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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
or
     
o   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)    
281-293-1000
(Registrant’s telephone number, including area code)
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. Yes þ     No o
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 þAccelerated filer o Non-accelerated filer oSmaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
The registrant had 1,519,804,610 shares of common stock, $.01 par value, outstanding at June 30, 2008.
 
 

 


 

CONOCOPHILLIPS
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 Amended and Restated Certificate of Incorporation
 Amended and Restated By-Laws
 First and Second Amendments to Director's Charitable Gift Program
 Computation of Ratio of Earnings to Fixed Charges
 Certification of CEO Pursuant to Rule 13a-14(a)
 Certification of CFO Pursuant to Rule 13a-14(a)
 Certifications Pursuant to Section 1350

 


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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
     
 
Consolidated Income Statement   ConocoPhillips
                                 
    Millions of Dollars  
     
    Three Months Ended     Six Months Ended  
    June 30     June 30  
     
    2008     2007     2008     2007  
     
Revenues and Other Income
                               
Sales and other operating revenues*
  $ 71,411       47,370       126,294       88,690  
Equity in earnings of affiliates
    1,812       1,506       3,171       2,435  
Other income
    130       521       440       1,139  
 
Total Revenues and Other Income
    73,353       49,397       129,905       92,264  
 
 
                               
Costs and Expenses
                               
Purchased crude oil, natural gas and products
    51,214       30,820       89,034       57,535  
Production and operating expenses
    3,111       2,557       5,802       5,049  
Selling, general and administrative expenses
    629       604       1,155       1,131  
Exploration expenses
    288       259       597       521  
Depreciation, depletion and amortization
    2,178       2,016       4,387       4,040  
Impairment—expropriated assets
          4,588             4,588  
Impairments
    19       98       25       97  
Taxes other than income taxes*
    5,796       4,697       10,951       9,071  
Accretion on discounted liabilities
    96       81       200       160  
Interest and debt expense
    210       319       417       626  
Foreign currency transaction gains
          (179 )     (43 )     (178 )
Minority interests
    17       19       36       40  
 
Total Costs and Expenses
    63,558       45,879       112,561       82,680  
 
Income before income taxes
    9,795       3,518       17,344       9,584  
Provision for income taxes
    4,356       3,217       7,766       5,737  
 
Net Income
  $ 5,439       301       9,578       3,847  
 
 
                               
Net Income Per Share of Common Stock (dollars)
                               
Basic
  $ 3.54       .18       6.18       2.34  
Diluted
    3.50       .18       6.11       2.31  
 
 
                               
Dividends Paid Per Share of Common Stock (dollars)
  $ .47       .41       .94       .82  
 
 
                               
Average Common Shares Outstanding (in thousands)
                               
Basic
    1,534,975       1,635,848       1,548,587       1,641,569  
Diluted
    1,555,447       1,657,999       1,568,867       1,663,618  
 
* Includes excise taxes on petroleum products sales:
  $ 4,091       4,069       7,948       7,910  
See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet   ConocoPhillips
                 
    Millions of Dollars  
    June 30     December 31  
    2008     2007  
     
Assets
               
Cash and cash equivalents
  $ 787       1,456  
Accounts and notes receivable (net of allowance of $62 million in 2008 and $58 million in 2007)
    17,474       14,687  
Accounts and notes receivable—related parties
    2,987       1,667  
Inventories
    6,757       4,223  
Prepaid expenses and other current assets
    5,510       2,702  
 
Total Current Assets
    33,515       24,735  
Investments and long-term receivables
    33,814       31,457  
Loans and advances—related parties
    1,981       1,871  
Net properties, plants and equipment
    89,990       89,003  
Goodwill
    29,227       29,336  
Intangibles
    873       896  
Other assets
    755       459  
 
Total Assets
  $ 190,155       177,757  
 
 
               
Liabilities
               
Accounts payable
  $ 21,319       16,591  
Accounts payable—related parties
    2,042       1,270  
Short-term debt
    385       1,398  
Accrued income and other taxes
    6,699       4,814  
Employee benefit obligations
    681       920  
Other accruals
    3,721       1,889  
 
Total Current Liabilities
    34,847       26,882  
Long-term debt
    21,539       20,289  
Asset retirement obligations and accrued environmental costs
    7,330       7,261  
Joint venture acquisition obligation—related party
    5,985       6,294  
Deferred income taxes
    21,044       21,018  
Employee benefit obligations
    3,043       3,191  
Other liabilities and deferred credits
    2,825       2,666  
 
Total Liabilities
    96,613       87,601  
 
 
               
Minority Interests
    1,144       1,173  
 
 
               
Common Stockholders’ Equity
               
Common stock (2,500,000,000 shares authorized at $.01 par value)
               
Issued (2008—1,727,212,141 shares; 2007—1,718,448,829 shares)
               
Par value
    17       17  
Capital in excess of par
    43,261       42,724  
Grantor trusts (at cost: 2008—42,397,731 shares; 2007—42,411,331 shares)
    (716 )     (731 )
Treasury stock (at cost: 2008—165,009,800 shares; 2007—104,607,149 shares)
    (12,978 )     (7,969 )
Accumulated other comprehensive income
    4,304       4,560  
Unearned employee compensation
    (115 )     (128 )
Retained earnings
    58,625       50,510  
 
Total Common Stockholders’ Equity
    92,398       88,983  
 
Total
  $ 190,155       177,757  
 
See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows   ConocoPhillips
                 
    Millions of Dollars  
     
    Six Months Ended  
    June 30  
     
    2008     2007  
     
Cash Flows From Operating Activities
               
Net income
  $ 9,578       3,847  
Adjustments to reconcile net income to net cash provided by operating activities
               
Nonworking capital adjustments
               
Depreciation, depletion and amortization
    4,387       4,040  
Impairment—expropriated assets
          4,588  
Impairments
    25       97  
Dry hole costs and leasehold impairments
    281       281  
Accretion on discounted liabilities
    200       160  
Deferred taxes
    11       180  
Undistributed equity earnings
    (1,988 )     (1,235 )
Gain on asset dispositions
    (213 )     (927 )
Other
    (81 )     88  
Working capital adjustments*
               
Decrease (increase) in accounts and notes receivable
    (3,625 )     210  
Increase in inventories
    (2,537 )     (271 )
Decrease (increase) in prepaid expenses and other current assets
    (2,349 )     285  
Increase in accounts payable
    5,481       1,097  
Increase (decrease) in taxes and other accruals
    2,851       (801 )
 
Net Cash Provided by Operating Activities
    12,021       11,639  
 
 
               
Cash Flows From Investing Activities
               
Capital expenditures and investments
    (6,720 )     (5,347 )
Proceeds from asset dispositions
    441       2,215  
Long-term advances/loans—related parties
    (154 )     (326 )
Collection of advances/loans—related parties
    4       66  
Other
    7       19  
 
Net Cash Used in Investing Activities
    (6,422 )     (3,373 )
 
 
               
Cash Flows From Financing Activities
               
Issuance of debt
    2,065       765  
Repayment of debt
    (1,841 )     (5,121 )
Issuance of company common stock
    185       181  
Repurchase of company common stock
    (5,008 )     (2,000 )
Dividends paid on company common stock
    (1,449 )     (1,342 )
Other
    (240 )     (153 )
 
Net Cash Used in Financing Activities
    (6,288 )     (7,670 )
 
 
               
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    20       (2 )
 
 
               
Net Change in Cash and Cash Equivalents
    (669 )     594  
Cash and cash equivalents at beginning of period
    1,456       817  
 
Cash and Cash Equivalents at End of Period
  $ 787       1,411  
 
*Net of acquisition and disposition of businesses.
See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements   ConocoPhillips
Note 1—Interim Financial Information
The interim-period financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments, in the opinion of management, necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature. To enhance your understanding of these interim financial statements, see the consolidated financial statements and notes included in our 2007 Annual Report on Form 10-K.
Note 2—Changes in Accounting Principles
SFAS No. 157
Effective January 1, 2008, we implemented Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. We elected to implement this Statement with the one-year deferral permitted by FASB Staff Position (FSP) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually). The deferral applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which we use fair value. We do not expect any significant impact to our consolidated financial statements when we implement SFAS No. 157 for these assets and liabilities.
Due to our election under FSP 157-2, for 2008, SFAS No. 157 applies to commodity and foreign currency derivative contracts and certain nonqualified deferred compensation and retirement plan assets that are measured at fair value on a recurring basis in periods subsequent to initial recognition. The implementation of SFAS No. 157 did not cause a change in the method of calculating fair value of assets or liabilities, with the exception of incorporating the impact of our nonperformance risk on derivative liabilities—which was not material. The primary impact from adoption was additional disclosures.
SFAS No. 157 requires disclosures that 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 our assumptions about pricing by market participants.
We value our exchange-cleared derivatives using unadjusted closing prices provided by the exchange as of the balance sheet date, and these are classified as Level 1 in the fair value hierarchy. Over the counter (OTC) financial swaps and physical commodity purchase and sale contracts are generally valued using quotations provided by brokers and price index developers such as Platts and Oil Price Information Service. These are classified as Level 2. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, OTC swaps and physical commodity purchase and sale contracts are valued using internally developed methodologies that consider historical relationships among various commodities that result in management’s best estimate of fair value. These contracts are classified as Level 3.
Exchange-cleared financial options are valued using exchange closing prices and are classified as Level 1. Financial OTC and physical commodity options are valued using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and

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contractual prices for the underlying instruments, as well as other relevant economic measures. The degree to which these inputs are observable in the forward markets determines whether the option is classified as Level 2 or 3.
As permitted under SFAS No. 157, we use a mid-market pricing convention (the mid-point price between bid and ask prices). When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
The fair value hierarchy for our financial assets and liabilities accounted for at fair value on a recurring basis at June 30, 2008, was:
                                 
    Millions of Dollars
    Level 1     Level 2     Level 3     Total  
     
Assets
                               
Commodity derivatives
  $ 7,990       4,310       40       12,340  
Foreign exchange derivatives
          50             50  
Nonqualified benefit plans
    412                   412  
 
Total assets
    8,402       4,360       40       12,802  
 
 
                               
Liabilities
                               
Commodity derivatives
    (7,887 )     (4,565 )     (96 )     (12,548 )
Foreign exchange derivatives
          (43 )           (43 )
 
Total liabilities
    (7,887 )     (4,608 )     (96 )     (12,591 )
 
Net assets (liabilities)
  $ 515       (248 )     (56 )     211  
 
The derivative values above are based on analysis of each contract as the fundamental unit of account as required by SFAS No. 157. Derivative assets and liabilities with the same counterparty are not netted where the legal right of offset exists, which is different than the net presentation basis in Note 13—Financial Instruments and Derivative Contracts. Gains or losses from contracts in one level may be offset by gains or losses on contracts in another level or by changes in values of physical contracts or positions that are not reflected in the table above.

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Changes in the fair value of net commodity derivatives classified as Level 3 in the fair value hierarchy during the three- and six-month periods ended June 30, 2008, were:
                 
    Millions of Dollars
    Three Months Ended     Six Months Ended  
    June 30     June 30
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
               
Beginning balance
  $ (53 )     (34 )
Total gains (losses), realized and unrealized
               
Included in earnings
    (11 )     (53 )
Included in other comprehensive income
           
Purchases, issuances and settlements
          24  
Transfers in and/or out of Level 3
    8       7  
 
Balance at June 30, 2008
  $ (56 )     (56 )
 
The amount of total gains (losses) for the three- and six-month periods included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at June 30, 2008, were:
                 
    Millions of Dollars
    Three Months Ended     Six Months Ended  
    June 30     June 30
Related to assets
  $ 14       17  
Related to liabilities
    (25 )     (61 )
 
Gains and losses, realized and unrealized, included in earnings for the three- and six-month periods ending June 30, 2008, were:
                                                 
    Millions of Dollars  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
            Purchased                     Purchased        
    Other     Crude Oil,             Other     Crude Oil,        
    Operating     Natural Gas             Operating     Natural Gas        
    Revenues     and Products     Total     Revenues     and Products     Total  
         
 
                                               
Total gains (losses) included in earnings
  $ (14 )     3       (11 )     (57 )     4       (53 )
 
 
                                               
Change in unrealized gains (losses) relating to assets held at June 30, 2008
  $ 10       4       14       13       4       17  
 
 
                                               
Change in unrealized gains (losses) relating to liabilities held at June 30, 2008
  $ (25 )           (25 )     (61 )           (61 )
 

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SFAS No. 159
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This Statement permits the election to carry financial instruments and certain other items similar to financial instruments at fair value on the balance sheet, with all changes in fair value reported in earnings. By electing the fair value option in conjunction with a derivative, an entity can achieve an accounting result similar to a fair value hedge without having to comply with complex hedge accounting rules. We adopted this Statement effective January 1, 2008, but did not make a fair value election at that time or during the first six months of 2008 for any financial instruments not already carried at fair value in accordance with other accounting standards. Accordingly, the adoption of SFAS No. 159 did not impact our consolidated financial statements.
Note 3—Variable Interest Entities (VIEs)
We have a 24 percent interest in West2East Pipeline LLC (West2East), a company holding a 100 percent interest in Rockies Express Pipeline LLC (Rockies Express). West2East is a VIE, but we are not the primary beneficiary. We use the equity method of accounting for our investment. In 2007, we issued a guarantee for 24 percent of the $2 billion in credit facilities of Rockies Express. In addition, we have a guarantee for 24 percent of $600 million of Floating Rate Notes due 2009 issued by Rockies Express. At June 30, 2008, the book value of our investment in West2East was $249 million. See Note 11—Guarantees, for additional information.
We have a 30 percent ownership interest with a 50 percent governance interest in the OOO Naryanmarneftegaz (NMNG) joint venture to develop resources in the Timan-Pechora province of Russia. The NMNG joint venture is a VIE because we and our related party, OAO LUKOIL, have disproportionate interests. We are not the primary beneficiary of the VIE and we use the equity method of accounting for this investment. At June 30, 2008, the book value of our investment in the venture was $2,063 million.
Note 4—Inventories
Inventories consisted of the following:
                 
    Millions of Dollars  
    June 30     December 31  
    2008     2007  
     
 
               
Crude oil and petroleum products
  $ 5,854       3,373  
Materials, supplies and other
    903       850  
 
 
  $ 6,757       4,223  
 
Inventories valued on the last-in, first-out (LIFO) basis totaled $5,513 million and $2,974 million at June 30, 2008, and December 31, 2007, respectively. The remaining inventories were valued under various methods, including first-in, first-out and weighted average. The excess of current replacement cost over LIFO cost of inventories amounted to $12,234 million and $6,668 million at June 30, 2008, and December 31, 2007, respectively.

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Note 5—Assets Held for Sale
Noncurrent assets and noncurrent liabilities classified as current assets and current liabilities under the “held for sale” provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” totaled $1,092 million and $159 million, respectively, at December 31, 2007. During the first six months of 2008, a portion of these held-for-sale assets were sold, and additional assets met the held-for-sale criteria. As a result, at June 30, 2008, we classified $1,179 million of noncurrent assets as “Prepaid expenses and other current assets” on our consolidated balance sheet and we classified $303 million of noncurrent liabilities as current liabilities, consisting of $164 million in “Accrued income and other taxes” and $139 million in “Other accruals.” Contingent upon necessary regulatory approvals, we expect the disposal of these assets to be substantially completed by the end of 2008.
The major classes of noncurrent assets and noncurrent liabilities held for sale and classified as current were:
                 
    Millions of Dollars  
    June 30     December 31  
    2008     2007  
     
Assets
               
Investments and long-term receivables
  $ 7       48  
Net properties, plants and equipment
    973       946  
Goodwill
    188       89  
Intangibles
    2       2  
Other assets
    9       7  
 
Total assets
  $ 1,179       1,092  
 
Exploration and Production
  $ 432       189  
Refining and Marketing
    747       903  
 
 
  $ 1,179       1,092  
 
 
               
Liabilities
               
Asset retirement obligations and accrued environmental costs
  $ 108       23  
Deferred income taxes
    164       133  
Other liabilities and deferred credits
    31       3  
 
Total liabilities
  $ 303       159  
 
Exploration and Production
  $ 191       35  
Refining and Marketing
    112       124  
 
 
  $ 303       159  
 

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Note 6—Investments, Loans and Long-Term Receivables
LUKOIL
Our ownership interest in LUKOIL was 20 percent at June 30, 2008, based on 851 million shares authorized and issued. For financial reporting under U.S. generally accepted accounting principles, treasury shares held by LUKOIL are not considered outstanding for determining our equity-method ownership interest in LUKOIL. Our ownership interest, based on estimated shares outstanding, was also 20 percent at June 30, 2008, compared with 20.6 percent at December 31, 2007.
At June 30, 2008, the book value of our ordinary share investment in LUKOIL was $12,393 million. Our share of the net assets of LUKOIL was estimated to be $9,900 million. This basis difference of $2,493 million is primarily being amortized on a unit-of-production basis. On June 30, 2008, the closing price of LUKOIL shares on the London Stock Exchange was $98.60 per share, making the total market value of our LUKOIL investment $16,773 million.
Loans to Related Parties
As part of our normal ongoing business operations and consistent with industry practice, we invest and 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. Included in such activity are loans made to certain affiliated companies. The long-term portion of these loans are included in the “Loans and advances—related parties” balance sheet line item, while the short-term portion is included in “Accounts and notes receivable—related parties.” Significant loans to affiliated companies at June 30, 2008, included the following:
    $644 million in loan financing and an additional $116 million of accrued interest to Freeport LNG Development, L.P. for the construction of a liquefied natural gas (LNG) facility. We expect to provide loan financing of approximately $678 million, excluding accrued interest, for the construction of the facility. The terminal became operational late in the second quarter of 2008.
 
    $359 million in loan financing and an additional $46 million of accrued interest to Varandey Terminal Company associated with the costs of a terminal expansion. We expect our total financing obligation for the terminal expansion to be approximately $390 million at current exchange rates, excluding interest to be accrued during construction.
 
    $787 million of project financing and an additional $60 million of accrued interest to Qatargas 3, an integrated project to produce and liquefy natural gas from Qatar’s North field. Our maximum exposure to this financing structure is $1.2 billion, excluding accrued interest.

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Note 7—Properties, Plants and Equipment
The company’s investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (Accum. DD&A), was:
                                                 
    Millions of Dollars  
    June 30, 2008     December 31, 2007  
    Gross     Accum.     Net     Gross     Accum.     Net  
    PP&E     DD&A     PP&E     PP&E     DD&A     PP&E  
 
E&P
  $ 107,053       34,675       72,378       102,550       30,701       71,849  
Midstream
    114       66       48       267       103       164  
R&M
    20,764       5,112       15,652       19,926       4,733       15,193  
LUKOIL Investment
                                   
Chemicals
                                   
Emerging Businesses
    1,308       181       1,127       1,204       138       1,066  
Corporate and Other
    1,499       714       785       1,414       683       731  
 
 
  $ 130,738       40,748       89,990       125,361       36,358       89,003  
 
Suspended Wells
The company’s capitalized cost of suspended wells at June 30, 2008, was $694 million, an increase of $105 million from $589 million at year-end 2007. For the category of exploratory well costs capitalized for a period greater than one year as of December 31, 2007, $12 million was charged to dry hole expense during the first six months of 2008.
Note 8—Impairments
Expropriated Assets
In the second quarter of 2007, we recorded a noncash impairment, including allocable goodwill, of $4,588 million before-tax ($4,512 million after-tax) related to our investments in the Petrozuata and Hamaca heavy-oil ventures and the offshore Corocoro oil development project in Venezuela. See Note 13—Impairments, in our 2007 Annual Report on Form 10-K, for additional information.
Other Impairments
During the first six months of 2008 and 2007, we recognized the following net impairments:
                                 
    Millions of Dollars  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
E&P
                               
United States
  $       1             1  
International
    1       81       3       175  
R&M
                               
United States
    18       16       22       49  
Increase in fair value of previously impaired assets
                      (128 )
 
 
  $ 19       98       25       97  
 

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During the second quarter and six-month period of 2008, property impairments were primarily associated with planned asset dispositions.
During the second quarter and six-month period of 2007, we recorded property impairments for:
    The write-down of held-for-sale assets to fair value, less cost to sell.
 
    Changes in asset retirement obligations for properties at the end of their economic life.
 
    The write-down of abandoned properties or projects.
In addition and in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the six-month period of 2007 included a $128 million gain for the subsequent increase in the fair value of certain assets impaired in the prior year to reflect finalized sales agreements. This gain was netted with write-downs into the “Impairments” line of the consolidated income statement.
Note 9—Debt
In January 2008, we reduced our Floating Rate Five-Year Term Note due 2011 from $3 billion to $2 billion, with a subsequent reduction in June 2008 to $1.5 billion. In March 2008, we redeemed our $300 million 7.125% Debentures due 2028 at a premium of $8 million, plus accrued interest.
In May 2008, we issued notes consisting of $400 million of 4.40% Notes due 2013, $500 million of 5.20% Notes due 2018 and $600 million of 5.90% Notes due 2038. The proceeds from the offering were used to reduce commercial paper and for general corporate purposes.
At June 30, 2008, we had a $7.5 billion revolving credit facility, which expires in September 2012. The facility may be used as direct bank borrowings, as support for the ConocoPhillips $7.5 billion commercial paper program, as support for the ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program, or as support for issuances of letters of credit totaling up to $750 million. At June 30, 2008, and December 31, 2007, we had no outstanding borrowings under the credit facility, but $40 million and $41 million, respectively, in letters of credit had been issued. Under both commercial paper programs, $1,314 million of commercial paper was outstanding at June 30, 2008, compared with $725 million at December 31, 2007.
Also at June 30, 2008, we classified $2,264 million of short-term debt as long-term debt, based on our ability and intent to refinance the obligations on a long-term basis under our revolving credit facilities.
Note 10—Joint Venture Acquisition Obligation
On January 3, 2007, we closed on a business venture with EnCana Corporation. As part of this transaction, we are obligated to contribute $7.5 billion, plus interest, over a ten-year period, which began in 2007, to the upstream business venture, FCCL Oil Sands Partnership, which was formed as a result of the transaction.
Quarterly principal and interest payments of $237 million began in the second quarter of 2007, and will continue until the balance is paid. Of the principal obligation amount, approximately $609 million is short-term and is included in the “Accounts payable—related parties” line on our June 30, 2008, consolidated balance sheet. The principal portion of these payments, which totaled $293 million in the first six months of 2008, is presented on our consolidated statement of cash flows as an other financing activity. Interest accrues 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.

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Note 11—Guarantees
At June 30, 2008, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial.
Construction Completion Guarantees
    In December 2005, we issued a construction completion guarantee for 30 percent of the $4.0 billion in loan facilities of Qatargas 3, which will be used to construct an LNG train in Qatar. Of the $4.0 billion in loan facilities, ConocoPhillips has committed to provide $1.2 billion. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $850 million, which could become payable if the full debt financing is utilized and completion of the Qatargas 3 project is not achieved. The project financing will be nonrecourse to ConocoPhillips upon certified completion, currently expected in 2010. At June 30, 2008, the carrying value of the guarantee to the third-party lenders was $11 million. For additional information, see Note 6—Investments, Loans and Long-Term Receivables.
Guarantees of Joint-Venture Debt
    In June 2006, we issued a guarantee for 24 percent of the $2 billion in credit facilities of Rockies Express Pipeline LLC (Rockies Express), which will be used to construct a natural gas pipeline across a portion of the United States. At June 30, 2008, Rockies Express had $740 million outstanding under the credit facilities, with our 24 percent guarantee equaling $178 million. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $480 million, which could become payable if the credit facility is fully utilized and Rockies Express fails to meet its obligations under the credit agreement. In addition, we also have a guarantee for 24 percent of $600 million of Floating Rate Notes due 2009 issued by Rockies Express in September 2007. It is anticipated final construction completion will be achieved in 2009, and refinancing will take place at that time, making the debt nonrecourse to ConocoPhillips. At June 30, 2008, the total carrying value of these guarantees to third-party lenders was $12 million. See Note 3—Variable Interest Entities (VIEs), for additional information.
    At June 30, 2008, we had other guarantees outstanding for our portion of joint-venture debt obligations, which have terms of up to 17 years. The maximum potential amount of future payments under the guarantees is approximately $90 million. Payment would be required if a joint venture defaults on its debt obligations.
Other Guarantees
    The Merey Sweeny, L.P. (MSLP) joint-venture project agreement requires the partners in the venture to pay cash calls to cover operating expenses in the event the venture does not have enough cash to cover operating expenses after setting aside the amount required for debt service over the next 16 years. Although there is no maximum limit stated in the agreement, the intent is to cover short-term cash deficiencies should they occur. Our maximum potential future payments under the agreement are currently estimated to be $100 million, assuming such a shortfall exists at some point in the future due to an extended operational disruption.
    In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two LNG ships. Subject to the terms of each such facility, we will be required to make payments should the charter revenue generated by the respective ship fall below certain specified minimum thresholds, and we will receive payments to the extent that such revenues exceed those thresholds. The net maximum future payments that we may have to make over the 20-year terms of the two agreements could be up to $100 million in total. To the extent we receive any such payments, our

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      actual gross payments over the 20 years could exceed that amount. In the event either ship is sold or a total loss occurs, we also may have recourse to the sales or insurance proceeds to recoup payments made under the guarantee facilities.
    We have guarantees of the residual value of leased corporate aircraft. The maximum potential payment under these guarantees at June 30, 2008, was $150 million.
    In December 2007, we acquired a 50 percent equity interest in the Keystone Oil Pipeline (Keystone) to form a 50/50 joint venture with TransCanada Corporation. Keystone plans to construct a crude oil pipeline originating in Hardisty, Alberta, with delivery points at Wood River and Patoka, Illinois, and Cushing, Oklahoma. In connection with certain planning and construction activities, agreements were put in place with third parties to guarantee the payments due. Our maximum potential amount of future payments under those agreements are estimated to be $400 million, which could become payable if Keystone fails to meet its obligations under the agreements noted above and the obligation cannot otherwise be mitigated. Payments under the guarantees are contingent upon the partners not making necessary equity contributions into Keystone; therefore, it is considered unlikely that payments would be required. All but $15 million of the guarantees will terminate after construction is completed, currently estimated to be in 2010.
    We have other guarantees with maximum future potential payment amounts totaling $200 million, which consist primarily of dealer and jobber loan guarantees to support our marketing business, guarantees to fund the short-term cash liquidity deficits of certain joint ventures, one small construction completion guarantee, guarantees relating to the startup of a refining joint venture, and guarantees of the lease payment obligations of a joint venture. These guarantees generally extend up to 10 years or life of the venture and payment would be required only if the dealer, jobber or lessee goes into default, if the joint ventures have cash liquidity issues, if a construction project is not completed, or if a guaranteed party defaults on lease payments.
Indemnifications
Over the years, we have entered into various agreements to sell ownership interests in certain corporations and joint ventures and have sold several assets, including downstream and midstream assets, certain exploration and production assets, and downstream retail and wholesale sites that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at June 30, 2008, was $454 million. We amortize the indemnification liability over the relevant time period, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. Included in the carrying amount recorded were $256 million of environmental accruals for known contamination that is included in asset retirement obligations and accrued environmental costs at June 30, 2008. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.
Note 12—Contingencies and Commitments
In the case of all known non-income-tax-related contingencies, 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

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receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we adopted FIN 48, effective January 1, 2007. FIN 48 requires a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain.
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. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs 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. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes.
Environmental
We are subject to federal, state and local environmental laws and regulations. These may result in obligations 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 sites. When we prepare our consolidated financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities and we accrue them in the period that they are both probable and reasonably estimable.
Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for state sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all of the cleanup costs related to any site at which we have been designated as a potentially responsible party. If we were solely responsible, the costs, in some cases, could be material to our, or one of our segments’, results of operations, capital resources or liquidity. However, settlements and costs incurred in matters that previously have been resolved have not been material to our results of operations or financial condition. We have been successful to date in sharing cleanup costs with other financially sound companies. 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 the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability and we adjust our accruals accordingly.
As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit and some of the indemnifications are subject to dollar limits and time limits. We have not recorded accruals for any potential contingent liabilities that we expect to be funded by the prior owners under these indemnifications.
We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except for those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable that future costs will be incurred and these costs can be reasonably estimated. At June 30, 2008, our balance

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sheet included a total environmental accrual of $1,046 million, compared with $1,089 million at December 31, 2007. We expect to incur the majority of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.
Legal Proceedings
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 which have been scheduled for trial, as well as the pace of settlement discussions in individual matters. 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 believes there is a remote likelihood 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.
Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at June 30, 2008, we had performance obligations secured by letters of credit of $1,967 million (of which $40 million was issued under the provisions of our revolving credit facility, and the remainder was issued as direct bank letters of credit) and various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business.
Note 13—Financial Instruments and Derivative Contracts
Derivative assets and liabilities were:
                 
    Millions of Dollars  
    June 30     December 31  
    2008     2007  
Derivative Assets
               
Current
  $ 1,641       453  
Long-term
    322       89  
 
 
  $ 1,963       542  
 
Derivative Liabilities
               
Current
  $ 1,913       493  
Long-term
    251       67  
 
 
  $ 2,164       560  
 
These derivative assets and liabilities appear as prepaid expenses and other current assets, other assets, other accruals, or other liabilities and deferred credits on the balance sheet.

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Note 14—Comprehensive Income
ConocoPhillips’ comprehensive income was as follows:
                                 
    Millions of Dollars
    Three Months Ended   Six Months Ended
    June 30   June 30
    2008     2007     2008     2007  
         
 
                               
Net income
  $ 5,439       301       9,578       3,847  
After-tax changes in:
                               
Defined benefit pension plans
                               
Net prior service cost
    (14 )     5       (10 )     10  
Net actuarial loss
    (2 )     14       7       30  
Nonsponsored plans
    2             4       (3 )
Foreign currency translation adjustments
    178       1,145       (257 )     1,276  
Hedging activities
    2       (2 )           (3 )
 
Comprehensive income
  $ 5,605       1,463       9,322       5,157  
 
Accumulated other comprehensive income in the equity section of the balance sheet included:
                 
    Millions of Dollars  
    June 30     December 31  
    2008     2007  
     
 
               
Defined benefit pension plans
  $ (464 )     (465 )
Foreign currency translation adjustments
    4,776       5,033  
Deferred net hedging loss
    (8 )     (8 )
 
Accumulated other comprehensive income
  $ 4,304       4,560  
 
Note 15—Cash Flow Information
                 
    Millions of Dollars
    Six Months Ended
    June 30
    2008     2007  
     
 
               
Noncash Investing and Financing Activities
               
Investment in an upstream business venture through issuance of an acquisition obligation
  $       7,313  
Investment in a downstream business venture through contribution of noncash assets and liabilities
          2,415  
 
Cash Payments
               
Interest
  $ 398       532  
Income taxes
    6,405       5,525  
 

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Note 16—Employee Benefit Plans
Pension and Postretirement Plans
                                                 
    Millions of Dollars  
    Pension Benefits     Other Benefits  
    June 30     June 30  
Components of Net Periodic Benefit Cost   2008     2007     2008     2007  
    U.S.     Int’l.     U.S.     Int’l.                
 
                                               
Three Months Ended
                                               
Service cost
  $ 47       24       44       24       4       4  
Interest cost
    62       46       57       41       16       11  
Expected return on plan assets
    (56 )     (45 )     (51 )     (37 )            
Amortization of prior service cost
    2             2       2       2       4  
Recognized net actuarial loss (gain)
    17       3       16       12       (6 )     (6 )
 
Net periodic benefit costs
  $ 72       28       68       42       16       13  
 
 
                                               
Six Months Ended
                                               
Service cost
  $ 94       47       88       48       7       7  
Interest cost
    124       90       114       79       28       22  
Expected return on plan assets
    (112 )     (89 )     (102 )     (72 )            
Amortization of prior service cost
    4             5       4       5       7  
Recognized net actuarial loss (gain)
    33       6       31       23       (10 )     (10 )
 
Net periodic benefit costs
  $ 143       54       136       82       30       26  
 
During the first six months of 2008, we contributed $222 million to our domestic qualified and nonqualified plans and $92 million to our international benefit plans. We currently expect to contribute a total of $460 million to our domestic plans and $180 million to our international plans in 2008.
Note 17—Related Party Transactions
Significant transactions with related parties were:
                                 
    Millions of Dollars  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
 
                               
Operating revenues (a)
  $ 4,001       2,884       7,172       5,502  
Purchases (b)
    5,693       4,089       10,092       7,299  
Operating expenses and selling, general and administrative expenses (c)
    127       98       243       206  
Net interest income (d)
    19       26       40       56  
 
(a)   We sold natural gas to DCP Midstream and crude oil to the Malaysian Refining Company Sdn. Bhd. (MRC), among others, for processing and marketing. Natural gas liquids, solvents and petrochemical feedstocks were sold to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks were sold to Excel Paralubes and refined products were sold primarily to CFJ Properties and LUKOIL. Natural gas, crude oil, blendstock and other intermediate products were sold to WRB Refining LLC. In addition, we charged several of our affiliates including CPChem, Merey Sweeny L.P. (MSLP)

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    and Hamaca Holding LLC (until expropriation on June 26, 2007) for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.
 
(b)   We purchased refined products from WRB Refining. We purchased natural gas and natural gas liquids from DCP Midstream and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchased crude oil from LUKOIL, upgraded crude oil from Petrozuata C.A. (as a related party until expropriation on June 26, 2007) and refined products from MRC. We also paid fees to various pipeline equity companies for transporting finished refined products and natural gas, and a price upgrade to MSLP for heavy crude oil processing. We purchased base oils and fuel products from Excel Paralubes for use in our refinery and specialty businesses.
 
(c)   We paid processing fees to various affiliates. Additionally, we paid crude oil transportation fees to pipeline equity companies.
 
(d)   We paid and/or received interest to/from various affiliates, including FCCL Oil Sands Partnership. See Note 6—Investments, Loans and Long-Term Receivables, for additional information on loans to affiliated companies.
Note 18—Segment Disclosures and Related Information
We have organized our reporting structure based on the grouping of similar products and services, resulting in six operating segments:
  1)   E&P—This segment primarily explores for, produces, transports and markets crude oil, natural gas and natural gas liquids on a worldwide basis.
 
  2)   Midstream—This segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States and Trinidad. The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream.
 
  3)   R&M—This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia Pacific.
 
  4)   LUKOIL Investment—This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia. At June 30, 2008, our ownership interest was 20 percent based on both issued shares and estimated shares outstanding.
 
  5)   Chemicals—This segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in CPChem.
 
  6)   Emerging Businesses—This segment represents our investment in new technologies or businesses outside our normal scope of operations.
Corporate and Other includes general corporate overhead, most interest income and expense, restructuring charges, and various other corporate activities. Corporate assets include all cash and cash equivalents. We evaluate performance and allocate resources based on net income. Intersegment sales are at prices that approximate market.

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Analysis of Results by Operating Segment
                                 
    Millions of Dollars  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
Sales and Other Operating Revenues
                               
E&P
                               
United States
  $ 15,964       9,465       27,511       17,737  
International
    8,471       5,480       16,912       11,493  
Intersegment eliminations—U.S.
    (2,525 )     (1,496 )     (4,637 )     (2,652 )
Intersegment eliminations—international
    (3,550 )     (1,476 )     (5,847 )     (2,917 )
 
E&P
    18,360       11,973       33,939       23,661  
 
Midstream
                               
Total sales
    2,100       1,109       3,742       2,214  
Intersegment eliminations
    (30 )     (45 )     (119 )     (104 )
 
Midstream
    2,070       1,064       3,623       2,110  
 
R&M
                               
United States
    37,250       24,614       64,211       44,653  
International
    13,969       9,793       24,895       18,428  
Intersegment eliminations—U.S.
    (285 )     (119 )     (504 )     (263 )
Intersegment eliminations—international
    (13 )     (3 )     (20 )     (5 )
 
R&M
    50,921       34,285       88,582       62,813  
 
LUKOIL Investment
                       
Chemicals
    3       3       6       6  
 
Emerging Businesses
                               
Total sales
    230       131       488       300  
Intersegment eliminations
    (179 )     (91 )     (356 )     (205 )
 
Emerging Businesses
    51       40       132       95  
 
Corporate and Other
    6       5       12       5  
 
Consolidated sales and other operating revenues
  $ 71,411       47,370       126,294       88,690  
 
 
                               
Net Income (Loss)
                               
E&P
                               
United States
  $ 1,852       1,055       3,201       1,971  
International
    2,147       (3,459 )     3,685       (2,046 )
 
Total E&P
    3,999       (2,404 )     6,886       (75 )
 
Midstream
    162       102       299       187  
 
R&M
                               
United States
    587       1,879       1,022       2,775  
International
    77       479       162       719  
 
Total R&M
    664       2,358       1,184       3,494  
 
LUKOIL Investment
    774       526       1,484       782  
Chemicals
    18       68       70       150  
Emerging Businesses
    8       (12 )     20       (13 )
Corporate and Other
    (186 )     (337 )     (365 )     (678 )
 
Consolidated net income
  $ 5,439       301       9,578       3,847  
 

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    Millions of Dollars  
    June 30     December 31  
    2008     2007  
Total Assets
               
E&P
               
United States
  $ 38,338       35,160  
International
    60,102       59,412  
Goodwill
    25,460       25,569  
 
Total E&P
    123,900       120,141  
 
Midstream
    2,070       2,016  
 
R&M
               
United States
    29,207       24,336  
International
    12,464       9,766  
Goodwill
    3,767       3,767  
 
Total R&M
    45,438       37,869  
 
LUKOIL Investment
    12,697       11,164  
Chemicals
    2,265       2,225  
Emerging Businesses
    1,308       1,230  
Corporate and Other
    2,477       3,112  
 
Consolidated total assets
  $ 190,155       177,757  
 
Note 19—Income Taxes
Our effective tax rate for the second quarter and first six months of 2008 was 44 percent and 45 percent, respectively, compared with 91 percent and 60 percent for the same two periods of 2007. The change in the effective tax rate for the second quarter and six months of 2008, versus the same periods of 2007, was primarily due to the impact of the expropriation of our oil interests in Venezuela on 2007 results (see the “Expropriated Assets” section of Note 13—Impairments, in our 2007 Annual Report on Form 10-K, for additional information), partially offset by the impact of a higher proportion of income in higher tax-rate jurisdictions in 2008. The effective tax rate in excess of the domestic federal statutory rate of 35 percent was primarily due to the impact of foreign taxes.
Note 20—New Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations” (SFAS No. 141(R)). This Statement will apply to all transactions in which an entity obtains control of one or more other businesses. In general, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the fair value of all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date as the fair value measurement point; and modifies the disclosure requirements. This Statement applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. However, starting January 1, 2009, accounting for changes in valuation allowances for acquired deferred tax assets and the resolution of uncertain tax positions for prior business combinations will impact tax expense instead of impacting goodwill. We are currently evaluating the changes provided for in this Statement.
Also in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” which changes the classification of noncontrolling interests, sometimes called a minority interest, in the consolidated financial statements. Additionally, this Statement establishes a single method of accounting for changes in a parent company’s ownership interest that do not result in deconsolidation and requires a parent company to recognize a gain or loss when a subsidiary is deconsolidated. This Statement is effective January 1, 2009, and will be applied prospectively with the

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exception of the presentation and disclosure requirements which must be applied retrospectively for all periods presented. We are currently evaluating the impact of this Statement on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB No. 133.” This Statement expands the annual and interim disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for derivative instruments within the scope of that Statement. We must adopt SFAS No. 161 no later than January 1, 2009, but it will not have any impact on our consolidated financial statements, other than the additional disclosures.

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Supplementary Information—Condensed Consolidating Financial Information
We have various cross guarantees among ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to publicly held debt securities. ConocoPhillips Company is wholly owned by ConocoPhillips. ConocoPhillips Australia Funding Company is an indirect, wholly owned subsidiary of ConocoPhillips Company. ConocoPhillips Canada Funding Company I and ConocoPhillips Canada Funding Company II are indirect, wholly owned subsidiaries of ConocoPhillips. ConocoPhillips and ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to their publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:
    ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
 
    All other nonguarantor subsidiaries of ConocoPhillips.
 
    The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.
This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes.

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    Millions of Dollars  
    Three Months Ended June 30, 2008  
                    ConocoPhillips                                
                    Australia     ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Income Statement   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
                 
Revenues and Other Income
                                                               
Sales and other operating revenues
  $       47,793                         23,618             71,411  
Equity in earnings of affiliates
    5,466       3,796                         1,446       (8,896 )     1,812  
Other income
    (1 )     182                         (51           130  
Intercompany revenues
    15       915       19       22       13       9,693       (10,677 )      
 
Total Revenues and Other Income
    5,480       52,686       19       22       13       34,706       (19,573 )     73,353  
 
 
                                                               
Costs and Expenses
                                                               
Purchased crude oil, natural gas and products
          44,038                         17,540       (10,364 )     51,214  
Production and operating expenses
          1,337                         1,807       (33 )     3,111  
Selling, general and administrative expenses
    5       466                         171       (13 )     629  
Exploration expenses
          45                         243             288  
Depreciation, depletion and amortization
          379                         1,799             2,178  
Impairments
          17                         2             19  
Taxes other than income taxes
          1,285                         4,569       (58 )     5,796  
Accretion on discounted liabilities
          14                         82             96  
Interest and debt expense
    51       104       18       20       13       213       (209 )     210  
Foreign currency transaction (gains) losses
          2             58       66       (126 )            
Minority interests
                                  17             17  
 
Total Costs and Expenses
    56       47,687       18       78       79       26,317       (10,677 )     63,558  
 
Income (loss) before income taxes
    5,424       4,999       1       (56 )     (66 )     8,389       (8,896 )     9,795  
Provision for income taxes
    (15 )     550             (17 )     (21 )     3,859             4,356  
 
Net Income (Loss)
  $ 5,439       4,449       1       (39 )     (45 )     4,530       (8,896 )     5,439  
 

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    Millions of Dollars  
    Three Months Ended June 30, 2007  
                    ConocoPhillips                                
                    Australia     ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Income Statement   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
                                                               
Revenues and Other Income
                                                               
Sales and other operating revenues
  $       30,915                         16,455             47,370  
Equity in earnings of affiliates
    329       632                         780       (235 )     1,506  
Other income
    4       (70 )                       587             521  
Intercompany revenues
    58       791       30       20       12       4,754       (5,665 )      
 
Total Revenues and Other Income
    391       32,268       30       20       12       22,576       (5,900 )     49,397  
 
 
                                                               
Costs and Expenses
                                                               
Purchased crude oil, natural gas and products
          25,780                         9,989       (4,949 )     30,820  
Production and operating expenses
          1,109                         1,469       (21 )     2,557  
Selling, general and administrative expenses
    6       375                         235       (12 )     604  
Exploration expenses
          24                         235             259  
Depreciation, depletion and amortization
          361                         1,655             2,016  
Impairment—expropriated assets
          1,925                         2,663             4,588  
Impairments
                                  98             98  
Taxes other than income taxes
          1,295                         3,472       (70 )     4,697  
Accretion on discounted liabilities
          14                         67             81  
Interest and debt expense
    99       291       28       19       13       482       (613 )     319  
Foreign currency transaction (gains) losses
          10             91       67       (347 )           (179 )
Minority interests
                                  19             19  
 
Total Costs and Expenses
    105       31,184       28       110       80       20,037       (5,665 )     45,879  
 
Income (loss) before income taxes
    286       1,084       2       (90 )     (68 )     2,539       (235 )     3,518  
Provision for income taxes
    (15 )     1,090       1       5       6       2,130             3,217  
 
Net Income (Loss)
  $ 301       (6 )     1       (95 )     (74 )     409       (235 )     301  
 

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    Millions of Dollars  
    Six Months Ended June 30, 2008  
                    ConocoPhillips
Australia
    ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Income Statement   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
Revenues and Other Income
                                                               
Sales and other operating revenues
  $       82,596                         43,698             126,294  
Equity in earnings of affiliates
    9,651       6,857                         2,754       (16,091 )     3,171  
Other income
    (1 )     487                         (46           440  
Intercompany revenues
    24       1,632       43       45       27       15,743       (17,514 )      
 
Total Revenues and Other Income
    9,674       91,572       43       45       27       62,149       (33,605 )     129,905  
 
 
                                                               
Costs and Expenses
                                                               
Purchased crude oil, natural gas and products
          75,530                         30,183       (16,679 )     89,034  
Production and operating expenses
          2,447                         3,425       (70 )     5,802  
Selling, general and administrative expenses
    7       785                         396       (33 )     1,155  
Exploration expenses
          100                         497             597  
Depreciation, depletion and amortization
          751                         3,636             4,387  
Impairments
          21                         4             25  
Taxes other than income taxes
          2,539                         8,531       (119 )     10,951  
Accretion on discounted liabilities
          29                         171             200  
Interest and debt expense
    128       325       40       39       26       472       (613 )     417  
Foreign currency transaction (gains) losses
          (2 )           (14 )     (7 )     (20 )           (43 )
Minority interests
                                  36             36  
 
Total Costs and Expenses
    135       82,525       40       25       19       47,331       (17,514 )     112,561  
 
Income before income taxes
    9,539       9,047       3       20       8       14,818       (16,091 )     17,344  
Provision for income taxes
    (39 )     987       1       (13 )     (13 )     6,843             7,766  
 
Net Income
  $ 9,578       8,060       2       33       21       7,975       (16,091 )     9,578  
 

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    Millions of Dollars  
    Six Months Ended June 30, 2007  
                    ConocoPhillips
Australia
    ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Income Statement   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
Revenues and Other Income
                                                               
Sales and other operating revenues
  $       56,892                         31,798             88,690  
Equity in earnings of affiliates
    3,892       3,654                         1,325       (6,436 )     2,435  
Other income
    4       (180 )                       1,315             1,139  
Intercompany revenues
    147       1,489       60       39       24       8,567       (10,326 )      
 
Total Revenues and Other Income
    4,043       61,855       60       39       24       43,005       (16,762 )     92,264  
 
 
                                                               
Costs and Expenses
                                                               
Purchased crude oil, natural gas and products
          47,802                         18,620       (8,887 )     57,535  
Production and operating expenses
          2,195                         2,896       (42 )     5,049  
Selling, general and administrative expenses
    9       688                         464       (30 )     1,131  
Exploration expenses
          46                         475             521  
Depreciation, depletion and amortization
          723                         3,317             4,040  
Impairment—expropriated assets
          1,925                         2,663             4,588  
Impairments
          (24 )                       121             97  
Taxes other than income taxes
          2,798                         6,410       (137 )     9,071  
Accretion on discounted liabilities
          28                         132             160  
Interest and debt expense
    211       646       56       38       26       879       (1,230 )     626  
Foreign currency transaction (gains) losses
          10             98       77       (363 )           (178 )
Minority interests
                                  40             40  
 
Total Costs and Expenses
    220       56,837       56       136       103       35,654       (10,326 )     82,680  
 
Income (loss) before income taxes
    3,823       5,018       4       (97 )     (79 )     7,351       (6,436 )     9,584  
Provision for income taxes
    (24 )     1,674       2       (2 )     (2 )     4,089             5,737  
 
Net Income (Loss)
  $ 3,847       3,344       2       (95 )     (77 )     3,262       (6,436 )     3,847  
 

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    Millions of Dollars  
    At June 30, 2008  
                    ConocoPhillips
Australia
    ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Balance Sheet   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
                                                               
Assets
                                                               
Cash and cash equivalents
  $       366             12       1       408             787  
Accounts and notes receivable
    18       13,189       8                   23,323       (16,077 )     20,461  
Inventories
          4,102                         2,764       (109 )     6,757  
Prepaid expenses and other current assets
    5       2,342             2       1       3,160             5,510  
 
Total Current Assets
    23       19,999       8       14       2       29,655       (16,186 )     33,515  
Investments, loans and long-term receivables*
    93,749       66,090       1,700       1,421       964       37,876       (166,005 )     35,795  
Net properties, plants and equipment
          18,852                         71,136       2       89,990  
Goodwill
          12,730                         16,497             29,227  
Intangibles
          792                         81             873  
Other assets
    14       288       3       4       4       660       (218 )     755  
 
Total Assets
  $ 93,786       118,751       1,711       1,439       970       155,905       (182,407 )     190,155  
 
 
                                                               
Liabilities and Stockholders’ Equity
                                                               
Accounts payable
  $ 1       21,851             6       3       17,577       (16,077 )     23,361  
Short-term debt
          298       950                   87       (950 )     385  
Accrued income and other taxes
          198                   (1 )     6,502             6,699  
Employee benefit obligations
          412                         268       1       681  
Other accruals
    27       1,494       15       15       10       2,163       (3 )     3,721  
 
Total Current Liabilities
    28       24,253       965       21       12       26,597       (17,029 )     34,847  
Long-term debt
    4,878       5,390       749       1,250       848       7,474       950       21,539  
Asset retirement obligations and accrued environmental costs
          1,127                         6,203             7,330  
Joint venture acquisition obligation
                                  5,985             5,985  
Deferred income taxes
    (3 )     3,524             8       2       17,529       (16 )     21,044  
Employee benefit obligations
          2,206                         837             3,043  
Other liabilities and deferred credits*
    3,155       19,458             121       97       18,550       (38,556 )     2,825  
 
Total Liabilities
    8,058       55,958       1,714       1,400       959       83,175       (54,651 )     96,613  
Minority interests
          (15 )                       1,159             1,144  
Retained earnings (deficit)
    52,112       32,012       (3 )     (114 )     (86 )     27,512       (52,808 )     58,625  
Other stockholders’ equity
    33,616       30,796             153       97       44,059       (74,948 )     33,773  
 
Total
  $ 93,786       118,751       1,711       1,439       970       155,905       (182,407 )     190,155  
 
*Includes intercompany loans.

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    Millions of Dollars  
    At December 31, 2007  
                    ConocoPhillips                                
                    Australia     ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Balance Sheet   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
                                                               
Assets
                                                               
Cash and cash equivalents
  $       195             7       1       1,626       (373 )     1,456  
Accounts and notes receivable
    40       12,421       15       12       4       19,548       (15,686 )     16,354  
Inventories
          2,043                         2,190       (10 )     4,223  
Prepaid expenses and other current assets
    9       578             1             2,114             2,702  
 
Total Current Assets
    49       15,237       15       20       5       25,478       (16,069 )     24,735  
Investments, loans and long-term receivables*
    86,942       57,936       1,700       1,470       997       18,972       (134,689 )     33,328  
Net properties, plants and equipment
          17,677                         71,317       9       89,003  
Goodwill
          12,746                         16,590             29,336  
Intangibles
          808                         88             896  
Other assets
    8       153       3       5       4       520       (234 )     459  
 
Total Assets
  $ 86,999       104,557       1,718       1,495       1,006       132,965       (150,983 )     177,757  
 
 
                                                               
Liabilities and Stockholders’ Equity
                                                               
Accounts payable
  $ 6       18,792             10       4       15,108       (16,059 )     17,861  
Short-term debt
    1,000       309                         89             1,398  
Accrued income and other taxes
          601                   (1 )     4,117       97       4,814  
Employee benefit obligations
          509                         411             920  
Other accruals
    21       594       20       16       11       1,230       (3 )     1,889  
 
Total Current Liabilities
    1,027       20,805       20       26       14       20,955       (15,965 )     26,882  
Long-term debt
    3,402       5,694       1,699       1,250       848       7,396             20,289  
Asset retirement obligations and accrued environmental costs
          1,167                         6,094             7,261  
Joint venture acquisition obligation
                                  6,294             6,294  
Deferred income taxes
    (3 )     3,050             32       18       17,907       14       21,018  
Employee benefit obligations
          2,292                         899             3,191  
Other liabilities and deferred credits*
    42       16,447             132       102       15,489       (29,546 )     2,666  
 
Total Liabilities
    4,468       49,455       1,719       1,440       982       75,034       (45,497 )     87,601  
Minority interests
          (19 )                       1,194       (2 )     1,173  
Retained earnings (deficit)
    43,988       23,952       (1 )     (147 )     (107 )     20,738       (37,913 )     50,510  
Other stockholders’ equity
    38,543       31,169             202       131       35,999       (67,571 )     38,473  
 
Total
  $ 86,999       104,557       1,718       1,495       1,006       132,965       (150,983 )     177,757  
 
*Includes intercompany loans.

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    Millions of Dollars  
    Six Months Ended June 30, 2008  
                    ConocoPhillips                                
                    Australia     ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Statement of Cash Flows   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
                                                               
Net Cash Provided by Operating Activities
  $ 5,815       189       4       5             6,830       (822 )     12,021  
 
 
                                                               
Cash Flows From Investing Activities
                                                               
Capital expenditures and investments
          (2,462 )                       (4,611 )     353       (6,720 )
Proceeds from asset dispositions
          73                         372       (4 )      441  
Long-term advances/loans —related parties
          (53 )                       (2,523 )     2,422       (154 )
Collection of advances/loans—related parties
          212                         9       (217 )     4  
Other
          10                         (3 )           7  
 
Net Cash Used in Investing Activities
          (2,220 )                       (6,756 )     2,554       (6,422 )
 
 
                                                               
Cash Flows From Financing Activities
                                                               
Issuance of debt
    1,967       2,412                         108       (2,422 )     2,065  
Repayment of debt
    (1,500 )     (338 )                       (220 )     217       (1,841 )
Issuance of company common stock
    185                                           185  
Repurchase of company common stock
    (5,008 )                                         (5,008 )
Dividends paid on common stock
    (1,449 )           (4 )                 (1,191 )     1,195       (1,449 )
Other
    (10 )     128                         (9 )     (349 )     (240 )
 
Net Cash Provided by (Used in) Financing Activities
    (5,815 )     2,202       (4 )                 (1,312 )     (1,359 )     (6,288 )
 
 
                                                               
Effect of Exchange Rate Changes on Cash and Cash Equivalents
                                  20             20  
 
 
                                                               
Net Change in Cash and Cash Equivalents
          171             5             (1,218 )     373       (669 )
Cash and cash equivalents at beginning of year
          195             7       1       1,626       (373 )     1,456  
 
Cash and Cash Equivalents at End of Period
  $       366             12       1       408             787  
 

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    Millions of Dollars  
    Six Months Ended June 30, 2007  
                    ConocoPhillips                                
                    Australia     ConocoPhillips     ConocoPhillips                    
            ConocoPhillips     Funding     Canada Funding     Canada Funding     All Other     Consolidating     Total  
Statement of Cash Flows   ConocoPhillips     Company     Company     Company I     Company II     Subsidiaries     Adjustments     Consolidated  
 
                                                               
Net Cash Provided by (Used in) Operating Activities
  $ 7,762       (777 )     5                   4,755       (106 )     11,639  
 
 
                                                               
Cash Flows From Investing Activities
                                                               
Capital expenditures and investments
          (1,148 )                       (4,301 )     102       (5,347 )
Proceeds from asset dispositions
          951                         1,679       (415 )     2,215  
Long-term advances/loans —related parties
          (118 )                       (1,137 )     929       (326 )
Collection of advances/loans—related parties
          811                               (745 )     66  
Other
    1       18                                     19  
 
Net Cash Provided by (Used in) Investing Activities
    1       514                         (3,759 )     (129 )     (3,373 )
 
 
                                                               
Cash Flows From Financing Activities
                                                               
Issuance of debt
    (36 )     929                         801       (929 )     765  
Repayment of debt
    (4,564 )     (547 )                       (755 )     745       (5,121 )
Issuance of company common stock
    181                                           181  
Repurchase of company common stock
    (2,000 )                                         (2,000 )
Dividends paid on common stock
    (1,342 )           (5 )                 (316 )     321       (1,342 )
Other
    (2 )     50                         (513 )     312       (153 )
 
Net Cash Provided by (Used in) Financing Activities
    (7,763 )     432       (5 )                 (783 )     449       (7,670 )
 
 
                                                               
Effect of Exchange Rate Changes on Cash and Cash Equivalents
                                  (2 )           (2 )
 
 
                                                               
Net Change in Cash and Cash Equivalents
          169                         211       214       594  
Cash and cash equivalents at beginning of year
          116                   1       1,042       (342 )     817  
 
Cash and Cash Equivalents at End of Period
  $       285                   1       1,253       (128 )     1,411  
 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis contains 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 “intends,” “believes,” “expects,” “plans,” “scheduled,” “should,” “anticipates,” “estimates,” and similar expressions identify forward-looking statements. We do not undertake to update, revise or correct any of the forward-looking information. Readers are cautioned that such forward-looking statements should be read in conjunction with the 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 51.
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
Our Exploration and Production (E&P) segment had net income of $3,999 million in the second quarter of 2008, which accounted for 74 percent of our total net income in the quarter. This compares with E&P net income of $2,887 million in the first quarter of 2008, and a loss of $2,404 million in the second quarter of 2007. In the second quarter of 2007, we recorded a noncash impairment of $4,588 million before-tax ($4,512 million after-tax) related to the expropriation of our oil interests in Venezuela. For additional information, see the “Expropriated Assets” section of Note 13—Impairments, in our 2007 Annual Report on Form 10-K.
E&P net income in the second quarter of 2008 benefited from an increase in commodity prices. Industry crude oil prices for West Texas Intermediate averaged $123.98 per barrel in the second quarter of 2008, or $26.04 per barrel higher than the first quarter of 2008, and $59.09 per barrel higher than in the same period a year earlier. Crude oil prices were influenced by higher demand in developing economies; geopolitical supply risks; and a financial sector rotation into commodities due to fears about the falling value of the U.S. dollar, inflation and risk in credit markets.
Industry natural gas prices for Henry Hub increased during the second quarter of 2008 to $10.94 per million British thermal units (MMBTU), up $2.91 per MMBTU from the first quarter of 2008. Natural gas prices trended higher during the second quarter due to the outage of a natural gas hub in the Gulf of Mexico for a significant portion of the quarter, low storage levels, and a low level of liquefied natural gas (LNG) imports into the United States. Along with these supply issues, demand in the United States for natural gas remained in line with year-ago levels despite the increased prices.
Our Refining and Marketing (R&M) segment had net income of $664 million in the second quarter of 2008, compared with $520 million in the first quarter of 2008, and $2,358 million in the second quarter of 2007. The increase in net income from the previous quarter was primarily due to higher worldwide realized refining margins and improved refining operations in the U.S. Gulf Coast and United Kingdom. This improvement in realized margins was partially offset by a lower net benefit from asset rationalization efforts, as well as higher turnaround and utility costs. The decrease in net income from the second quarter of 2007 was primarily due to significantly lower U.S. refining and marketing margins, a lower net benefit from the company’s asset rationalization efforts and higher turnaround and utility costs.

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RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three- and six-month periods ending June 30, 2008, is based on a comparison with the corresponding periods of 2007.
Consolidated Results
A summary of net income (loss) by business segment follows:
                                 
    Millions of Dollars  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
 
                               
Exploration and Production (E&P)
  $ 3,999       (2,404 )     6,886       (75 )
Midstream
    162       102       299       187  
Refining and Marketing (R&M)
    664       2,358       1,184       3,494  
LUKOIL Investment
    774       526       1,484       782  
Chemicals
    18       68       70       150  
Emerging Businesses
    8       (12 )     20       (13 )
Corporate and Other
    (186 )     (337 )     (365 )     (678 )
 
Net income
  $ 5,439       301       9,578       3,847  
 
Net income was $5,439 million in the second quarter of 2008, compared with $301 million in the second quarter of 2007. For the six-month periods ended June 30, 2008 and 2007, net income was $9,578 million and $3,847 million, respectively. The higher results in both 2008 periods were primarily the result of a complete impairment in 2007 ($4,512 million after-tax) of our oil interests in Venezuela, resulting from their expropriation on June 26, 2007.
In addition, the results in both 2008 periods benefited from:
    Significantly higher crude oil, natural gas and natural gas liquids prices in our E&P segment.
 
    Increased earnings from our LUKOIL investment, primarily due to higher estimated realized prices, partially offset by higher estimated taxes.
These items were partially offset by a decrease in net income from our R&M segment, primarily due to lower domestic realized refining and marketing margins, and a reduced net benefit from asset rationalization efforts. In addition, net income decreased due to higher taxes in our E&P segment.
See the “Segment Results” section for additional information on our segment results.
Income Statement Analysis
Sales and other operating revenues increased 51 percent in the second quarter of 2008 and 42 percent in the six-month period, while purchased crude oil, natural gas and products increased 66 percent and 55 percent, respectively. These increases were mainly the result of higher petroleum product prices, and higher prices for crude oil, natural gas and natural gas liquids.

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Equity in earnings of affiliates increased 20 percent in the second quarter of 2008 and 30 percent in the six-month period, reflecting improved results from:
    LUKOIL, primarily reflecting higher estimated realized prices, partially offset by higher estimated taxes.
 
    DCP Midstream, our midstream joint venture, primarily due to higher realized natural gas liquids prices and volumes.
These increases were partially offset by lower earnings from WRB Refining LLC, primarily due to lower refining margins.
Other income decreased 75 percent and 61 percent during the second quarter and first six months of 2008, respectively. The decrease was primarily due to higher 2007 net gains on asset dispositions associated with asset rationalization efforts.
Production and operating costs increased 22 percent and 15 percent during the second quarter and first six months of 2008, respectively. Contributing to the increase were higher maintenance, well workover and repair costs in E&P and higher turnaround and utility costs in R&M.
Impairment—expropriated assets reflects a second-quarter 2007 noncash impairment of $4,588 million before-tax related to the expropriation of our oil interests in Venezuela. For additional information, see the “Expropriated Assets” section of Note 13—Impairments, in our 2007 Annual Report on Form 10-K.
Taxes other than income taxes increased 23 percent and 21 percent during the second quarter and first six months of 2008, respectively, primarily due to increased production taxes in Alaska.
Interest and debt expense decreased 34 percent and 33 percent during both periods of 2008, respectively, primarily due to lower average debt levels.

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Segment Results
E&P
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
    Millions of Dollars  
Net Income (Loss)
                               
Alaska
  $ 700       535       1,303       1,042  
Lower 48
    1,152       520       1,898       929  
 
United States
    1,852       1,055       3,201       1,971  
International
    2,147       (3,459 )     3,685       (2,046 )
 
 
  $ 3,999       (2,404 )     6,886       (75 )
 
                                 
    Dollars Per Unit  
Average Sales Prices
                               
Crude oil (per barrel)
                               
United States
  $ 118.66       61.91       106.51       57.86  
International
    119.75       67.16       107.94       61.16  
Total consolidated
    119.24       64.55       107.27       59.61  
Equity affiliates*
    93.20       47.74       76.86       44.24  
Worldwide E&P
    118.01       61.97       105.68       57.53  
Natural gas (per thousand cubic feet)
                               
United States
    9.69       6.49       8.67       6.34  
International
    10.02       6.42       9.15       6.46  
Total consolidated
    9.87       6.45       8.94       6.41  
Equity affiliates*
          .30             .30  
Worldwide E&P
    9.87       6.44       8.94       6.40  
Natural gas liquids (per barrel)
                               
United States
    65.96       44.17       62.31       41.04  
International
    71.40       45.64       66.86       42.30  
Total consolidated
    68.42       44.80       64.40       41.60  
Equity affiliates*
                       
Worldwide E&P
    68.42       44.80       64.40       41.60  
                                 
    Millions of Dollars  
Worldwide Exploration Expenses
                               
General administrative; geological and geophysical; and lease rentals
  $ 161       126       316       240  
Leasehold impairment
    59       59       119       145  
Dry holes
    68       74       162       136  
 
 
  $ 288       259       597       521  
 
*Excludes our equity share of LUKOIL, which is reported in the LUKOIL Investment segment.

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    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
    Thousands of Barrels Daily  
Operating Statistics
                               
Crude oil produced
                               
Alaska
    244       267       249       272  
Lower 48
    95       105       96       104  
 
United States
    339       372       345       376  
Europe
    194       193       198       214  
Asia Pacific
    86       93       88       95  
Canada
    24       19       23       20  
Middle East and Africa
    78       73       80       84  
Other areas
    10       10       10       10  
 
Total consolidated
    731       760       744       799  
Equity affiliates*
                               
Canada
    25       28       27       26  
Russia and Caspian
    16       15       16       15  
Venezuela
          85             83  
 
 
    772       888       787       923  
 
Natural gas liquids produced
                               
Alaska
    17       18       18       20  
Lower 48
    76       71       73       70  
 
United States
    93       89       91       90  
Europe
    19       11       21       12  
Asia Pacific
    17       15       15       13  
Canada
    25       28       26       30  
Middle East and Africa
    2       2       2       2  
 
 
    156       145       155       147  
 
                                 
    Millions of Cubic Feet Daily  
Natural gas produced**
                               
Alaska
    98       100       99       111  
Lower 48
    2,034       2,219       1,998       2,205  
 
United States
    2,132       2,319       2,097       2,316  
Europe
    880       921       952       1,003  
Asia Pacific
    616       603       602       601  
Canada
    1,055       1,133       1,078       1,142  
Middle East and Africa
    116       127       110       134  
Other areas
    19       21       20       22  
 
Total consolidated
    4,818       5,124       4,859       5,218  
Equity affiliates*
                               
Venezuela
          9             9  
 
 
    4,818       5,133       4,859       5,227  
 
                                 
    Thousands of Barrels Daily  
Mining operations
                               
Syncrude produced
    19       21       20       22  
 
  *Excludes our equity share of LUKOIL, which is reported in the LUKOIL Investment segment.
 
**Represents quantities available for sale. Excludes gas equivalent of natural gas liquids shown above.

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The E&P segment explores for, produces, transports and markets crude oil, natural gas and natural gas liquids on a worldwide basis. It also mines deposits of oil sands in Canada to extract the bitumen and upgrade it into a synthetic crude oil. At June 30, 2008, our E&P operations were producing in the United States, Norway, the United Kingdom, the Netherlands, Canada, Nigeria, Ecuador, Argentina, offshore Timor-Leste in the Timor Sea, Australia, China, Indonesia, Algeria, Libya, Vietnam, and Russia.
The E&P segment reported net income of $3,999 million in the second quarter of 2008, compared with a net loss of $2,404 million in the second quarter of 2007. In the second quarter of 2007, we recorded a noncash impairment of $4,588 million before-tax ($4,512 million after-tax) related to the expropriation of our oil interests in Venezuela. For additional information, see the “Expropriated Assets” section of Note 13—Impairments, in our 2007 Annual Report on Form 10-K. In addition to the impact of the impairment, results for the second quarter of 2008 reflect higher crude oil, natural gas and natural gas liquids prices, partially offset by higher production taxes, lower volumes and higher operating costs.
Net income for the E&P segment for the first six months of 2008 was $6,886 million, compared with a net loss of $75 million for the corresponding period of 2007. In addition to the impact of the impairment noted above, the 2008 period benefited from higher crude oil, natural gas and natural gas liquids prices, partially offset by higher production taxes, lower volumes, higher operating costs, and a reduced net benefit from asset rationalization efforts. See the “Business Environment and Executive Overview” section for additional information on industry crude oil and natural gas prices.
U.S. E&P
Net income from our U.S. E&P operations increased 76 percent and 62 percent in the second quarter and six months of 2008, respectively, primarily due to higher crude oil, natural gas and natural gas liquids prices. The increases were partially offset by higher production taxes in Alaska, lower crude oil and natural gas volumes and higher operating costs.
U.S. E&P production on a barrel-of-oil-equivalent (BOE) basis averaged 787,000 BOE per day in the second quarter of 2008, a decrease of 7 percent from 848,000 BOE per day in the second quarter of 2007. The production decrease was primarily due to normal field decline, as well as unplanned downtime.
We have a long-term terminal use agreement with Freeport LNG Development, L.P. (Freeport) for 0.9 billion cubic feet per day of capacity at Freeport’s 1.5-billion-cubic-feet-per-day liquefied natural gas (LNG) receiving terminal in Quintana, Texas. The terminal became operational late in the second quarter of 2008. Due to present market conditions, which favor the flow of LNG to European and Asian markets, our near-to-mid-term utilization of the terminal is expected to be limited. Due to the process-or-pay nature of the terminal use agreement, we are responsible for monthly payments to Freeport irrespective of whether we are utilizing the terminal for regasification. However, the financial impact of this capacity underutilization is not expected to be material to our future earnings or cash flows.
International E&P
Net income from our international E&P operations was $2,147 million and $3,685 million in the second quarter and first six months of 2008, respectively, compared with a net loss of $3,459 million and $2,046 million in the corresponding periods of 2007. In addition to the impact of the impairment of our oil interests in Venezuela, the 2008 periods benefited from higher crude oil, natural gas and natural gas liquids prices, partially offset by lower crude oil and natural gas volumes, lower foreign currency gains, and higher operating costs and taxes. The first six months of 2008 were also negatively impacted by a lower net benefit from asset rationalization efforts.

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International E&P production averaged 944,000 BOE per day in the second quarter of 2008, a decrease of 9 percent from 1,041,000 BOE per day in the second quarter of 2007. Production decreased primarily due to the expropriation of our Venezuelan oil projects and normal field decline. These decreases were partially offset by production from new developments in Indonesia, Norway, the United Kingdom, and Canada.
Our Syncrude mining operations produced 19,000 barrels per day in the second quarter of 2008, compared with 21,000 barrels per day in the second quarter of 2007.
Midstream
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
    Millions of Dollars  
 
Net Income*
  $ 162       102       299       187  
 
*Includes DCP Midstream-related net income:
  $ 137       76       255       126  
                                 
    Dollars Per Barrel  
Average Sales Prices
                               
U.S. natural gas liquids*
                               
Consolidated
  $ 68.21       45.19       64.15       41.46  
Equity
    62.53       44.30       59.51       40.43  
 
*Prices are based on index prices from the Mont Belvieu and Conway market hubs that are weighted by natural gas liquids component and location mix.
                                 
    Thousands of Barrels Daily  
Operating Statistics
                               
Natural gas liquids extracted*
    196       211       197       204  
Natural gas liquids fractionated**
    162       176       158       175  
 
  *Includes our share of equity affiliates, except LUKOIL, which is included in the LUKOIL Investment segment.
 
**Excludes DCP Midstream.
The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering systems. The natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining “residue” gas is marketed to electrical utilities, industrial users, and gas marketing companies. Most of the natural gas liquids are fractionated—separated into individual components like ethane, butane and propane—and marketed as chemical feedstock, fuel, or blendstock. The Midstream segment consists of our 50 percent equity investment in DCP Midstream, LLC, as well as our other natural gas gathering and processing operations, and natural gas liquids fractionation and marketing businesses, primarily in the United States and Trinidad.
Net income from the Midstream segment increased 59 percent and 60 percent in the second quarter and first six months of 2008. The increase in both periods was primarily due to higher realized natural gas liquids prices, slightly offset by lower natural gas liquids extraction volumes in our consolidated operations.

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R&M
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
    Millions of Dollars  
Net Income
                               
United States
  $ 587       1,879       1,022       2,775  
International
    77       479       162       719  
 
 
  $ 664       2,358       1,184       3,494  
 
                                 
    Dollars Per Gallon  
U.S. Average Sales Prices*
                               
Gasoline
                               
Wholesale
  $ 3.23       2.50       2.89       2.19  
Retail
    3.36       2.68       3.01       2.36  
Distillates—wholesale
    3.73       2.24       3.33       2.09  
 
*Excludes excise taxes.
                                 
    Thousands of Barrels Daily  
Operating Statistics
                               
Refining operations*
                               
United States
                               
Crude oil capacity
    2,008       2,033       2,008       2,033  
Crude oil runs
    1,891       1,896       1,848       1,917  
Capacity utilization (percent)
    94 %     93       92       94  
Refinery production
    2,095       2,087       2,043       2,119  
International
                               
Crude oil capacity
    670       696       670       696  
Crude oil runs
    589       650       583       637  
Capacity utilization (percent)
    88 %     93       87       92  
Refinery production
    592       664       583       654  
Worldwide
                               
Crude oil capacity
    2,678       2,729       2,678       2,729  
Crude oil runs
    2,480       2,546       2,431       2,554  
Capacity utilization (percent)
    93 %     93       91       94  
Refinery production
    2,687       2,751       2,626       2,773  
 
*Includes our share of equity affiliates, except for our share of LUKOIL, which is reported in the LUKOIL Investment segment.
                                 
Petroleum products sales volumes
                               
United States
                               
Gasoline
    1,127       1,300       1,098       1,279  
Distillates
    912       827       890       845  
Other products
    404       503       394       491  
 
 
    2,443       2,630       2,382       2,615  
International
    683       739       650       726  
 
 
    3,126       3,369       3,032       3,341  
 

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The R&M segment’s operations encompass refining crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels); buying, selling and transporting crude oil; and buying, selling, transporting, distributing and marketing petroleum products. R&M has operations mainly in the United States, Europe and Asia Pacific.
Net income from the R&M segment decreased 72 percent during the second quarter of 2008 and 66 percent in the first six months of 2008. The decrease in both periods was primarily due to significantly lower domestic realized refining and marketing margins. Contributing to the lower refinery margins in the second quarter of 2008 were decreases in margins for secondary products, such as fuel oil, natural gas liquids and petroleum coke. Both periods were also impacted by higher turnaround and utility costs. The results for the six-month period of 2008 also included a lower net benefit from asset rationalization efforts.
U.S. R&M
Net income from our U.S. R&M operations decreased 69 percent in the second quarter of 2008 and 63 percent in the first six months of 2008. The decrease was primarily the result of lower refining and marketing margins and higher turnaround and utility costs.
Our U.S. refining capacity utilization rate was 94 percent in the second quarter of 2008, compared with 93 percent in the second quarter of 2007. The current year rate benefited from lower unplanned downtime.
International R&M
Net income from our international R&M operations decreased 84 percent in the second quarter of 2008 and 77 percent for the first six months of 2008. Contributing to the decrease in both periods were lower realized refining margins and a reduced net benefit from our asset rationalization efforts.
Our international refining capacity utilization rate was 88 percent in the second quarter of 2008, compared with 93 percent in the same quarter of 2007. The utilization rate was primarily impacted by reduced crude throughput at our Wilhelmshaven, Germany, refinery due to economic conditions, and planned maintenance at the Humber refinery in the United Kingdom.
LUKOIL Investment
                                 
    Millions of Dollars  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2008     2007     2008     2007  
Net Income
  $ 774       526       1,484       782  
   
 
                               
Operating Statistics*
                               
Net crude oil production (thousands of barrels daily)
    387       427       390       411  
Net natural gas production (millions of cubic feet daily)
    363       278       383       293  
Net refinery crude oil processed (thousands of barrels daily)
    215       184       218       202  
   
*Represents our net share of our estimate of LUKOIL’s production and processing.
This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia, which we account for under the equity method. As of June 30, 2008, our ownership interest in LUKOIL was 20 percent based on issued shares. Our ownership interest based on estimated shares outstanding, used for equity-method accounting, was also 20 percent at June 30, 2008. During the second quarter of 2008, our equity-method accounting ownership percentage was reduced from 20.6 to 20 percent as a result of LUKOIL’s issuance of treasury shares in connection with an acquisition.

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Since LUKOIL’s accounting cycle close and preparation of U.S. generally accepted accounting principles financial statements occur subsequent to our reporting deadline, our equity earnings and statistics for our LUKOIL investment are estimated, based on current market indicators, publicly available LUKOIL operating results, and other objective data. Once the difference between actual and estimated results is known, an adjustment is recorded. This estimate-to-actual adjustment will be a recurring component of future period results. The adjustment to first-quarter 2008 estimates, recorded in the second quarter of 2008, decreased net income $120 million. This compares with a decrease to net income of $44 million in the second quarter of 2007.
In addition to our estimate of our equity share of LUKOIL’s earnings, this segment reflects the amortization of the basis difference between our equity interest in the net assets of LUKOIL and the historical cost of our investment in LUKOIL, and also includes the costs associated with our employees seconded to LUKOIL.
Net income from the LUKOIL Investment segment increased 47 percent in the second quarter of 2008 and 90 percent in the first six months of 2008. The increase in net income from the second quarter of 2007 was primarily due to higher estimated realized prices, partially offset by higher estimated taxes and operating costs, as well as the net impact from the alignment of estimated net income to LUKOIL’s reported results. The increase in the first six months of 2008 was primarily due to higher estimated realized prices, partially offset by higher estimated taxes and operating costs.
Chemicals
                                 
    Millions of Dollars
    Three Months Ended   Six Months Ended
    June 30   June 30
    2008     2007     2008     2007  
         
 
                               
Net Income
  $ 18       68       70       150  
 
The Chemicals segment consists of our 50 percent interest in Chevron Phillips Chemical Company LLC (CPChem), which we account for under the equity method. CPChem uses natural gas liquids and other feedstocks to produce petrochemicals. These products are then marketed and sold, or used as feedstocks to produce plastics and commodity chemicals.
Net income from the Chemicals segment decreased 74 percent and 53 percent in the second quarter of 2008 and first six months of 2008, respectively. The decrease in both periods was due to lower benzene and polyethylene margins as the result of significant increases in feedstock costs, as well as higher utility and turnaround costs. This decrease was partially offset by an asset retirement in 2007. Business conditions in the chemicals and plastics industry are expected to remain challenging in the near term.

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Emerging Businesses
                                 
    Millions of Dollars
    Three Months Ended     Six Months Ended
    June 30   June 30
    2008     2007     2008     2007  
         
Net Income (Loss)
                               
Power
  $ 26       (1 )     53       12  
Other
    (18 )     (11 )     (33 )     (25 )
 
 
  $ 8       (12 )     20       (13 )
 
The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. Activities within this segment are currently focused on power generation and other items, such as carbon-to-liquids, technology solutions, and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.
The Emerging Businesses segment reported net income of $8 million in the second quarter of 2008, compared with a net loss of $12 million in the same quarter of 2007. Net income for the first six months of 2008 was $20 million, compared with a net loss of $13 million for the same period a year ago. The improvement for both periods primarily reflects improved international power generation results. The improvements were partially offset by lower domestic power results and increased technology spending.
Corporate and Other
                                 
    Millions of Dollars
    Three Months Ended   Six Months Ended
    June 30   June 30
    2008     2007     2008     2007  
         
Net Income (Loss)
                               
Net interest
  $ (119 )     (224 )     (227 )     (468 )
Corporate general and administrative expenses
    (68 )     (54 )     (112 )     (77 )
Acquisition/merger-related costs
          (16 )           (29 )
Other
    1       (43 )     (26 )     (104 )
 
 
  $ (186 )     (337 )     (365 )     (678 )
 
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 decreased 47 percent in the second quarter of 2008 and 51 percent in the first six months of 2008. The decrease in both periods was primarily due to lower average debt levels, as well as higher amounts of interest being capitalized. The first six months of 2008 also benefited from higher interest income.
Corporate general and administrative expenses increased 26 percent and 45 percent in the second quarter and first six months of 2008, respectively. The increase in both periods was primarily due to higher corporate staff costs and benefit-related expenses.
Acquisition-related costs in 2007 included transition costs associated with the Burlington Resources acquisition.

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The category “Other” includes certain foreign currency transaction gains and losses, and environmental costs associated with sites no longer in operation. Included in the improved results from Other in the second quarter and first six months of 2008 were foreign currency gains in 2008, compared with losses in 2007, as well as lower environmental costs.

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CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
                 
    Millions of Dollars  
    At June 30     At December 31  
    2008     2007  
     
 
               
Short-term debt
  $ 385       1,398  
Total debt*
  $ 21,924       21,687  
Minority interests
  $ 1,144       1,173  
Common stockholders’ equity
  $ 92,398       88,983  
Percent of total debt to capital**
    19 %     19  
Percent of floating-rate debt to total debt
    20 %     25  
 
  *Total debt includes short-term and long-term debt, as shown on our consolidated balance sheet.
 
**Capital includes total debt, minority interests and common stockholders’ equity.
To meet our short- and long-term liquidity requirements, we look to a variety of funding sources. Cash generated from operating activities is the primary source of funding. In addition, during the first six months of 2008, we raised $441 million in proceeds from asset dispositions. During the first six months, available cash was used to support our ongoing capital expenditures and investments program, repurchase shares of our common stock, provide loan financing to certain equity affiliates, pay dividends, and meet the funding requirements to FCCL Oil Sands Partnership (FCCL). Total dividends paid on our common stock during the first six months were $1,449 million. During the first half of 2008, cash and cash equivalents decreased $669 million to $787 million.
In addition to cash flows from operating activities and proceeds from asset sales, we rely on our cash balance, commercial paper and credit facility programs, and our shelf registration statements, to support our short- and long-term liquidity requirements. We anticipate these sources of liquidity will be adequate to meet our funding requirements in the near- and long-term, including our capital spending program, our share repurchase programs, dividend payments, required debt payments and the funding requirements to FCCL.
Significant Sources of Capital
Operating Activities
During the first six months of 2008, cash of $12,021 million was provided by operating activities, a 3 percent increase from cash from operations of $11,639 million in the corresponding period of 2007. Contributing to the increase were higher commodity prices in our E&P segment, partially offset by lower U.S. refining and marketing margins, as well as higher volumetric inventory builds in our R&M segment.
While the stability of our cash flows from operating activities benefits from geographic diversity and the effects of upstream and downstream integration, our short- and long-term operating cash flows are highly dependent upon prices for crude oil, natural gas and natural gas liquids, as well as refining and marketing margins. During the first six months of 2008 and 2007, we benefited from favorable crude oil and natural gas prices. Prices and margins 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.

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The level of our production volumes of crude oil, natural gas and natural gas liquids also impacts our cash flows. These production levels are impacted by such factors as acquisitions and dispositions of fields, field production decline rates, new technologies, operating efficiency, weather conditions, the addition of proved reserves through exploratory success, and the timely and cost-effective development of those proved reserves. While we actively manage these factors, production levels can cause variability in cash flows, although historically this variability has not been as significant as that experienced with commodity prices.
In addition, the level and quality of output from our refineries impacts our cash flows. The output at our refineries is impacted by such factors as operating efficiency, maintenance turnarounds, feedstock availability and weather conditions. We actively manage the operations of our refineries and, typically, any variability in their operations has not been as significant to cash flows as that experienced with refining margins.
Asset Sales
Proceeds from asset sales during the first half of 2008 were $441 million, compared with $2,215 million in the same period of 2007. Proceeds for both periods primarily reflect our ongoing efforts to dispose of assets that no longer fit into our strategic plans or those that could bring more value by being monetized in the near term.
Commercial Paper and Credit Facilities
At June 30, 2008, we had a $7.5 billion revolving credit facility, which expires in September 2012. This facility may be used as direct bank borrowings, as support for the ConocoPhillips $7.5 billion commercial paper program, as support for the ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program, or as support for issuances of letters of credit totaling up to $750 million. The 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 ratings. The credit 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 by any of its consolidated subsidiaries. At June 30, 2008 and December 31, 2007, we had no outstanding borrowings under the credit facility, but $40 million and $41 million, respectively, in letters of credit had been issued. Under both commercial paper programs, $1,314 million of commercial paper was outstanding at June 30, 2008, compared with $725 million at December 31, 2007.
At June 30, 2008, our primary funding source for short-term working capital needs was the ConocoPhillips $7.5 billion commercial paper program. Commercial paper maturities are generally limited to 90 days. The ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program is used to fund commitments relating to the Qatargas 3 project. Since we had $1,314 million of commercial paper outstanding and had issued $40 million of letters of credit, we had access to $6.1 billion in borrowing capacity under our revolving credit facility at June 30, 2008.
Shelf Registrations
We have a universal shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC) 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. Under this shelf, in May 2008, we issued notes consisting of $400 million of 4.40% Notes due 2013, $500 million of 5.20% Notes due 2018 and $600 million of 5.90% Notes due 2038. The proceeds from the offering were used to reduce commercial paper and for general corporate purposes.
We also have on file with the SEC a shelf registration statement under which ConocoPhillips Canada Funding Company I and ConocoPhillips Canada Funding Company II, both wholly owned subsidiaries, could issue an indeterminate amount of senior debt securities, fully and unconditionally guaranteed by ConocoPhillips and ConocoPhillips Company.

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Minority Interests
At June 30, 2008, we had outstanding $1,144 million of equity in less than wholly owned consolidated subsidiaries held by minority interest owners, including a minority interest of $505 million in Ashford Energy Capital S.A. The remaining minority interest amounts are primarily related to operating joint ventures we control. The largest of these, $620 million, was related to the Darwin LNG project located in northern Australia.
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. At June 30, 2008, we were liable for certain contingent obligations under the following contractual arrangements:
    Qatargas 3: We own a 30 percent interest in Qatargas 3, an integrated project to produce and liquefy natural gas from Qatar’s North field. Our interest is held through a jointly owned company, Qatar Liquefied Gas Company Limited (3), for which we use the equity method of accounting. Qatargas 3 secured project financing of $4 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. Prior to project completion certification, all loans, including the ConocoPhillips loan facilities, are guaranteed by the participants, based on their respective ownership interests. Accordingly, our maximum exposure to this financing structure is $1.2 billion, excluding accrued interest. Upon completion certification, currently expected in 2010, all project loan facilities, including the ConocoPhillips loan facilities, will become nonrecourse to the project participants. At June 30, 2008, Qatargas 3 had $2.6 billion outstanding under all the loan facilities, of which ConocoPhillips provided $787 million, and an additional $60 million of accrued interest.
 
    Rockies Express Pipeline LLC: In June 2006, we issued a guarantee for 24 percent of $2.0 billion in credit facilities issued to Rockies Express Pipeline LLC (Rockies Express). Rockies Express intends to construct a natural gas pipeline across a portion of the United States. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $480 million, which could become payable if the credit facility is fully utilized and Rockies Express fails to meet its obligations under the credit agreement. At June 30, 2008, Rockies Express had $740 million outstanding under the credit facilities, with our 24 percent guarantee equaling $178 million. In addition, we have a 24 percent guarantee on $600 million of Floating Rate Notes due 2009. It is anticipated that construction completion will be achieved in 2009, and refinancing will take place at that time, making the debt nonrecourse.
 
    Keystone Oil Pipeline: We own a 50 percent equity interest in the Keystone Oil Pipeline (Keystone), a joint venture with TransCanada Corporation. Keystone plans to construct a crude oil pipeline originating in Alberta, with delivery points in Illinois and Oklahoma. In connection with certain planning and construction activities, agreements were put in place with third parties to guarantee the payments due under those agreements. Our maximum potential amount of future payments under those agreements are estimated to be $400 million, which could become payable if Keystone fails to meet its obligations under the agreements noted above and the obligation cannot otherwise be mitigated. Payments under the guarantees are contingent upon the partners not making necessary equity contributions into Keystone; therefore, it is considered unlikely that payments would be required. All but $15 million of the guarantees will terminate after construction is completed, currently estimated to be in 2010.
For additional information about guarantees, see Note 11—Guarantees, in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

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Capital Requirements
For information about our capital expenditures and investments, see the “Capital Spending” section.
Our debt balance at June 30, 2008, was $21.9 billion, a slight increase from the balance at December 31, 2007.
In January 2008, we reduced our Floating Rate Five-Year Term Note due 2011 from $3 billion to $2 billion, with a subsequent reduction in June 2008 to $1.5 billion. In March 2008, we redeemed our $300 million 7.125% Debentures due 2028 at a premium of $8 million, plus accrued interest.
On January 3, 2007, we closed on a business venture with EnCana. As part of this transaction, we are obligated to contribute $7.5 billion, plus interest, over a ten-year period, which began in 2007, to the upstream business venture, FCCL, formed as a result of the transaction. Quarterly principal and interest payments of $237 million began in the second quarter of 2007, and will continue until the balance is paid. Of the principal obligation amount, approximately $609 million is short-term and is included in the “Accounts payable—related parties” line on our June 30, 2008, consolidated balance sheet. The principal portion of these payments, which totaled $293 million in the first six months of 2008, is presented on our consolidated statement of cash flows as an other financing activity. Interest accrues 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.
At year-end 2007, approximately $10.1 billion remained authorized for share repurchases in 2008 for our share repurchase programs announced in 2007. During the first six months of 2008, we repurchased 60.4 million shares of our common stock at a cost of $5.0 billion. We anticipate third-quarter 2008 share repurchases to be $2 billion to $3 billion.
In December 2005, we entered into a credit agreement with Qatargas 3, whereby we will provide loan financing of approximately $1.2 billion for the construction of an LNG train in Qatar. This financing will represent 30 percent of the project’s total debt financing. Through June 30, 2008, we had provided $787 million in loan financing, and an additional $60 million of accrued interest. See the “Off-Balance Sheet Arrangements” section for additional information on Qatargas 3.
In 2004, we finalized our transaction with Freeport to participate in a proposed LNG receiving terminal in Quintana, Texas. We entered into a credit agreement with Freeport to provide loan financing of approximately $678 million, excluding accrued interest, for the construction of the facility. The terminal became operational late in the second quarter of 2008. Through June 30, 2008, we had provided $644 million in loan financing, and an additional $116 million of accrued interest.
In the fall of 2004, ConocoPhillips and LUKOIL agreed to the expansion of the Varandey terminal as part of our investment in the OOO Naryanmarneftegaz (NMNG) joint venture. We have an obligation to provide loan financing to Varandey Terminal Company for 30 percent of the costs of the terminal expansion, but we will have no governance or ownership interest in the terminal. We estimate our total loan obligation for the terminal expansion to be approximately $390 million at current exchange rates, excluding interest to be accrued during construction. This amount will be adjusted as the project’s cost estimate and schedule are updated and the ruble exchange rate fluctuates. Through June 30, 2008, we had provided $359 million in loan financing, and an additional $46 million of accrued interest.
The long-term portion of our loans to Qatargas 3, Freeport and Varandey Terminal Company are included in the “Loans and advances—related parties” line on the balance sheet, while the short-term portion is in “Accounts and notes receivable—related parties.”

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Contractual Obligations
Our contractual purchase obligations at June 30, 2008, were estimated to be $166 billion, an increase of $40 billion from the amount reported at December 31, 2007, of $126 billion. The increase primarily results from higher crude oil, natural gas and natural gas liquids prices.
Capital Spending
Capital Expenditures and Investments
                 
    Millions of Dollars  
    Six Months Ended  
    June 30  
    2008     2007  
E&P
               
United States—Alaska
  $ 890       324  
United States—Lower 48
    1,735       1,392  
International
    2,999       3,002  
 
 
    5,624       4,718  
 
Midstream
          2  
 
R&M
               
United States
    677       388  
International
    196       88  
 
 
    873       476  
 
LUKOIL Investment
           
Chemicals
           
Emerging Businesses
    112       65  
Corporate and Other
    111       86  
 
 
  $ 6,720       5,347  
 
United States
  $ 3,413       2,191  
International
    3,307       3,156  
 
 
  $ 6,720       5,347  
 
E&P
Capital expenditures and investments for E&P during the first six months of 2008 totaled $5.6 billion. The expenditures supported key exploration and development projects including:
    Significant U.S. lease acquisitions in the Chukchi Sea federal waters, offshore Alaska, as well as acquisitions in the deepwater Gulf of Mexico.
 
    Other Alaska activities related to development drilling in the Greater Kuparuk Area, including West Sak; the Greater Prudhoe Bay Area; the Alpine field, including satellite field prospects; the Cook Inlet Area; as well as exploration activities.
 
    Oil and natural gas developments in the Lower 48 states, including New Mexico, Texas, Louisiana, Oklahoma, Montana, North Dakota, Colorado, Wyoming, and offshore in the Gulf of Mexico.
 
    Investment in the West2East Pipeline LLC (West2East), a company holding a 100 percent interest in Rockies Express Pipeline LLC (Rockies Express).
 
    The development of the Surmont heavy-oil project, investments related to FCCL, and development of conventional oil and gas reserves, all in Canada.
 
    Development drilling and facilities projects in the Greater Ekofisk Area and Alvheim project in the Norwegian North Sea.

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    The Britannia satellite developments in the U.K. North Sea.
 
    An integrated project to produce and liquefy natural gas from Qatar’s North field.
 
    The Kashagan field in the Caspian Sea, offshore Kazakhstan.
 
    Development of the Yuzhno Khylchuyu (YK) field in the northern part of Russia’s Timan-Pechora province through the NMNG joint venture with LUKOIL.
 
    The Peng Lai 19-3 development in China’s Bohai Bay.
 
    The Gumusut-Kakap development offshore Sabah, Malaysia.
 
    Projects offshore Block B and onshore South Sumatra in Indonesia.
During the second quarter of 2008, affiliates of ConocoPhillips and BP Plc formed a limited liability company to progress the pipeline project named Denali—The Alaska Gas Pipeline. The project, which would move approximately four billion cubic feet per day of Alaska natural gas to North American markets, consists of a gas treatment plant on Alaska’s North Slope and a large-diameter pipeline through Alaska to Alberta, Canada. Should it be required to transport gas from Alberta, the project also could include a large-diameter pipeline from Alberta to the Lower 48 states. Summer fieldwork related to the project began in late May, primarily in eastern Alaska, and involves route reconnaissance and environmental studies. In late June 2008, the Federal Regulatory Commission (FERC) approved the Denali project to use the FERC’s prefiling process.
In July 2008, we announced the signing of an interim agreement with the Abu Dhabi National Oil Company (ADNOC) to develop the Shah gas field in Abu Dhabi. Final project agreements are expected to be completed by year-end 2008. ADNOC will have a 60 percent interest and we will have a 40 percent interest in the project.
R&M
Capital spending for R&M during the first six months of 2008 totaled $873 million and included projects to meet environmental standards and improve the operating integrity, safety and energy efficiency of processing units. Capital also was spent on pipeline development and refinery upgrade projects to increase crude oil capacity, expand conversion capability and increase clean product yield.
Major project activities in progress include:
    Expansion of a hydrocracker at the Rodeo facility of our San Francisco refinery.
 
    Investment in the Keystone Oil Pipeline.
 
    U.S. programs aimed at air emission reductions.
Through our joint ventures with TransCanada, we plan to expand the Keystone crude oil pipeline system and provide additional capacity of 500,000 barrels per day from western Canada to the U.S. Gulf Coast. Targeted for completion in 2012, this expansion would increase the capacity of the Keystone pipeline system to approximately 1.1 million barrels per day.
In May 2008, we and the Saudi Arabian Oil Company announced the two companies had approved continued funding for the development of the Yanbu Export Refinery project. Each company would be responsible for marketing one-half of the refinery’s production. The refinery is targeted to start up in 2013.

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Contingencies
Legal and Tax Matters
We accrue for non-income-tax-related contingencies when a loss is probable and the amounts can be reasonably estimated. 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. In the case of income-tax-related contingencies, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48), effective January 1, 2007. FIN 48 requires a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain. 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.
Environmental
We are subject to the same numerous international, federal, state, and local environmental laws and regulations, as are other companies in the petroleum exploration and production, refining and crude oil and refined product marketing and transportation businesses. For a discussion of the most significant of these environmental laws and regulations, including those with associated remediation obligations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 81 through 84 of our 2007 Annual Report on Form 10-K.
We, from time to time, receive requests for information or notices of potential liability from the Environmental Protection Agency and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (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, 2007, we reported we had been notified of potential liability under CERCLA and comparable state laws at 68 sites around the United States. At June 30, 2008, we reopened and closed one site, resolved and closed four sites, and received two new notices of potential liability, leaving 66 unresolved sites where we have been notified of potential liability.
At June 30, 2008, our balance sheet included a total environmental accrual of $1,046 million, compared with $1,089 million at December 31, 2007. We expect to incur a substantial majority 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 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 on our results of operations or financial position as a result of compliance with environmental laws and regulations.

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NEW ACCOUNTING STANDARDS
In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141 (Revised), “Business Combinations” (SFAS No. 141(R)). This Statement will apply to all transactions in which an entity obtains control of one or more other businesses. In general, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the fair value of all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date as the fair value measurement point; and modifies the disclosure requirements. This Statement applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. However, starting January 1, 2009, accounting for changes in valuation allowances for acquired deferred tax assets and the resolution of uncertain tax positions for prior business combinations will impact tax expense instead of impacting goodwill. We are currently evaluating the changes provided for in this Statement.
Also in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” which changes the classification of noncontrolling interests, sometimes called a minority interest, in the consolidated financial statements. Additionally, this Statement establishes a single method of accounting for changes in a parent company’s ownership interest that do not result in deconsolidation and requires a parent company to recognize a gain or loss when a subsidiary is deconsolidated. This Statement is effective January 1, 2009, and will be applied prospectively with the exception of the presentation and disclosure requirements which must be applied retrospectively for all periods presented. We are currently evaluating the impact of this Statement on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB No. 133.” This Statement expands the annual and interim disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for derivative instruments within the scope of that Statement. We must adopt SFAS No. 161 no later than January 1, 2009, but it will not have any impact on our consolidated financial statements, other than the additional disclosures.
OUTLOOK
In E&P, we expect our third-quarter 2008 production to be similar to the level in the second quarter of 2008. We expect full-year 2008 production will be consistent with our operating plan.
In R&M, we expect our U.S. crude oil capacity utilization in the third quarter of 2008 to be similar to the second quarter. In international refining, utilization at our Wilhelmshaven refinery will continue to be impacted by hydro-skimming margins.

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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. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.
We based the forward-looking statements relating to our operations on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and assumptions 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 the following:
    Fluctuations in crude oil, natural gas and natural gas liquids prices, refining and marketing margins and margins for our chemicals business.
 
    Potential failure or delays in achieving expected reserve or production levels from existing and future oil and gas development projects due to operating hazards, drilling risks and the inherent uncertainties in predicting oil and gas reserves and oil and gas reservoir performance.
 
    Unsuccessful exploratory drilling activities or the inability to obtain access to exploratory acreage.
 
    Failure of new products and services to achieve market acceptance.
 
    Unexpected changes in costs or technical requirements for constructing, modifying or operating facilities for exploration and production, manufacturing, refining or transportation projects.
 
    Unexpected technological or commercial difficulties in manufacturing, refining, or transporting our products, including synthetic crude oil and chemicals products.
 
    Lack of, or disruptions in, adequate and reliable transportation for our crude oil, natural gas, natural gas liquids, LNG and refined products.
 
    Inability to timely obtain or maintain permits, including those necessary for construction of LNG terminals or regasification facilities, or refinery projects; 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 LNG, refinery and transportation projects.
 
    Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events or terrorism.
 
    International monetary conditions and exchange controls.
 
    Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
 
    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, natural gas, natural gas liquids or refined product pricing, regulation, or taxation; other political, economic or diplomatic developments; and international monetary fluctuations.
 
    Changes in tax and other laws, regulations (including alternative energy mandates), or royalty rules applicable to our business.
 
    Inability to obtain economical financing for projects, construction or modification of facilities and general corporate purposes.
 
    The operation and financing of our midstream and chemicals joint ventures.

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    The factors set forth under the heading “Risk Factors” on pages 34 through 39 of our 2007 Annual Report on Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the six months ended June 30, 2008, does not differ materially from that discussed under Item 7A of ConocoPhillips’ Annual Report on Form 10-K for the year ended December 31, 2007.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2008, with the participation of our management, our Chairman, President and Chief Executive Officer (principal executive officer) and our Executive Vice President, Finance, and Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Act), of the effectiveness of the design and operation of ConocoPhillips’ disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman, President and Chief Executive Officer and our Executive Vice President, Finance, and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of June 30, 2008.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1. 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 second quarter of 2008 and any material developments with respect to matters previously reported in ConocoPhillips’ 2007 Annual Report on Form 10-K or first-quarter 2008 10-Q. While it is not possible to accurately predict the final outcome of these pending proceedings, if any one or more of such proceedings were decided adversely to ConocoPhillips, we expect there would be no material effect on our consolidated financial position. Nevertheless, such proceedings are reported pursuant to the U.S. Securities and Exchange Commission’s regulations.
Our U.S. refineries are implementing two separate consent decrees, regarding alleged violations of the Federal Clean Air Act, with the U.S. Environmental Protection Agency (EPA), six states and one local air pollution agency. Some of the requirements and limitations contained in the decrees provide for stipulated penalties for violations. Stipulated penalties under the decrees are not automatic, but must be requested by one of the agency signatories. As part of periodic reports under the decrees and/or other reports required by permits or regulations, we occasionally report matters which could be subject to a request for stipulated penalties. If a specific request for stipulated penalties meeting the reporting threshold set forth in U.S. Securities and Exchange Commission rules is made pursuant to these decrees based on a given reported exceedance, we will separately report that matter and the amount of the proposed penalty.
New Matters
On July 16, 2008, ConocoPhillips received a demand from the Bay Area Air Quality Management District (BAAQMD) to settle 24 Notices of Violation (NOVs) issued in late 2006 and 2007 for alleged violations of air pollution control regulations at the San Francisco refinery. The amount of the settlement demand is $304,500. We intend to work with BAAQMD to resolve these NOVs.
On June 19, 2008, the Trainer refinery received a demand for stipulated penalties under the Refinery Enforcement Initiative Consent Decree in the amount of $110,000 for alleged violations associated with its leak detection and repair program. We intend to work with U.S. EPA and the Pennsylvania Department of Environmental Protection (PADEP) to resolve this matter.
On June 2, 2008, the Billings refinery received a Violation Letter from the Montana Department of Environmental Quality (MDEQ) for opacity and nickel emissions, which occurred during startup of the cat cracker in April 2007. The letter also alleged certain monitoring quality assurance/quality control violations. The letter requests a penalty of $604,000. We intend to work with the MDEQ to resolve this matter.
Matters Previously Reported
The South Coast Air Quality Management District (SCAQMD) conducted an audit of the Los Angeles refinery to assess compliance with applicable local, state, and federal regulations related to fugitive emissions. As a result of the audit, SCAQMD issued three NOVs alleging multiple counts of noncompliance. We reached an agreement with SCAQMD to settle two of the three NOVs for $42,500 and are working with SCAQMD to resolve the third NOV.
On September 25, 2007, the Sweeny refinery received a draft order to resolve a July 6, 2007, Notice of Enforcement (NOE) relating to alleged violations of the Texas Clean Air Act. The allegations relate to compliance with limitations contained in the refinery’s Title V operating permit and one emission event. In November 2007, we paid $114,450 as a penalty and agreed to fund a Supplemental Environmental Project (SEP) in the same amount. The settlement was approved by the Texas Commission on Environmental Quality (TCEQ) on May 22, 2008.

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In June 2007, the U.S. EPA informed the Ferndale refinery it will seek penalties for Ferndale’s alleged failure to comply with certain portions of the Benzene Waste Operations rule. The government alleges the facility has not complied with certain equipment maintenance and inspection rules since 1993. The parties have reached an agreement, which resolves the matter. The agreement specifies a penalty of $60,000, an SEP valued at $200,000 and injunctive actions. The agreement has been incorporated into an amendment to an existing consent decree, which was lodged on June 24, 2008.
The U.S. EPA and the PADEP informed the Trainer refinery they intend to seek penalties for acid gas flaring which allegedly occurred between April 2, 2007, and May 19, 2007. The parties have reached an agreement, which resolves the matter. The agreement has been incorporated into an amendment to an existing consent decree, which was lodged on June 24, 2008.
On April 30, 2007, the Borger refinery received an offer to settle a range of violations alleged in a March 16, 2007, NOE issued by the TCEQ. The alleged violations relate to air quality permit limits, emission events, testing requirements, and reporting or recordkeeping requirements. In November 2007, we submitted payment of a penalty of $84,900 and agreed to fund an SEP valued at $84,900. The settlement was approved by the TCEQ on May 13, 2008.
In March 2005, ConocoPhillips Pipe Line Company (CPPL) received a Notice of Probable Violation and Proposed Civil Penalty from the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (DOT) alleging violation of DOT operation and safety regulations at certain facilities in Kansas, Missouri, Illinois, Indiana, Wyoming and Nebraska. DOT is proposing penalties in the amount of $184,500. An information hearing was held on September 24, 2007. CPPL has provided additional information in support of its position. A DOT ruling is not anticipated until the fourth quarter of 2008.
In August of 2003, EPA Region 6 issued a Show Cause Order alleging violations of the Federal Clean Water Act at the Borger refinery. The alleged violations relate primarily to discharges of selenium and reported exceedances of permit limits for whole effluent toxicity. On April 7, 2008, a Consent Decree (CD) was lodged in the federal court for the Northern District of Texas, Amarillo Division. The CD requires a penalty of $1.2 million and an SEP valued at $600,000. After public notice and comment, the judge approved the consent decree and the penalty has been paid.

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Item 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
                                 
                            Millions of Dollars  
                    Total Number of     Approximate Dollar  
                    Shares Purchased as     Value of Shares  
            Average Price     Part of Publicly     that May Yet Be  
    Total Number of     Paid per Total     Announced Plans or     Purchased Under the  
Period   Shares Purchased   Shares Purchased     Programs **    Plans or Programs ** 
 
April 1-30, 2008
    10,761,518     $ 80.26       10,755,700     $ 6,737  
May 1-31, 2008
    9,236,776       89.03       9,217,080       5,916  
June 1-30, 2008
    8,894,997       93.43       8,864,300       5,088  
   
Total
    28,893,291     $ 87.12       28,837,080          
   
 
  *Includes the repurchase of common shares from company employees in connection with the company’s broad-based employee incentive
     plans.
 
**On January 12, 2007, we announced a stock repurchase program that provided for the repurchase of up to $1 billion of the company’s common stock. On February 9, 2007, we announced plans to repurchase $4 billion of our common stock in 2007, including the $1 billion announced on January 12, 2007. On July 9, 2007, we announced plans to repurchase up to $15 billion of the company’s common stock through the end of 2008, which included the $2 billion remaining under the previously announced $4 billion program. Acquisitions for the share repurchase programs are made at management’s discretion, at prevailing prices, subject to market conditions and other factors. Repurchases may be increased, decreased or discontinued at any time without prior notice. Shares of stock repurchased under the plans are held as treasury shares.

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual stockholders meeting on May 14, 2008. A brief description of each proposal and the voting results follow:
     A company proposal to elect three directors.
                         
    Number of Shares  
    Voted For     Voted Against     Abstain  
     
Harold W. McGraw III
    1,350,374,854       29,576,891       16,553,718  
James J. Mulva
    1,352,429,492       29,441,436       14,634,207  
Bobby S. Shackouls
    1,352,499,577       27,226,764       16,779,121  
Those directors whose term of office continued were as follows: Richard L. Armitage, Richard H. Auchinleck, James E. Copeland, Jr., Kenneth M. Duberstein, Ruth R. Harkin, Harald J. Norvik, William K. Reilly, Victoria J. Tschinkel, Kathryn C. Turner and William E. Wade, Jr.
Results of other matters submitted to a vote were:
                                 
    Number of Shares  
    Voted For     Voted Against     Abstain     Broker Nonvotes  
     
Proposal to Amend By-Laws and Certificate of Incorporation for Annual Election of Directors
    1,363,589,104       18,979,597       13,936,563        
Ratification to Appoint Ernst & Young as ConocoPhillips’ Independent Registered Public Accounting Firm
    1,375,375,305       7,831,658       13,298,300        
Stockholder Proposal to Report on Recognition of Indigenous Rights
    89,602,302       910,866,101       195,582,036       200,455,024  
Stockholder Proposal for Advisory Vote on Executive Compensation
    469,972,284       664,403,359       61,672,997       200,456,823  
Stockholder Proposal on Political Contributions
    287,338,404       730,470,975       178,241,060       200,455,024  
Stockholder Proposal on Greenhouse Gas Reduction
    293,016,777       704,412,443       198,621,220       200,455,023  
Stockholder Proposal on Community Accountability
    85,871,110       914,130,286       196,049,043       200,455,024  
Stockholder Proposal on Drilling in Sensitive/Protected Areas
    267,528,860       737,075,568       191,444,012       200,457,023  
Stockholder Proposal on Environment Impact
    276,223,532       728,791,844       191,035,065       200,455,022  
Stockholder Proposal on Global Warming
    36,783,213       967,166,684       192,100,693       200,454,873  
All three nominated directors were elected, the appointment of the independent auditors was ratified, and a management proposal providing for the annual election of directors was approved. The eight stockholder proposals presented were not approved.

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Item 6. EXHIBITS
Exhibits
     
3.1
  Amended and Restated Certificate of Incorporation
 
   
3.3
  Amended and Restated By-Laws
 
   
10
  First and Second Amendments to the ConocoPhillips Directors’ Charitable Gift Program.
 
   
12
  Computation of Ratio of Earnings to Fixed Charges.
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
32
  Certifications pursuant to 18 U.S.C. Section 1350.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CONOCOPHILLIPS
 
 
  /s/ Rand C. Berney    
  Rand C. Berney   
  Vice President and Controller
(Chief Accounting and Duly Authorized Officer) 
 
 
July 29, 2008

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Table of Contents

EXHIBIT INDEX
Exhibits
     
3.1
  Amended and Restated Certificate of Incorporation
 
   
3.3
  Amended and Restated By-Laws
 
   
10
  First and Second Amendments to the ConocoPhillips Directors’ Charitable Gift Program.
 
   
12
  Computation of Ratio of Earnings to Fixed Charges.
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
   
32
  Certifications pursuant to 18 U.S.C. Section 1350.