

At year-end 2015, total suspended well costs were $1,260 million, compared with $1,299 million at year-end 2014. For additional information on suspended wells, including an aging analysis, see Note 8—Suspended Wells and Other Exploration Expenses, in the Notes to Consolidated Financial Statements.

Proved Reserves

Engineering estimates of the quantities of proved reserves are inherently imprecise and represent only approximate amounts because of the judgments involved in developing such information. Reserve estimates are based on geological and engineering assessments of in-place hydrocarbon volumes, the production plan, historical extraction recovery and processing yield factors, installed plant operating capacity and approved operating limits. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data and the efficiency of extracting and processing the hydrocarbons.

Despite the inherent imprecision in these engineering estimates, accounting rules require disclosure of “proved” reserve estimates due to the importance of these estimates to better understand the perceived value and future cash flows of a company’s operations. There are several authoritative guidelines regarding the engineering criteria that must be met before estimated reserves can be designated as “proved.” Our geosciences and reservoir engineering organization has policies and procedures in place consistent with these authoritative guidelines. We have trained and experienced internal engineering personnel who estimate our proved reserves held by consolidated companies, as well as our share of equity affiliates.

Proved reserve estimates are adjusted annually in the fourth quarter and during the year if significant changes occur, and take into account recent production and subsurface information about each field. Also, as required by current authoritative guidelines, the estimated future date when an asset will be permanently shut down for economic reasons is based on 12-month average prices and current costs. This estimated date when production will end affects the amount of estimated reserves. Therefore, as prices and cost levels change from year to year, the estimate of proved reserves also changes. Generally, our proved reserves decrease as prices decline and increase as prices rise.

 

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Our proved reserves include estimated quantities related to production sharing contracts, reported under the “economic interest” method, as well as variable-royalty regimes, and are subject to fluctuations in commodity prices; 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. We would expect reserves from these contracts to decrease when product prices rise and increase when prices decline.

The estimation of proved developed reserves also is important to the income statement because the proved developed reserve estimate for a field serves as the denominator in the unit-of-production calculation of the DD&A of the capitalized costs for that asset. At year-end 2015, the net book value of productive properties, plants and equipment (PP&E) subject to a unit-of-production calculation was approximately $58 billion and the DD&A recorded on these assets in 2015 was approximately $8.7 billion. The estimated proved developed reserves for our consolidated operations were 4.6 billion BOE at the end of 2014 and 4.0 billion BOE at the end of 2015. If the estimates of proved reserves used in the unit-of-production calculations had been lower by 10 percent across all calculations, pre-tax DD&A in 2015 would have increased by an estimated $960 million.

Impairments

Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset group and annually in the fourth quarter following updates to corporate planning assumptions. If there is an indication the carrying amount of an asset may not be recovered, the asset is monitored by management through an established process where changes to significant assumptions such as prices, volumes and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets—generally on a field-by-field basis for exploration and production assets. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants, or based on a multiple of operating cash flow validated with historical market transactions of similar assets where possible. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of future production volumes, commodity prices, operating costs and capital decisions, considering all available information at the date of review. Differing assumptions could affect the timing and the amount of an impairment in any period. See Note 9—Impairments, in the Notes to Consolidated Financial Statements, for additional information.

Investments in nonconsolidated entities accounted for under the equity method are reviewed for impairment when there is evidence of a loss in value and annually following updates to corporate planning assumptions. Such evidence of a loss in value might include our inability to recover the carrying amount, the lack of sustained earnings capacity which would justify the current investment amount, or a current fair value less than the investment’s carrying amount. When it is determined such a loss in value is other than temporary, an impairment charge is recognized for the difference between the investment’s carrying value and its estimated fair value. When determining whether a decline in value is other than temporary, management considers factors such as the length of time and extent of the decline, the investee’s financial condition and near-term prospects, and our ability and intention to retain our investment for a period that will be sufficient to allow for any anticipated recovery in the market value of the investment. Since quoted market prices are usually not available, the fair value is typically based on the present value of expected future cash flows using discount rates believed to be consistent with those used by principal market participants, plus market analysis of comparable assets owned by the investee, if appropriate. Differing assumptions could affect the timing and the amount of an impairment of an investment in any period.

 

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Asset Retirement Obligations and Environmental Costs

Under various contracts, permits and regulations, we have material legal obligations to remove tangible equipment and restore the land or seabed at the end of operations at operational sites. Our largest asset removal obligations involve plugging and abandonment of wells, removal and disposal of offshore oil and gas platforms around the world, as well as oil and gas production facilities and pipelines in Alaska. The fair values of obligations for dismantling and removing these facilities are recorded as a liability and an increase to PP&E at the time of installation of the asset based on estimated discounted costs. Estimating future asset removal costs is difficult. Most of these removal obligations are many years, or decades, in the future and the contracts and regulations often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs. Asset removal technologies and costs, regulatory and other compliance considerations, expenditure timing, and other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change.

Normally, changes in asset removal obligations are reflected in the income statement as increases or decreases to DD&A over the remaining life of the assets. However, for assets at or nearing the end of their operations, as well as previously sold assets for which we retained the asset removal obligation, an increase in the asset removal obligation can result in an immediate charge to earnings, because any increase in PP&E due to the increased obligation would immediately be subject to impairment, due to the low fair value of these properties.

In addition to asset removal obligations, under the above or similar contracts, permits and regulations, we have certain environmental-related projects. These are primarily related to remediation activities required by Canada and various states within the United States at exploration and production sites. Future environmental remediation costs are difficult to estimate because they are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. See Note 10—Asset Retirement Obligations and Accrued Environmental Costs, in the Notes to Consolidated Financial Statements, for additional information.

Projected Benefit Obligations

Determination of the projected benefit obligations for our defined benefit pension and postretirement plans are important to the recorded amounts for such obligations on the balance sheet and to the amount of benefit expense in the income statement. The actuarial determination of projected benefit obligations and company contribution requirements involves judgment about uncertain future events, including estimated retirement dates, salary levels at retirement, mortality rates, lump-sum election rates, rates of return on plan assets, future health care cost-trend rates, and rates of utilization of health care services by retirees. Due to the specialized nature of these calculations, we engage outside actuarial firms to assist in the determination of these projected benefit obligations and company contribution requirements. For Employee Retirement Income Security Act-governed pension plans, the actuary exercises fiduciary care on behalf of plan participants in the determination of the judgmental assumptions used in determining required company contributions into the plans. Due to differing objectives and requirements between financial accounting rules and the pension plan funding regulations promulgated by governmental agencies, the actuarial methods and assumptions for the two purposes differ in certain important respects. Ultimately, we will be required to fund all vested benefits under pension and postretirement benefit plans not funded by plan assets or investment returns, but the judgmental assumptions used in the actuarial calculations significantly affect periodic financial statements and funding patterns over time. Projected benefit obligations are particularly sensitive to the discount rate assumption. A 1 percent decrease in the discount rate assumption would increase projected benefit obligations by $1,100 million. Benefit expense is particularly sensitive to the discount rate and return on plan assets assumptions. A 1 percent decrease in the discount rate assumption would increase annual benefit expense by $100 million, while a 1 percent decrease in the return on plan assets assumption would increase annual benefit expense by $70 million. In determining the discount rate, we use yields on high-quality fixed income investments matched to the estimated benefit cash flows of our plans. We are also exposed to the possibility that lump sum retirement benefits taken from pension plans during the year could exceed the total of service and interest components of annual pension expense and trigger accelerated recognition of a portion of

 

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unrecognized net actuarial losses and gains. These benefit payments are based on decisions by plan participants and are therefore difficult to predict. In the event there is a significant reduction in the expected years of future service of present employees or elimination for a significant number of employees the accrual of defined benefits for some or all of their future services, we could recognize a curtailment gain or loss. See Note 18—Employee Benefit Plans, in the Notes to Consolidated Financial Statements, for additional information.

Contingencies

A number of claims and lawsuits are made against the company arising in the ordinary course of business. Management exercises judgment related to accounting and disclosure of these claims which includes losses, damages, and underpayments associated with environmental remediation, tax, contracts, and other legal disputes. As we learn new facts concerning contingences, we reassess our position both with respect to amounts recognized and disclosed considering changes to the probability of additional losses and potential exposure. However, actual losses can and do vary from estimates for a variety of reasons including legal, arbitration, or other third party decisions; settlement discussions; evaluation of scope of damages; interpretation of regulatory or contractual terms; expected timing of future actions; and proportion of liability shared with other responsible parties. Estimated future costs related to contingencies are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes. For additional information on contingent liabilities, see the “Contingencies” section within “Capital Resources and Liquidity.”

 

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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans, and objectives of management for future operations, are forward-looking statements. Examples of forward-looking statements contained in this report include our expected production growth in 2016 and outlook on the business environment generally, our expected capital budget and capital expenditures, and discussions concerning future dividends. You can often identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including, but not limited to, the following:

 

    Fluctuations in crude oil, bitumen, natural gas, LNG and natural gas liquids prices, including a prolonged decline in these prices relative to historical or future expected levels.
    The impact of recent, significant declines in prices for crude oil, bitumen, natural gas, LNG and natural gas liquids, which may result in recognition of impairment costs on our long-lived assets, leaseholds and nonconsolidated equity investments.
    Potential failures or delays in achieving expected reserve or production levels from existing and future oil and gas developments due to operating hazards, drilling risks and the inherent uncertainties in predicting reserves and reservoir performance.
    Inability to maintain reserves replacement rates consistent with prior periods, whether as a result of the recent, significant declines in commodity prices or otherwise.
    Unsuccessful exploratory drilling activities or the inability to obtain access to exploratory acreage.
    Unexpected changes in costs or technical requirements for constructing, modifying or operating exploration and production facilities.
    Legislative and regulatory initiatives addressing environmental concerns, including initiatives addressing the impact of global climate change or further regulating hydraulic fracturing, methane emissions, flaring or water disposal.
    Lack of, or disruptions in, adequate and reliable transportation for our crude oil, bitumen, natural gas, LNG and natural gas liquids.
    Inability to timely obtain or maintain permits, including those necessary for drilling and/or development, construction of LNG terminals or regasification facilities; comply with government regulations; or make capital expenditures required to maintain compliance.
    Failure to complete definitive agreements and feasibility studies for, and to timely complete construction of, announced and future exploration and production and LNG development.
    Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events, terrorism, cyber attacks or infrastructure constraints or disruptions.
    International monetary conditions and exchange controls, and changes in foreign currency exchange rates.
    Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations, use of competing energy sources or the development of alternative energy sources.

 

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    Liability for remedial actions, including removal and reclamation obligations, under environmental regulations.
    Liability resulting from litigation.
    General domestic and international economic and political developments, including armed hostilities; expropriation of assets; changes in governmental policies relating to crude oil, bitumen, natural gas, LNG and natural gas liquids pricing, regulation or taxation; other political, economic or diplomatic developments; and international monetary fluctuations.
    Volatility in the commodity futures markets.
    Changes in tax and other laws, regulations (including alternative energy mandates), or royalty rules applicable to our business.
    Competition in the oil and gas exploration and production industry.
    Limited access to capital or significantly higher cost of capital related to illiquidity or uncertainty in the domestic or international financial markets.
    Delays in, or our inability to, execute asset dispositions.
    Inability to obtain economical financing for development, construction or modification of facilities and general corporate purposes.
    The operation and financing of our joint ventures.
    The ability of our customers and other contractual counterparties to satisfy their obligations to us.
    Our inability to realize anticipated cost savings and expenditure reductions.
    The factors generally described in Item 1A—Risk Factors in this report.

 

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Instrument Market Risk

We and certain of our subsidiaries hold and issue derivative contracts and financial instruments that expose our cash flows or earnings to changes in commodity prices, foreign currency exchange rates or interest rates. We may use financial and commodity-based derivative contracts to manage the risks produced by changes in the prices of natural gas, crude oil and related products; fluctuations in interest rates and foreign currency exchange rates; or to capture market opportunities.

Our use of derivative instruments is governed by an “Authority Limitations” document approved by our Board of Directors that prohibits the use of highly leveraged derivatives or derivative instruments without sufficient liquidity. The Authority Limitations document also establishes the Value at Risk (VaR) limits for the company, and compliance with these limits is monitored daily. The Chief Financial Officer monitors risks resulting from foreign currency exchange rates and interest rates and reports to the Chief Executive Officer. The Executive Vice President of Commercial, Business Development and Corporate Planning monitors commodity price risk and also reports to the Chief Executive Officer. The Commercial organization manages our commercial marketing, optimizes our commodity flows and positions, and monitors risks.

Commodity Price Risk

Our Commercial organization uses futures, forwards, swaps and options in various markets to accomplish the following objectives:

 

    Meet customer needs. Consistent with our policy to generally remain exposed to market prices, we use swap contracts to convert fixed-price sales contracts, which are often requested by natural gas consumers, to floating market prices.
    Enable us to use market knowledge to capture opportunities such as moving physical commodities to more profitable locations and storing commodities to capture seasonal or time premiums. We may use derivatives to optimize these activities.

We use a VaR model to estimate the loss in fair value that could potentially result on a single day from the effect of adverse changes in market conditions on the derivative financial instruments and derivative commodity instruments we hold or issue, including commodity purchases and sales contracts recorded on the balance sheet at December 31, 2015, as derivative instruments. Using Monte Carlo simulation, a 95 percent confidence level and a one-day holding period, the VaR for those instruments issued or held for trading purposes at December 31, 2015 and 2014, was immaterial to our consolidated cash flows and net income attributable to ConocoPhillips. The VaR for instruments held for purposes other than trading at December 31, 2015 and 2014, was also immaterial to our consolidated cash flows and net income attributable to ConocoPhillips.

Interest Rate Risk

The following table provides information about our financial instruments that are sensitive to changes in U.S. interest rates. The debt portion of the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on effective rates at the reporting date. The carrying amount of our floating-rate debt approximates its fair value. The fair value of the fixed-rate financial instruments is estimated based on quoted market prices.

 

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     Millions of Dollars Except as Indicated  
  

 

 

 
     Debt   
  

 

 

 
     Fixed         Average        Floating         Average   
     Rate         Interest        Rate         Interest   

Expected Maturity Date

     Maturity         Rate        Maturity         Rate   
  

 

 

   

 

 

 

Year-End 2015

          

2016

   $ 1,250         5.63  %    $ 108         0.35  % 

2017

     1,024         1.03        -         -   

2018

     1,547         3.68        250         0.69   

2019

     2,250         5.75        695         0.35   

2020

     1,500         4.73        -         -   

Remaining years

     14,371         5.72        783         0.81   

 

 

Total

   $ 21,942         $ 1,836      

 

 

Fair value

   $ 22,949         $ 1,836      

 

 

 

Year-End 2014

          

2015

   $ -         -  %    $ 107         0.18  % 

2016

     1,273         5.52        -         -   

2017

     1,001         1.06        -         -   

2018

     797         5.74        -         -   

2019

     2,250         5.75        753         0.18   

Remaining years

     14,871         5.81        283         0.04   

 

 

Total

   $ 20,192         $ 1,143      

 

 

Fair value

   $ 24,048         $ 1,143      

 

 

Foreign Currency Exchange Risk

We have foreign currency exchange rate risk resulting from international operations. We do not comprehensively hedge the exposure to currency exchange rate changes although we may choose to selectively hedge certain foreign currency exchange rate exposures, such as firm commitments for capital projects or local currency tax payments, dividends and cash returns from net investments in foreign affiliates to be remitted within the coming year.

At December 31, 2015 and 2014, we held foreign currency exchange forwards hedging cross-border commercial activity and foreign currency exchange swaps for purposes of mitigating our cash-related exposures. Although these forwards and swaps hedge exposures to fluctuations in exchange rates, we elected not to utilize hedge accounting. As a result, the change in the fair value of these foreign currency exchange derivatives is recorded directly in earnings. Since the gain or loss on the swaps is offset by the gain or loss from remeasuring the related cash balances, and since our aggregate position in the forwards was not material, there would be no material impact to our income from an adverse hypothetical 10 percent change in the December 31, 2015, or 2014, exchange rates. The notional and fair market values of these positions at December 31, 2015 and 2014, were as follows:

 

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     In Millions  
  

 

 

 

Foreign Currency Exchange Derivatives

     Notional*         Fair Market Value**   
  

 

 

    

 

 

 
        2015         2014         2015        2014   
  

 

 

    

 

 

 

Sell U.S. dollar, buy British pound

     USD         200         -         (3     -   

Sell U.S. dollar, buy Canadian dollar

     USD         -         7         -        (1

Sell U.S. dollar, buy Norwegian krone

     USD         147         -         (2     -   

Buy U.S. dollar, sell Norwegian krone

     USD         -         44         -        -   

Buy U.S. dollar, sell Canadian dollar

     USD         20         -         2        -   

Buy British pound, sell Canadian dollar

     GBP         564         -         44        -   

Buy British pound, sell euro

     GBP         3         20         (1     1   

 

 

  *Denominated in U.S. dollars (USD) and British pound (GBP).

**Denominated in U.S. dollars.

For additional information about our use of derivative instruments, see Note 14—Derivative and Financial Instruments, in the Notes to Consolidated Financial Statements.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONOCOPHILLIPS

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Report of Management

     78   

Reports of Independent Registered Public Accounting Firm

     79   

Consolidated Income Statement for the years ended December 31, 2015, 2014 and 2013

     81   

Consolidated Statement of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013

     82   

Consolidated Balance Sheet at December 31, 2015 and 2014

     83   

Consolidated Statement of Cash Flows for the years ended December 31, 2015, 2014 and 2013

     84   

Consolidated Statement of Changes in Equity for the years ended December 31, 2015, 2014 and 2013

     85   

Notes to Consolidated Financial Statements

     86   

Supplementary Information

  

Oil and Gas Operations

     139   

Selected Quarterly Financial Data

     166   

Condensed Consolidating Financial Information

     167   

 

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Report of Management

Management prepared, and is responsible for, the consolidated financial statements and the other information appearing in this annual report. The consolidated financial statements present fairly the company’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. In preparing its consolidated financial statements, the company includes amounts that are based on estimates and judgments management believes are reasonable under the circumstances. The company’s financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm appointed by the Audit and Finance Committee of the Board of Directors and ratified by stockholders. Management has made available to Ernst & Young LLP all of the company’s financial records and related data, as well as the minutes of stockholders’ and directors’ meetings.

Assessment of Internal Control Over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over financial reporting. ConocoPhillips’ internal control system was designed to provide reasonable assurance to the company’s management and directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on our assessment, we believe the company’s internal control over financial reporting was effective as of December 31, 2015.

Ernst & Young LLP has issued an audit report on the company’s internal control over financial reporting as of December 31, 2015, and their report is included herein.

 

/s/ Ryan M. Lance      /s/ Jeff W. Sheets
Ryan M. Lance      Jeff W. Sheets
Chairman and      Executive Vice President, Finance
Chief Executive Officer      and Chief Financial Officer

February 23, 2016

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

ConocoPhillips

We have audited the accompanying consolidated balance sheets of ConocoPhillips as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the related condensed consolidating financial information listed in the Index at Item 8 and financial statement schedule listed in Item 15(a). These financial statements, condensed consolidating financial information, and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements, condensed consolidating financial information, and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ConocoPhillips at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related condensed consolidating financial information and financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ConocoPhillips’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2016, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP                

Houston, Texas

February 23, 2016

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

ConocoPhillips

We have audited ConocoPhillips’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). ConocoPhillips’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included under the heading “Assessment of Internal Control Over Financial Reporting” in the accompanying “Report of Management.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ConocoPhillips maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of ConocoPhillips and our report dated February 23, 2016, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP                

Houston, Texas

February 23, 2016

 

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Consolidated Income Statement    ConocoPhillips

Years Ended December 31

     Millions of Dollars  
  

 

 

 
                 2015                  2014                  2013  
  

 

 

 

Revenues and Other Income

        

Sales and other operating revenues

   $ 29,564         52,524         54,413   

Equity in earnings of affiliates

     655         2,529         2,219   

Gain on dispositions

     591         98         1,242   

Other income

     125         366         374   

 

 

Total Revenues and Other Income

     30,935         55,517         58,248   

 

 

Costs and Expenses

        

Purchased commodities

     12,426         22,099         22,643   

Production and operating expenses

     7,016         8,909         7,238   

Selling, general and administrative expenses

     953         735         854   

Exploration expenses

     4,192         2,045         1,232   

Depreciation, depletion and amortization

     9,113         8,329         7,434   

Impairments

     2,245         856         529   

Taxes other than income taxes

     901         2,088         2,884   

Accretion on discounted liabilities

     483         484         434   

Interest and debt expense

     920         648         612   

Foreign currency transaction gains

     (75)         (66)         (58)   

 

 

Total Costs and Expenses

     38,174         46,127         43,802   

 

 

Income (loss) from continuing operations before income taxes

     (7,239)         9,390         14,446   

Provision (benefit) for income taxes

     (2,868)         3,583         6,409   

 

 

Income (Loss) From Continuing Operations

     (4,371)         5,807         8,037   

Income from discontinued operations*

     -         1,131         1,178   

 

 

Net income (loss)

     (4,371)         6,938         9,215   

Less: net income attributable to noncontrolling interests

     (57)         (69)         (59)   

 

 

Net Income (Loss) Attributable to ConocoPhillips

   $ (4,428)         6,869         9,156   

 

 

Amounts Attributable to ConocoPhillips Common Shareholders:

        

Income (loss) from continuing operations

   $ (4,428)         5,738         7,978   

Income from discontinued operations*

     -         1,131         1,178   

 

 

Net Income (Loss)

   $ (4,428)         6,869         9,156   

 

 

Net Income (Loss) Attributable to ConocoPhillips Per Share of Common Stock (dollars)

        

Basic

        

Continuing operations

   $ (3.58)         4.63         6.47   

Discontinued operations

     -         0.91         0.96   

 

 

Net Income (Loss) Attributable to ConocoPhillips Per Share of Common Stock

   $ (3.58)         5.54         7.43   

 

 

Diluted

        

Continuing operations

   $ (3.58)         4.60         6.43   

Discontinued operations

     -         0.91         0.95   

 

 

Net Income (Loss) Attributable to ConocoPhillips Per Share of Common Stock

   $ (3.58)         5.51         7.38   

 

 

Dividends Paid Per Share of Common Stock (dollars)

   $ 2.94         2.84         2.70   

 

 

Average Common Shares Outstanding (in thousands)

        

Basic

     1,241,919         1,237,325         1,230,963   

Diluted

     1,241,919         1,245,863         1,239,803   

 

 

*Net of provision for income taxes on discontinued operations of:

   $ -         16         283   

See Notes to Consolidated Financial Statements.

        

 

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Consolidated Statement of Comprehensive Income    ConocoPhillips

Years Ended December 31

     Millions of Dollars  
  

 

 

 
     2015      2014      2013  
  

 

 

 

Net Income (Loss)

   $ (4,371)                 6,938                 9,215   

Other comprehensive income (loss)

        

Defined benefit plans

        

Prior service credit (cost) arising during the period

                 301         (3)         1   

Reclassification adjustment for amortization of prior service credit included in net income

     (19)         (6)         (5)   

 

 

Net change

     282         (9)         (4)   

 

 

Net actuarial gain (loss) arising during the period

     592         (840)         688   

Reclassification adjustment for amortization of net actuarial losses included in net income

     403         131         294   

 

 

Net change

     995         (709)         982   

Nonsponsored plans*

     1         -         10   

Income taxes on defined benefit plans

     (460)         281         (387)   

 

 

Defined benefit plans, net of tax

     818         (437)         601   

 

 

Foreign currency translation adjustments

     (5,199)         (3,539)         (2,705)   

Reclassification adjustment for gain included in net income

     -         -         (4)   

Income taxes on foreign currency translation adjustments

     36         72         23   

 

 

Foreign currency translation adjustments, net of tax

     (5,163)         (3,467)         (2,686)   

 

 

Other Comprehensive Income (Loss), Net of Tax

     (4,345)         (3,904)         (2,085)   

 

 

Comprehensive Income (Loss)

     (8,716)         3,034         7,130   

Less: comprehensive income attributable to noncontrolling interests

     (57)         (69)         (59)   

 

 

Comprehensive Income (Loss) Attributable to ConocoPhillips

   $ (8,773)         2,965         7,071   

 

 

*Plans for which ConocoPhillips is not the primary obligor—primarily those administered by equity affiliates.

  

  

See Notes to Consolidated Financial Statements.

        

 

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Consolidated Balance Sheet    ConocoPhillips

 

At December 31    Millions of Dollars  
  

 

 

 
     2015        2014   
  

 

 

 

Assets

    

Cash and cash equivalents

   $           2,368                  5,062   

Accounts and notes receivable (net of allowance of $7 million in 2015 and $5 million in 2014)

     4,314        6,675   

Accounts and notes receivable—related parties

     200        132   

Inventories

     1,124        1,331   

Prepaid expenses and other current assets

     783        1,868   

 

 

Total Current Assets

     8,789        15,068   

Investments and long-term receivables

     20,490        24,335   

Loans and advances—related parties

     696        804   

Net properties, plants and equipment (net of accumulated depreciation, depletion and amortization of $70,413 million in 2015 and $70,786 million in 2014)

     66,446        75,444   

Other assets

     1,063        888   

 

 

Total Assets

   $ 97,484        116,539   

 

 

Liabilities

    

Accounts payable

   $ 4,895        7,982   

Accounts payable—related parties

     38        44   

Short-term debt

     1,427        182   

Accrued income and other taxes

     499        1,051   

Employee benefit obligations

     887        878   

Other accruals

     1,510        1,400   

 

 

Total Current Liabilities

     9,256        11,537   

Long-term debt

     23,453        22,383   

Asset retirement obligations and accrued environmental costs

     9,580        10,647   

Deferred income taxes

     10,999        15,070   

Employee benefit obligations

     2,286        2,964   

Other liabilities and deferred credits

     1,828        1,665   

 

 

Total Liabilities

     57,402        64,266   

 

 

Equity

    

Common stock (2,500,000,000 shares authorized at $.01 par value)

    

Issued (2015—1,778,226,388 shares; 2014—1,773,583,368) Par value

     18        18   

Capital in excess of par

     46,357        46,071   

Treasury stock (at cost: 2015—542,230,673; 2014—542,230,673)

     (36,780     (36,780

Accumulated other comprehensive loss

     (6,247     (1,902

Retained earnings

     36,414        44,504   

 

 

Total Common Stockholders’ Equity

     39,762        51,911   

Noncontrolling interests

     320        362   

 

 

Total Equity

     40,082        52,273   

 

 

Total Liabilities and Equity

   $ 97,484        116,539   

 

 

See Notes to Consolidated Financial Statements.

 

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Consolidated Statement of Cash Flows    ConocoPhillips

 

Years Ended December 31    Millions of Dollars  
  

 

 

 
     2015     2014*     2013*  
  

 

 

 

Cash Flows From Operating Activities

      

Net income (loss)

   $ (4,371     6,938        9,215   

Adjustments to reconcile net income (loss) to net cash provided by operating activities

      

Depreciation, depletion and amortization

             9,113                8,329                7,434   

Impairments

     2,245        856        529   

Dry hole costs and leasehold impairments

     3,065        1,166        443   

Accretion on discounted liabilities

     483        484        434   

Deferred taxes

     (2,772     709        1,311   

Undistributed equity earnings

     101        77        (822

Gain on dispositions

     (591     (98     (1,242

Income from discontinued operations

     -        (1,131     (1,178

Other

     321        (233     (371

Working capital adjustments

      

Decrease in accounts and notes receivable

     1,810        1,227        744   

Decrease (increase) in inventories

     166        (193     (278

Decrease (increase) in prepaid expenses and other current assets

     239        (190     (83

Increase (decrease) in accounts payable

     (1,647     (963     238   

Decrease in taxes and other accruals

     (590     (566     (518

 

 

Net cash provided by continuing operating activities

     7,572        16,412        15,856   

Net cash provided by discontinued operations

     -        157        285   

 

 

Net Cash Provided by Operating Activities

     7,572        16,569        16,141   

 

 

Cash Flows From Investing Activities

      

Capital expenditures and investments

     (10,050     (17,085     (15,537

Working capital changes associated with investing activities

     (968     180        (55

Proceeds from asset dispositions

     1,952        1,603        10,220   

Net sales (purchases) of short-term investments

     -        253        (263

Collection of advances/loans—related parties

     105        603        145   

Other

     306        (446     (212

 

 

Net cash used in continuing investing activities

     (8,655     (14,892     (5,702

Net cash used in discontinued operations

     -        (73     (603

 

 

Net Cash Used in Investing Activities

     (8,655     (14,965     (6,305

 

 

Cash Flows From Financing Activities

      

Issuance of debt

     2,498        2,994        -   

Repayment of debt

     (103     (2,014     (946

Change in restricted cash

     -        -        748   

Issuance of company common stock

     (82     35        20   

Dividends paid

     (3,664     (3,525     (3,334

Other

     (78     (64     (3,621

 

 

Net Cash Used in Financing Activities

     (1,429     (2,574     (7,133

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (182     (214     (75

 

 

Net Change in Cash and Cash Equivalents

     (2,694     (1,184     2,628   

Cash and cash equivalents at beginning of period

     5,062        6,246        3,618   

 

 

Cash and Cash Equivalents at End of Period

   $ 2,368        5,062        6,246   

 

 

*Certain amounts have been reclassified to conform to current-period presentation. See Note 21Cash Flow Information, in the Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

 

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Consolidated Statement of Changes in Equity    ConocoPhillips

 

     Millions of Dollars  
  

 

 

 
     Attributable to ConocoPhillips                
  

 

 

       
     Common Stock                              
  

 

 

             
    

Par

Value

     Capital in
Excess of
Par
    

Treasury

Stock

    

Accum. Other

Comprehensive

Income (Loss)

     Retained
Earnings
    

Non-

Controlling

Interests

     Total  
  

 

 

 

December 31, 2012

   $       18         45,324         (36,780)         4,087         35,338         440         48,427   

Net income

                 9,156         59         9,215   

Other comprehensive loss

              (2,085)               (2,085)   

Dividends paid

                 (3,334)            (3,334)   

Distributions to noncontrolling interests and other

                    (97)         (97)   

Distributed under benefit plans

        366                     366   

 

 

December 31, 2013

   $ 18         45,690         (36,780)         2,002         41,160         402         52,492   

Net income

                 6,869         69         6,938   

Other comprehensive loss

              (3,904)               (3,904)   

Dividends paid

                 (3,525)            (3,525)   

Distributions to noncontrolling interests and other

                    (109)         (109)   

Distributed under benefit plans

        381                     381   

 

 

December 31, 2014

   $ 18         46,071         (36,780)         (1,902)         44,504         362         52,273   

Net income (loss)

                 (4,428)         57         (4,371)   

Other comprehensive loss

              (4,345)               (4,345)   

Dividends paid

                 (3,664)            (3,664)   

Distributions to noncontrolling interests and other

                    (100)         (100)   

Distributed under benefit plans

        286                     286   

Other

                 2         1         3   

 

 

December 31, 2015

   $ 18         46,357         (36,780)         (6,247)         36,414         320         40,082   

 

 

See Notes to Consolidated Financial Statements.

 

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Notes to Consolidated Financial Statements    ConocoPhillips

Note 1—Accounting Policies

 

n Consolidation Principles and Investments—Our consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary. The equity method is used to account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies. When we do not have the ability to exert significant influence, the investment is either classified as available-for-sale if fair value is readily determinable, or the cost method is used if fair value is not readily determinable. Undivided interests in oil and gas joint ventures, pipelines, natural gas plants and terminals are consolidated on a proportionate basis. Other securities and investments are generally carried at cost.

We manage our operations through six operating segments, defined by geographic region: Alaska, Lower 48, Canada, Europe and North Africa, Asia Pacific and Middle East, and Other International. Effective November 1, 2015, the Other International and historically presented Europe segments were restructured to align with changes to our internal organization structure. The Libya business was moved from the Other International segment to the historically presented Europe segment, which is now renamed Europe and North Africa. Certain financial information has been revised for all prior periods presented to reflect the change in the composition of our operating segments. For additional information, see Note 24—Segment Disclosures and Related Information. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our continuing operations.

 

n Foreign Currency Translation—Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are included in accumulated other comprehensive income in common stockholders’ equity. Foreign currency transaction gains and losses are included in current earnings. Most of our foreign operations use their local currency as the functional currency.

 

n Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from these estimates.

 

n Revenue Recognition—Revenues associated with sales of crude oil, bitumen, natural gas, liquefied natural gas (LNG), natural gas liquids and other items are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry.

Revenues associated with producing properties in which we have an interest with other producers are recognized based on the actual volumes we sold during the period. Any differences between volumes sold and entitlement volumes, based on our net working interest, which are deemed to be nonrecoverable through remaining production, are recognized as accounts receivable or accounts payable, as appropriate. Cumulative differences between volumes sold and entitlement volumes are generally not significant.

Revenues associated with transactions commonly called buy/sell contracts, in which the purchase and sale of inventory with the same counterparty are entered into “in contemplation” of one another, are combined and reported net (i.e., on the same income statement line).

 

n Shipping and Handling Costs—We include shipping and handling costs in production and operating expenses for production activities. Transportation costs related to marketing activities are recorded in purchased commodities. Freight costs billed to customers are recorded as a component of revenue.

 

n Cash Equivalents—Cash equivalents are highly liquid, short-term investments that are readily convertible to known amounts of cash and have original maturities of 90 days or less from their date of purchase. They are carried at cost plus accrued interest, which approximates fair value.

 

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n Short-Term Investments—Investments in bank time deposits and marketable securities (commercial paper and government obligations) with original maturities of greater than 90 days but less than one year are classified as short-term investments.

 

n Inventories—We have several valuation methods for our various types of inventories and consistently use the following methods for each type of inventory. Commodity-related inventories are valued at the lower of cost or market in the aggregate, primarily on the last-in, first-out (LIFO) basis. Any necessary lower-of-cost-or-market write-downs at year end are recorded as permanent adjustments to the LIFO cost basis. LIFO is used to better match current inventory costs with current revenues. Costs include both direct and indirect expenditures incurred in bringing an item or product to its existing condition and location, but not unusual/nonrecurring costs or research and development costs. Materials, supplies and other miscellaneous inventories, such as tubular goods and well equipment, are valued using various methods, including the weighted-average-cost method, and the first-in, first-out (FIFO) method, consistent with industry practice.

 

n Fair Value Measurements—We categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant modifications to observable related market data or our assumptions about pricing by market participants.

 

n Derivative Instruments—Derivative instruments are recorded on the balance sheet at fair value. If the right of offset exists and certain other criteria are met, derivative assets and liabilities with the same counterparty are netted on the balance sheet and the collateral payable or receivable is netted against derivative assets and derivative liabilities, respectively.

Recognition and classification of the gain or loss that results from recording and adjusting a derivative to fair value depends on the purpose for issuing or holding the derivative. Gains and losses from derivatives not accounted for as hedges are recognized immediately in earnings. For derivative instruments that are designated and qualify as a fair value hedge, the gains or losses from adjusting the derivative to its fair value will be immediately recognized in earnings and, to the extent the hedge is effective, offset the concurrent recognition of changes in the fair value of the hedged item.

 

n Oil and Gas Exploration and Development—Oil and gas exploration and development costs are accounted for using the successful efforts method of accounting.

Property Acquisition Costs—Oil and gas leasehold acquisition costs are capitalized and included in the balance sheet caption properties, plants and equipment (PP&E). Leasehold impairment is recognized based on exploratory experience and management’s judgment. Upon achievement of all conditions necessary for reserves to be classified as proved, the associated leasehold costs are reclassified to proved properties.

Exploratory Costs—Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Exploratory well costs are capitalized, or “suspended,” on the balance sheet pending further evaluation of whether economically recoverable reserves have been found. If economically recoverable reserves are not found, exploratory well costs are expensed as dry holes. If exploratory wells encounter potentially economic quantities of oil and gas, the well costs remain capitalized on the balance sheet as long as sufficient progress assessing the reserves and the economic and operating viability of the project is being made. For complex exploratory discoveries, it is not unusual to have exploratory wells remain suspended on the balance sheet for several years while we perform additional appraisal drilling and seismic work on the

 

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potential oil and gas field or while we seek government or co-venturer approval of development plans or seek environmental permitting. Once all required approvals and permits have been obtained, the projects are moved into the development phase, and the oil and gas resources are designated as proved reserves.

Management reviews suspended well balances quarterly, continuously monitors the results of the additional appraisal drilling and seismic work, and expenses the suspended well costs as dry holes when it judges the potential field does not warrant further investment in the near term. See Note 8—Suspended Wells and Other Exploration Expenses, for additional information on suspended wells.

Development Costs—Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized.

Depletion and Amortization—Leasehold costs of producing properties are depleted using the unit-of-production method based on estimated proved oil and gas reserves. Amortization of intangible development costs is based on the unit-of-production method using estimated proved developed oil and gas reserves.

 

n Capitalized Interest—Interest from external borrowings is capitalized on major projects with an expected construction period of one year or longer. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful lives of the assets in the same manner as the underlying assets.

 

n Depreciation and Amortization—Depreciation and amortization of PP&E on producing hydrocarbon properties and certain pipeline assets (those which are expected to have a declining utilization pattern), are determined by the unit-of-production method. Depreciation and amortization of all other PP&E are determined by either the individual-unit-straight-line method or the group-straight-line method (for those individual units that are highly integrated with other units).

 

n Impairment of Properties, Plants and Equipment—PP&E used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group and annually in the fourth quarter following updates to corporate planning assumptions. If there is an indication the carrying amount of an asset may not be recovered, the asset is monitored by management through an established process where changes to significant assumptions such as prices, volumes and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value through additional amortization or depreciation provisions and reported as impairments in the periods in which the determination of the impairment is made. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets—generally on a field-by-field basis for exploration and production assets. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or based on a multiple of operating cash flow validated with historical market transactions of similar assets where possible. Long-lived assets committed by management for disposal within one year are accounted for at the lower of amortized cost or fair value, less cost to sell, with fair value determined using a binding negotiated price, if available, or present value of expected future cash flows as previously described.

The expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future production volumes, prices and costs, considering all available evidence at the date of review. The impairment review includes cash flows from proved developed and undeveloped reserves, including any development expenditures necessary to achieve that production. Additionally, when probable and possible reserves exist, an appropriate risk-adjusted amount of these reserves may be included in the impairment calculation.

 

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n Impairment of Investments in Nonconsolidated Entities—Investments in nonconsolidated entities are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred and annually following updates to corporate planning assumptions. When such a condition is judgmentally determined to be other than temporary, the carrying value of the investment is written down to fair value. The fair value of the impaired investment is based on quoted market prices, if available, or upon the present value of expected future cash flows using discount rates believed to be consistent with those used by principal market participants, plus market analysis of comparable assets owned by the investee, if appropriate.

 

n Maintenance and Repairs—Costs of maintenance and repairs, which are not significant improvements, are expensed when incurred.

 

n Property Dispositions—When complete units of depreciable property are sold, the asset cost and related accumulated depreciation are eliminated, with any gain or loss reflected in the “Gain on dispositions” line of our consolidated income statement. When less than complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation.

 

n Asset Retirement Obligations and Environmental Costs—The fair value of legal obligations to retire and remove long-lived assets are recorded in the period in which the obligation is incurred (typically when the asset is installed at the production location). When the liability is initially recorded, we capitalize this cost by increasing the carrying amount of the related PP&E. If, in subsequent periods, our estimate of this liability changes, we will record an adjustment to both the liability and PP&E. Over time the liability is increased for the change in its present value, and the capitalized cost in PP&E is depreciated over the useful life of the related asset. For additional information, see Note 10—Asset Retirement Obligations and Accrued Environmental Costs.

Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures relating to an existing condition caused by past operations, and those having no future economic benefit, are expensed. Liabilities for environmental expenditures are recorded on an undiscounted basis (unless acquired in a purchase business combination) when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is probable and estimable.

 

n Guarantees—The fair value of a guarantee is determined and recorded as a liability at the time the guarantee is given. The initial liability is subsequently reduced as we are released from exposure under the guarantee. We amortize the guarantee liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of guarantee. In cases where the guarantee term is indefinite, we reverse the liability when we have information indicating the liability is essentially relieved or amortize it over an appropriate time period as the fair value of our guarantee exposure declines over time. We amortize the guarantee liability to the related income statement line item based on the nature of the guarantee. When it becomes probable that we will have to perform on a guarantee, we accrue a separate liability if it is reasonably estimable, based on the facts and circumstances at that time. We reverse the fair value liability only when there is no further exposure under the guarantee.

 

n Share-Based Compensation—We recognize share-based compensation expense over the shorter of the service period (i.e., the stated period of time required to earn the award) or the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement. We have elected to recognize expense on a straight-line basis over the service period for the entire award, whether the award was granted with ratable or cliff vesting.

 

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n Income Taxes—Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, except for deferred taxes on income and temporary differences related to the cumulative translation adjustment considered to be permanently reinvested in certain foreign subsidiaries and foreign corporate joint ventures. Allowable tax credits are applied currently as reductions of the provision for income taxes. Interest related to unrecognized tax benefits is reflected in interest and debt expense, and penalties related to unrecognized tax benefits are reflected in production and operating expenses.

 

n Taxes Collected from Customers and Remitted to Governmental Authorities—Sales and value-added taxes are recorded net.

 

n Net Income (Loss) Per Share of Common Stock—Basic net income (loss) per share of common stock is calculated based upon the daily weighted-average number of common shares outstanding during the year, including unallocated shares held by the stock savings feature of the ConocoPhillips Savings Plan. Also, this calculation includes fully vested stock and unit awards that have not yet been issued as common stock, along with an adjustment to net income (loss) for dividend equivalents paid on unvested unit awards that are considered participating securities. Diluted net income per share of common stock includes unvested stock, unit or option awards granted under our compensation plans and vested but unexercised stock options, but only to the extent these instruments dilute net income per share, primarily under the treasury-stock method. Diluted net loss per share, which is calculated the same as basic net loss per share, does not assume conversion or exercise of securities that would have an antidilutive effect. Treasury stock and shares held by grantor trusts are excluded from the daily weighted-average number of common shares outstanding in both calculations. The earnings per share impact of the participating securities is immaterial.

Note 2—Changes in Accounting Principles

We adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” on a prospective basis, beginning January 1, 2015. The ASU amends the criteria for reporting discontinued operations to include only disposals representing a strategic shift in operations that have or will have a major effect on an entity’s operations and financial results. The ASU also requires entities to provide additional disclosures about discontinued operations as well as certain other significant disposal transactions that do not meet the revised discontinued operations reporting criteria. The adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures. See Note 3—Discontinued Operations, and Note 6—Assets Held for Sale or Sold, for additional information on our dispositions.

Effective December 31, 2015, we early adopted, on a prospective basis, FASB ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” The ASU requires all deferred tax assets and liabilities, along with any related valuation allowances, to be offset and presented as a single noncurrent amount in a classified balance sheet for each tax-paying component within a tax jurisdiction. See Note 19—Income Taxes, for additional information.

Note 3—Discontinued Operations

In 2012, we agreed to sell our interest in the North Caspian Sea Production Sharing Agreement (Kashagan) and our Nigeria and Algeria businesses (collectively, the “Disposition Group”). The Disposition Group was previously part of the Other International operating segment. We completed the sales of Kashagan and our Algeria business in the fourth quarter of 2013. We sold our Nigeria business in the third quarter of 2014.

On November 26, 2012, we notified government authorities in Kazakhstan and co-venturers of our intent to sell the company’s 8.4 percent interest in Kashagan to ONGC Videsh Limited (OVL). On July 2, 2013, we received notification from the government of Kazakhstan indicating it was exercising its right to pre-empt the

 

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proposed sale to OVL and designating KazMunayGas (KMG) as the entity to acquire the interest. On October 31, 2013, we completed the transaction with KMG for total proceeds of $5,392 million and recognized a pre-tax gain of $22 million, which is included in the “Income from discontinued operations” line on our consolidated income statement. At the time of disposition, the carrying value of the net assets related to our interest in Kashagan was $5,370 million, which included $212 million of other current assets, $239 million of long-term receivables, $5,149 million of PP&E, $144 million of other current liabilities, and $86 million of asset retirement obligations (ARO).

On December 18, 2012, we entered into an agreement with Pertamina to sell our wholly owned subsidiary, ConocoPhillips Algeria Ltd. On November 27, 2013, we completed the transaction with Pertamina, resulting in proceeds of $1,652 million. We recognized a pre-tax gain of $938 million, which is included in the “Income from discontinued operations” line on our consolidated income statement. At the time of disposition, the net carrying value of our Algerian assets was $714 million, which included $48 million of other current assets, $883 million of PP&E, $41 million of other current liabilities, $37 million of ARO, and $139 million of deferred taxes.

On December 20, 2012, we entered into agreements with affiliates of Oando PLC to sell our Nigeria business and on July 30, 2014, we completed the sale for $1,359 million, inclusive of $550 million deposits previously received. The deposits had been included in the “Other accruals” line on our consolidated balance sheet and in the “Other” line of cash flows from investing activities on our consolidated statement of cash flows. The deposits received included $435 million in 2012, $15 million in 2013, and $100 million in 2014. We recognized a before-tax gain of $1,052 million, which is included in the “Income from discontinued operations” line on our consolidated income statement. At the time of disposition, the net carrying value of the upstream assets was $307 million, which included $233 million of other current assets, $1,211 million of PP&E, $298 million of other current liabilities, $14 million of ARO, and $825 million of deferred taxes.

Sales and other operating revenues and income from discontinued operations related to the Disposition Group during 2014 and 2013 were as follows:

     Millions of Dollars         
  

 

 

 
     2014         2013   
  

 

 

 

Sales and other operating revenues from discontinued operations

   $ 480         1,185   

 

 

Income from discontinued operations before-tax

   $ 1,147         1,461   

Income tax expense

     16         283   

 

 

Income from discontinued operations

   $ 1,131         1,178   

 

 

Note 4—Variable Interest Entities (VIEs)

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on our significant VIE follows:

Australia Pacific LNG Pty Ltd (APLNG)

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. We are not the primary beneficiary of APLNG because we share with Origin Energy and China Petrochemical Corporation (Sinopec) the power to direct the key activities of APLNG that most significantly impact its economic performance, which involve activities related to the production and commercialization of coalbed methane, as well as LNG processing and export marketing. As a result, we do not consolidate APLNG, and it is accounted for as an equity method investment.

 

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As of December 31, 2015, we have not provided any financial support to APLNG other than amounts previously contractually required. Unless we elect otherwise, we have no requirement to provide liquidity or purchase the assets of APLNG. See Note 7—Investments, Loans and Long-Term Receivables, and Note 12—Guarantees, for additional information.

Note 5—Inventories

Inventories at December 31 were:

 

     Millions of Dollars           
  

 

 

 
     2015         2014   
  

 

 

 

Crude oil and natural gas

   $ 406         538   

Materials and supplies

     718         793   

 

 
   $ 1,124         1,331   

 

 

As a result of further declining commodity prices in the fourth quarter of 2015, we recorded a lower of cost or market adjustment of $44 million to our commodity inventories, which is included in the “Purchased commodities” line on our consolidated income statement. Inventories valued on the LIFO basis totaled $317 million and $440 million at December 31, 2015 and 2014, respectively. The estimated excess of current replacement cost over LIFO cost of inventories was approximately $6 million at both December 31, 2015 and December 31, 2014. In 2015, liquidation of LIFO inventory values increased the net loss from continuing operations by $25 million.

Note 6—Assets Held for Sale or Sold

Assets Held for Sale

On February 4, 2016, we entered into a definitive agreement to sell our interest in the Alaska Beluga River Unit natural gas field in the Cook Inlet. The transaction is expected to close in the second quarter of 2016.

Assets Sold

All gains or losses are reported before-tax and are included net in the “Gain on dispositions” line on our consolidated income statement.

2015

In November 2015, we sold a portion of our western Canadian properties located in British Columbia, Alberta, and Saskatchewan for $198 million and recognized a gain on disposition of $66 million. At the time of the disposition, the carrying value of our interest, which was included in the Canada segment, was $132 million, which included primarily $379 million of PP&E and $248 million of ARO.

In December 2015, we sold a portion of our western Canadian properties located in central Alberta for $130 million and recognized a loss on disposition of $235 million. At the time of the disposition, the carrying value of our interest, which was included in the Canada segment, was approximately $365 million, which included primarily $488 million of PP&E and $126 million of ARO.

Additionally, other December 2015 disposition transactions are summarized below.

We sold producing properties in East Texas and Northern Louisiana for $412 million and recognized a gain on disposition of $189 million. At the time of the disposition, the carrying value of our interest, which was included in the Lower 48 segment, was $223 million, which included $351 million of PP&E and $128 million of ARO.

 

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We sold certain gas producing properties in South Texas for $358 million and recognized a gain on disposition of $201 million. At the time of the disposition, the carrying value of our interest, which was included in the Lower 48 segment, was $157 million, which included $369 million of PP&E and $212 million of ARO.

We sold certain pipeline and gathering assets in South Texas for $201 million and recognized a gain on disposition of $193 million. At the time of the disposition, the carrying value of our interest, which was included in the Lower 48 segment, was $8 million, which primarily included $24 million of PP&E and $18 million of ARO.

We also sold our 50 percent interest in the Russian joint venture, Polar Lights Company, for $98 million and recognized a gain on disposition of $58 million. At the time of the disposition, the carrying value of our equity method investment in Polar Lights Company, which was included in our Other International segment, was approximately $40 million.

2014

For information on the sale of our Nigeria business, which is included in the “Income from discontinued operations” line on our consolidated income statement, see Note 3—Discontinued Operations.

2013

In March 2013, we sold the majority of our producing zones in the Cedar Creek Anticline for $994 million and recognized a loss on disposition of $43 million. At the time of the disposition, the carrying value of our interest, which was included in the Lower 48 segment, was $1,037 million, which included primarily $1,066 million of PP&E and $28 million of ARO.

In June 2013, we sold a portion of our working interests in the Browse and Canning basins for $402 million. Because we retain a working interest in the unproved properties, proceeds were treated as a reduction of the carrying value of PP&E with no gain or loss on disposition recognized. Prior to the partial disposition, the carrying value of the PP&E associated with our interests, included in our Asia Pacific and Middle East segment, was $486 million.

In August 2013, we sold our interest in the Clyden undeveloped oil sands leasehold for $724 million and recognized a gain on disposition of $614 million. At the time of the disposition, the carrying value of our interest in Clyden, which was included in the Canada segment, was $110 million and was primarily classified as PP&E.

In August 2013, we also sold our 39 percent interest in Phoenix Park Gas Processors Limited for $593 million and recognized a gain on disposition of $417 million. At the time of the disposition, the carrying value of our equity investment in Phoenix Park, which was included in our Other International segment, was $176 million.

For information on the Kashagan and Algeria sales, which are included in the “Income from discontinued operations” line on our consolidated income statement, see Note 3—Discontinued Operations.

 

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Note 7—Investments, Loans and Long-Term Receivables

Components of investments, loans and long-term receivables at December 31 were:

 

     Millions of Dollars         
  

 

 

 
     2015         2014   
  

 

 

 

Equity investments

   $         19,850         23,426   

Loans and advances—related parties

     696         804   

Long-term receivables

     519         444   

Other investments

     121         465   

 

 
   $ 21,186                 25,139   

 

 

Equity Investments

Affiliated companies in which we had a significant equity investment at December 31, 2015, included:

 

    APLNG—37.5 percent owned joint venture with Origin Energy (37.5 percent) and Sinopec (25 percent)—to develop coalbed methane production from the Bowen and Surat basins in Queensland, Australia, as well as process and export LNG.
    FCCL Partnership—50 percent owned business venture with Cenovus Energy Inc.—produces bitumen in the Athabasca oil sands in northeastern Alberta and sells the bitumen blend.
    Qatar Liquefied Gas Company Limited (3) (QG3)—30 percent owned joint venture with affiliates of Qatar Petroleum (68.5 percent) and Mitsui & Co., Ltd. (1.5 percent)—produces and liquefies natural gas from Qatar’s North Field, as well as exports LNG.

Summarized 100 percent earnings information for equity method investments in affiliated companies, combined, was as follows:

 

     Millions of Dollars   
  

 

 

 
     2015         2014         2013   
  

 

 

 

Revenues

   $         11,003                 19,243                 18,035   

Income before income taxes

     1,866         6,746         6,384   

Net income

     1,801         6,630         6,125   

 

 

Summarized 100 percent balance sheet information for equity method investments in affiliated companies, combined, was as follows:

 

     Millions of Dollars   
  

 

 

 
     2015         2014   
  

 

 

 

Current assets

   $ 2,504         4,512   

Noncurrent assets

             58,431         58,570   

Current liabilities

     1,863         3,346   

Noncurrent liabilities

     24,820                 20,210   

 

 

Our share of income taxes incurred directly by an equity company is reported in equity in earnings of affiliates, and as such is not included in income taxes in our consolidated financial statements.

At December 31, 2015, retained earnings included $1,323 million related to the undistributed earnings of affiliated companies. Dividends received from affiliates were $876 million, $2,648 million and $1,425 million in 2015, 2014 and 2013, respectively.

 

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APLNG

APLNG is focused on coalbed methane production from the Bowen and Surat basins in Queensland, Australia, and LNG processing and export sales. Our investment in APLNG gives us access to coalbed methane resources in Australia and enhances our LNG position. The majority of APLNG LNG is sold under two long term sales and purchase agreements, supplemented with sales of additional LNG spot cargoes targeting the Asia Pacific markets. Origin Energy, an integrated Australian energy company, is the operator of APLNG’s production and pipeline system, while we operate the LNG facility.

APLNG executed project financing agreements for an $8.5 billion project finance facility during the third quarter of 2012. The $8.5 billion project finance facility is composed of financing agreements executed by APLNG with the Export-Import Bank of the United States for approximately $2.9 billion, the Export-Import Bank of China for approximately $2.7 billion, and a syndicate of Australian and international commercial banks for approximately $2.9 billion. At December 31, 2015, $8.4 billion had been drawn from the facility. In connection with the execution of the project financing, we provided a completion guarantee for our pro-rata share of the project finance facility which will be released upon meeting certain completion milestones. See Note 12—Guarantees, for additional information.

APLNG is considered a VIE, as it has entered into certain contractual arrangements that provide it with additional forms of subordinated financial support. See Note 4—Variable Interest Entities (VIEs) for additional information.

During 2015, the outlook for crude oil and natural gas prices sharply deteriorated, and as a result of these significantly reduced price outlooks, the estimated fair value of our investment in APLNG declined to an amount below book value during the fourth quarter of 2015.

Based on a review of the facts and circumstances surrounding this decline in fair value, we concluded that the impairment was other than temporary under the guidance of FASB Accounting Standards Codification (ASC) Topic 323, “Investments – Equity Method and Joint Ventures,” and the recognition of an impairment of our investment to fair value was necessary. In reaching this conclusion, we primarily considered the severity of the current decline of commodity prices as well as the market outlook. Fair value has been estimated based on an internal discounted cash flow model using estimates of future production, prices from futures exchanges and pricing service companies, costs, foreign currency rates and a discount factor that is believed to be consistent with those used by principal market participants.

Accordingly, we recorded a noncash $1,502 million, before- and after-tax impairment, in our fourth-quarter 2015 results. The impairment, which is included in the “Impairments” line on our consolidated income statement, had the effect of reducing our book value to $10,185 million, based on the present value of discounted expected future cash flows as of December 31, 2015.

At December 31, 2015, the book value of our equity method investment in APLNG was $10,185 million, net of a $1,522 million reduction due to cumulative foreign currency translation effects. Effective October 1, 2015, in conjunction with APLNG Train 1 achieving first LNG during the fourth quarter, we changed the functional currency of our investment in APLNG from Australian dollar to U.S. dollar. Accordingly, we expect the currency translation adjustment associated with our investment balance to remain unchanged going forward. The historical cost basis of our 37.5 percent share of net assets on the books of APLNG under U.S. generally accepted accounting principles was $7,470 million, resulting in a basis difference of $2,715 million on our books. The basis difference, which is substantially all associated with PP&E and subject to amortization, has been allocated on a relative fair value basis to individual exploration and production license areas owned by APLNG, some of which are not currently in production. Any future additional payments are expected to be allocated in a similar manner. Each exploration license area will periodically be reviewed for any indicators of potential impairment, which, if required, would result in acceleration of basis difference amortization. As the joint venture produces natural gas from each license, we amortize the basis difference allocated to that license using the unit-of-production method. Included in net income (loss) attributable to ConocoPhillips for 2015, 2014 and 2013 was after-tax expense of $21 million, $24 million and $16 million, respectively, representing the amortization of this basis difference on currently producing licenses.

 

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FCCL

FCCL Partnership, a Canadian upstream 50/50 general partnership with Cenovus Energy Inc., produces bitumen in the Athabasca oil sands in northeastern Alberta and sells the bitumen blend. We account for our investment in FCCL under the equity method of accounting, with the operating results of our investment in FCCL converted to reflect the use of the successful efforts method of accounting for oil and gas exploration and development activities.

At December 31, 2015, the book value of our investment in FCCL was $8,165 million, net of a $1,955 million reduction due to cumulative foreign currency translation effects. FCCL’s operating assets consist of the Foster Creek and Christina Lake steam-assisted gravity drainage bitumen projects, both located in the eastern flank of the Athabasca oil sands in northeastern Alberta. Cenovus is the operator and managing partner of FCCL.

We were obligated to contribute $7.5 billion, plus accrued interest, to FCCL over a 10-year period that began in 2007. In December 2013, we repaid the remaining balance of the obligation, which totaled $2,810 million and is included in the “Other” line in the financing activities section of our consolidated statement of cash flows. Interest accrued at a fixed annual rate of 5.3 percent on the unpaid principal balance. Fifty percent of the quarterly interest payment is reflected as a capital contribution and is included in the “Capital expenditures and investments” line on our consolidated statement of cash flows. In the first quarter of 2014, we received a $1.3 billion distribution from FCCL, which is included in the “Undistributed equity earnings” line on our consolidated statement of cash flows.

QG3

QG3 is a joint venture that owns an integrated large-scale LNG project located in Qatar. We provided project financing, with a current outstanding balance of $804 million as described below under “Loans and Long-Term Receivables.” At December 31, 2015, the book value of our equity method investment in QG3, excluding the project financing, was $808 million. We have terminal and pipeline use agreements with Golden Pass LNG Terminal and affiliated Golden Pass Pipeline near Sabine Pass, Texas, in which we have a 12.4 percent interest, intended to provide us with terminal and pipeline capacity for the receipt, storage and regasification of LNG purchased from QG3. However, currently the LNG from QG3 is being sold to markets outside of the United States.

Loans and Long-Term Receivables

As part of our normal ongoing business operations and consistent with industry practice, we enter into numerous agreements with other parties to pursue business opportunities. Included in such activity are loans and long-term receivables to certain affiliated and non-affiliated companies. Loans are recorded when cash is transferred or seller financing is provided to the affiliated or non-affiliated company pursuant to a loan agreement. The loan balance will increase as interest is earned on the outstanding loan balance and will decrease as interest and principal payments are received. Interest is earned at the loan agreement’s stated interest rate. Loans and long-term receivables are assessed for impairment when events indicate the loan balance may not be fully recovered.

Through November 2014, we had an agreement with Freeport LNG Development, L.P. (Freeport LNG) to participate in an LNG receiving terminal in Quintana, Texas. We had no ownership in Freeport LNG; however, we had a 50 percent interest in Freeport LNG GP, Inc. (Freeport GP), which serves as the general partner managing the venture. We had entered into a credit agreement with Freeport LNG, whereby we agreed to provide loan financing for the construction of the terminal. We also entered into a long-term agreement with Freeport LNG to use 0.9 billion cubic feet per day of regasification capacity, which would have expired in 2033. When the terminal became operational in June 2008, we began making payments under the terminal use agreement. Freeport LNG began making loan repayments in September 2008.

In July 2013, we reached an agreement with Freeport LNG to terminate our long-term agreement at the Freeport LNG Terminal, subject to Freeport LNG obtaining regulatory approval and project financing for an LNG liquefaction and export facility in Texas, in which we are not a participant. These conditions were satisfied in 2014, and we paid Freeport LNG a termination fee of $522 million. Freeport LNG repaid the outstanding $454 million ConocoPhillips loan used by Freeport LNG to partially fund the original construction

 

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of the terminal. The payment made to Freeport LNG to terminate our long-term agreement is included in the cash flows from operating activities section on our consolidated statement of cash flows, while the receipt of the funds from Freeport LNG to repay the outstanding loan is included in the cash flows from investing activities section. These transactions, plus miscellaneous items, including the disposal of our 50 percent interest in Freeport GP, resulted in a one-time net cash outflow of $63 million for us. In addition, we recognized an after-tax charge to earnings of $540 million in 2014, and our terminal regasification capacity has been reduced from 0.9 billion cubic feet per day to 0.4 billion cubic feet per day, until July 1, 2016, at which time it will be reduced to zero.

At December 31, 2015, significant loans to affiliated companies include $804 million in project financing to QG3. We own a 30 percent interest in QG3, for which we use the equity method of accounting. The other participants in the project are affiliates of Qatar Petroleum and Mitsui. QG3 secured project financing of $4.0 billion in December 2005, consisting of $1.3 billion of loans from export credit agencies (ECA), $1.5 billion from commercial banks, and $1.2 billion from ConocoPhillips. The ConocoPhillips loan facilities have substantially the same terms as the ECA and commercial bank facilities. On December 15, 2011, QG3 achieved financial completion and all project loan facilities became nonrecourse to the project participants. Semi-annual repayments began in January 2011 and will extend through July 2022.

The long-term portion of these loans is included in the “Loans and advances—related parties” line on our consolidated balance sheet, while the short-term portion is in “Accounts and notes receivable—related parties.”

Note 8—Suspended Wells and Other Exploration Expenses

The following table reflects the net changes in suspended exploratory well costs during 2015, 2014 and 2013:

 

     Millions of Dollars   
  

 

 

 
     2015         2014         2013   
  

 

 

 

Beginning balance at January 1

   $ 1,299         994         1,038   

Additions pending the determination of proved reserves

     331         478         466   

Reclassifications to proved properties

     (28)         (9)         (29)   

Sales of suspended well investment

             (57)         (481)   

Charged to dry hole expense

     (342)         (107)           

 

 

Ending balance at December 31

   $         1,260                 1,299                   994

 

 

*Includes $57 million of assets that were held for sale in Nigeria.

The following table provides an aging of suspended well balances at December 31:

 

     Millions of Dollars   
  

 

 

 
     2015         2014         2013   
  

 

 

 

Exploratory well costs capitalized for a period of one year or less

   $ 235         466         437   

Exploratory well costs capitalized for a period greater than one year

     1,025         833         557   

 

 

Ending balance

   $         1,260                 1,299                   994  * 

 

 

Number of projects with exploratory well costs capitalized for a period greater than one year

     28         30         29   

 

 

*Includes $57 million of assets that were held for sale in Nigeria.

 

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The following table provides a further aging of those exploratory well costs that have been capitalized for more than one year since the completion of drilling as of December 31, 2015:

 

     Millions of Dollars   
  

 

 

 
        Suspended Since   
     

 

 

 
     Total         2012–2014         2009–2011         2002–2008   
  

 

 

 

Greater Poseidon—Australia(2)

     177         165         12         -   

Caldita/Barossa—Australia(1)

     77         -         -         77   

FAN—Senegal(1)

     117         117         -         -   

Fiord West—Alaska(2)

     16         -         -         16   

Greater Clair—UK(2)

     127         113         14         -   

Kamunsu East—Malaysia(2)

     19         19         -         -   

Limbayong—Malaysia(1)

     23         23         -         -   

NC 98—Libya(2)

     15         11         -         4   

NPRA—Alaska(1)

     93         70         17         6   

Shenandoah—Lower 48(1)

     94         51         43         -   

SNE—Senegal(1)

     23         23         -         -   

Sunrise—Australia(2)

     13         -         -         13   

Surmont 3 and beyond—Canada(1)

     89         58         14         17   

Tiber—Lower 48(1)

     100         60         40         -   

Other of $10 million or less each(1)(2)

     42         24         2         16   

 

 

Total

   $         1,025         734         142         149   

 

 

(1)Additional appraisal wells planned.

(2)Appraisal drilling complete; costs being incurred to assess development.

In line with our July 2015 announcement of plans to reduce future deepwater exploration spending, we recognized before-tax cancellation costs of $335 million and wrote off $48 million of before-tax capitalized rig costs in relation to the termination of our Gulf of Mexico deepwater drillship contract with Ensco in the Lower 48 segment in the third quarter of 2015.

In the fourth quarter of 2015, we impaired our leasehold cost associated with Block 36 in Angola due to the lack of commerciality of future prospects. We drilled one of our two-well commitment under the Angola Block 36 Production Sharing Contract (PSC) and recorded a before-tax charge of $93 million for potential future obligations.

These charges are included in the “Exploration expenses” line on our consolidated income statement.

 

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Note 9—Impairments

During 2015, 2014 and 2013, we recognized the following before-tax impairment charges:

 

             Millions of Dollars           
  

 

 

 
     2015        2014         2013   
  

 

 

 

Alaska

   $ 10        59         3   

Lower 48

     (2     208         2   

Canada

     4        38         216   

Europe and North Africa

     724        541         301   

Asia Pacific and Middle East

     1,508        7         3   

Corporate

     1        3         4