| CONOCOPHILLIPS 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 |
| A substantial or extended decline in crude oil, natural gas and natural gas liquids prices, as well as refining margins, would reduce our operating results and cash flows, and could impact our future rate of growth and the carrying value of our assets |
| Our revenues, operating results and future rate of growth are highly dependent on the prices we receive for our crude oil, natural gas, natural gas liquids and refined products |
| Historically, the markets for crude oil, natural gas, natural gas liquids and refined products have been volatile and may continue to be volatile in the future |
| Many of the factors influencing the prices of crude oil, natural gas, natural gas liquids and refined products are beyond our control |
| These factors include, among others: • Worldwide and domestic supplies of, and demand for, crude oil, natural gas, natural gas liquids and refined products |
| • The cost of exploring for, developing, producing, refining and marketing crude oil, natural gas, natural gas liquids and refined products |
| • The ability of the members of OPEC and other producing nations to agree to and maintain production levels |
| • The worldwide military and political environment, uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or further acts of terrorism in the United States, or elsewhere |
| • The price and availability of alternative and competing fuels |
| • Domestic and foreign governmental regulations and taxes |
| • General economic conditions worldwide |
| The long-term effects of these and other conditions on the prices of crude oil, natural gas, natural gas liquids and refined products are uncertain |
| Generally, our policy is to remain exposed to market prices of commodities; however, management may elect to hedge the price risk of our crude oil, natural gas, natural gas liquids and refined products |
| Lower crude oil, natural gas, natural gas liquids and refined products prices may reduce the amount of these commodities that we can produce economically, which may reduce our revenues, operating income and cash flows |
| Significant reductions in commodity prices could require us to reduce our capital expenditures and impair the carrying value of our assets |
| Estimates of crude oil and natural gas reserves depend on many factors and assumptions, including various assumptions that are based on conditions in existence as of the dates of the estimates |
| Any material changes in those conditions or other factors affecting those assumptions could impair the quantity and value of our crude oil and natural gas reserves |
| 36 ______________________________________________________________________ The proved crude oil and natural gas reserve information relating to us included in this annual report has been derived from engineering estimates prepared by our personnel |
| The estimates were calculated using crude oil and natural gas prices in effect as of December 31, 2005, as well as other conditions in existence as of that date |
| Any significant future price changes will have a material effect on the quantity and present value of our proved reserves |
| Future reserve revisions could also result from changes in, among other things, governmental regulation |
| Reserve estimation is a subjective process that involves estimating volumes to be recovered from underground accumulations of crude oil and natural gas that cannot be directly measured |
| Estimates of economically recoverable crude oil and natural gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including: • Historical production from the area, compared with production from other comparable producing areas |
| • The assumed effects of regulations by governmental agencies |
| • Assumptions concerning future crude oil and natural gas prices |
| • Assumptions concerning future operating costs, severance and excise taxes, development costs and workover and remedial costs |
| 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 |
| Because of the subjective nature of crude oil and natural gas reserve estimates, each of the following items may differ materially from the amounts or other factors estimated: • The amount and timing of crude oil and natural gas production |
| • The revenues and costs associated with that production |
| • The amount and timing of future development expenditures |
| The discounted future net revenues from our reserves should not be considered as the market value of the reserves attributable to our properties |
| As required by rules adopted by the SEC, the estimated discounted future net cash flows from our proved reserves, as described in the supplemental oil and gas operations disclosures on pages 183 through 185, are based generally on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower |
| In addition, the 10 percent discount factor, which SEC rules require to be used to calculate discounted future net revenues for reporting purposes, is not necessarily the most appropriate discount factor based on our cost of capital and the risks associated with our business and the crude oil and natural gas industry in general |
| If we are unsuccessful in acquiring or finding additional reserves, our future crude oil and natural gas production would decline, thereby reducing our cash flows and results of operations, negatively impacting our financial condition |
| The rate of production from crude oil and natural gas properties generally declines as reserves are depleted |
| Except to the extent that we acquire additional properties containing proved reserves, conduct successful exploration and development activities, or, through engineering studies, identify additional or secondary recovery reserves, our proved reserves will decline materially as we produce crude oil and natural gas |
| Accordingly, to the extent that we are not successful in replacing the crude oil and natural gas we produce 37 ______________________________________________________________________ with good prospects for future production, our business will decline |
| Creating and maintaining an inventory of projects depends on many factors, including: • Obtaining rights to explore, develop and produce crude oil and natural gas in promising areas |
| • Efficient and profitable operation of mature properties |
| We may not be able to find or acquire additional reserves at acceptable costs |
| Crude oil price increases and environmental regulations may reduce our refined product margins |
| The profitability of our R&M segment depends largely on the margin between the cost of crude oil and other feedstocks we refine and the selling prices we obtain for refined products |
| Our overall profitability could be adversely affected by the availability of supply and rising crude oil and other feedstock prices that we do not recover in the marketplace |
| Refined product margins historically have been volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products |
| In addition, environmental regulations, particularly the 1990 amendments to the Clean Air Act, have imposed, and are expected to continue to impose, increasingly stringent and costly requirements on our refining and marketing operations, which may reduce refined product margins |
| We will continue to incur substantial capital expenditures and operating costs as a result of compliance with, and changes in, environmental laws and regulations, and, as a result, our profitability could be materially reduced |
| 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 |
| • The handling, use, storage, transportation, disposal and clean-up of hazardous materials and hazardous and non-hazardous wastes |
| • The dismantlement, abandonment and restoration of our properties and facilities at the end of their useful lives |
| 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 operating results will be adversely affected |
| The specific impact of these laws and regulations on us and our competitors may vary depending on a number of factors, including the age and location of operating facilities, marketing areas and production processes |
| We may also be required to make material expenditures to: • Modify operations |
| • Install pollution control equipment |
| • Perform site cleanups |
| 38 ______________________________________________________________________ • Curtail operations |
| We may become subject to liabilities that we currently do not anticipate in connection with new, amended or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination |
| In addition, any failure by us to comply with existing or future laws could result in civil or criminal fines and other enforcement actions against us |
| Our, and our predecessors’, operations also could expose us to civil claims by third parties for alleged liability resulting from contamination of the environment or personal injuries caused by releases of hazardous substances |
| Environmental laws are subject to frequent change and many of them have become more stringent |
| In some cases, they can impose liability for the entire cost of cleanup on any responsible party, without regard to negligence or fault, and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them |
| Worldwide political and economic developments could damage our operations and materially reduce our profitability and cash flows |
| Local political and economic factors in international markets could have a material adverse effect on us |
| Approximately 65 percent of our crude oil, natural gas and natural gas liquids production in 2005 was derived from production outside the United States, and 66 percent of our proved reserves, as of December 31, 2005, were located outside the United States |
| There are many risks associated with operations in international markets, including changes in foreign governmental policies relating to crude oil, natural gas, natural gas liquids or refined product pricing and taxation, other political, economic or diplomatic developments, changing political conditions and international monetary fluctuations |
| These risks include, among others: • Political and economic instability, war, acts of terrorism and civil disturbances |
| • The possibility that a foreign government may seize our property, with or without compensation, may attempt to renegotiate or revoke existing contractual arrangements and concessions, or may impose additional taxes or royalties |
| • Fluctuating currency values, hard currency shortages and currency controls |
| Continued hostilities and turmoil in the world and the occurrence or threat of future terrorist attacks could affect the economies of the United States and other developed countries |
| A lower level of economic activity could result in a decline in energy consumption, which could cause our revenues and margins to decline and limit our future growth prospects |
| More specifically, our energy-related assets may be at greater risk of future terrorist attacks than other possible targets |
| A direct attack on our assets, or assets used by us, could have a material adverse effect on our operations, financial condition, results of operations and prospects |
| These risks could lead to increased volatility in prices for crude oil, natural gas, natural gas liquids and refined products and could increase instability in the financial and insurance markets, making it more difficult for us to access capital and to obtain the insurance coverage that we consider adequate |
| 39 ______________________________________________________________________ Actions of the US government through tax and other legislation, executive order and commercial restrictions could reduce our operating profitability both in the United States and abroad |
| The US government can 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 both the United States and host governments have affected operations significantly in the past and will continue to do so in the future |
| We also are exposed to fluctuations in foreign currency exchange rates |
| We do not comprehensively hedge our exposure to currency rate changes, although we may choose to selectively hedge certain working capital balances, firm commitments, cash returns from affiliates and/or tax payments |
| These efforts may not be successful |
| Changes in governmental regulations may impose price controls and limitations on production of crude oil and natural gas |
| 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 and natural gas wells below actual production capacity in order to conserve supplies of crude oil and natural gas |
| Because legal requirements are frequently changed and subject to interpretation, we cannot predict the effect of these requirements |
| Our operations are subject to business interruptions and casualty losses, and we do not insure against all potential losses, so we could be seriously harmed by unexpected liabilities |
| Our exploration and production operations are subject to unplanned occurrences, including blowouts, explosions, fires, loss of well control, formations with abnormal pressures, spills and adverse weather |
| In addition, our refining, marketing and transportation operations are subject to business interruptions due to scheduled refinery turnarounds and unplanned events such as explosions, fires, pipeline interruptions, pipeline ruptures, crude oil or refined product spills, inclement weather or labor disputes |
| Our operations are also subject to the additional hazards of pollution, releases of toxic gas and other environmental hazards and risks, as well as hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions |
| All such hazards could result in loss of human life, significant property and equipment damage, environmental pollution, impairment of operations and substantial losses to us |
| These hazards have adversely affected us in the past, and litigation arising from a catastrophic occurrence in the future at one of our locations may result in our being named as a defendant in lawsuits asserting potentially large claims or being assessed potentially substantial fines by governmental authorities |
| In addition, we are exposed to risks inherent in any business, such as terrorist attacks, equipment failures, accidents, theft, strikes, protests and sabotage, that could disrupt or interrupt operations |
| We maintain insurance against many, but not all, potential losses or liabilities arising from these operating hazards in amounts that we believe to be prudent |
| Uninsured losses and liabilities arising from operating hazards could reduce the funds available to us for exploration, drilling, production and other capital expenditures and could materially reduce our profitability |
| 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 |
| As with any joint-venture arrangement, differences in views among the joint-venture participants may result in delayed decisions or in failures to agree on major issues |
| There is the risk that our joint-venture partners may at any time have economic, business or legal interests or goals that are 40 ______________________________________________________________________ inconsistent with those of the joint venture or us |
| There is also risk that our joint-venture partners may be unable to meet their economic or other obligations and that 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 anticipate entering into additional joint ventures with other entities |
| We cannot assure that we will undertake such joint ventures or, if undertaken, that such joint ventures will be successful |
| We may not be successful in continuing to grow through acquisitions, and any further acquisitions may require us to obtain additional financing or could result in dilution of earnings per share |
| A substantial portion of our growth over the last several years has been attributable to acquisitions |
| Risks associated with acquisitions include those relating to: • Diversion of management time and attention from our existing businesses and other priorities |
| • Difficulties in integrating the financial, technological and management standards, processes, procedures and controls of an acquired business into those of our existing operations |
| • Liability for known or unknown environmental conditions or other contingent liabilities not covered by indemnification or insurance |
| • Greater than anticipated expenditures required for compliance with environmental or other regulatory standards, or for investments to improve operating results |
| • Difficulties in achieving anticipated operational improvements |
| We may not be successful in continuing to grow through acquisitions |
| In addition, the financing of future acquisitions may require us to incur additional indebtedness, which could limit our financial flexibility, or to issue additional equity, which could result in dilution of the ownership interests of existing stockholders |
| Any acquisitions that we do consummate may not produce the anticipated benefits or may have adverse effects on our business and operating results |
| Our results of operations could be adversely affected by goodwill impairments |
| As a result of mergers and acquisitions, at year-end 2005 we had approximately dlra15 billion of goodwill on our balance sheet |
| Goodwill is not amortized, but instead must be tested at least annually for impairment by applying a fair-value-based test |
| Goodwill is deemed impaired to the extent that its carrying amount exceeds the residual fair value of the reporting unit |
| Although our latest tests indicate that no goodwill impairment is currently required, future deterioration in market conditions could lead to goodwill impairments that could have a substantial negative affect on our profitability |