8-KFinancial EventsOther EventsExhibits & Filings

CONOCOPHILLIPS 8-K Report, Material Impairment (Jun 27, 2007)

Filed June 27, 2007For Securities:COP

Summary

ConocoPhillips (COP) has filed an 8-K report detailing a significant event: the mandatory expropriation of its heavy-oil ventures and oil production risk contracts in Venezuela. This action, mandated by a February 2007 decree from the Venezuelan president, has resulted in ConocoPhillips being unable to reach an agreement on transitioning to the "Empresa Mixta" structure. Consequently, Petróleos de Venezuela S.A. (PDVSA) or its affiliates will assume control of these operations, including the Petrozuata and Hamaca heavy-oil ventures and the Corocoro development project. This event necessitates a substantial non-cash impairment charge of approximately $4.5 billion, encompassing the historical cost of investments (around $2.6 billion) and an estimated $1.9 billion in allocated goodwill. The company is actively pursuing negotiations for appropriate compensation and reserves all legal rights, including the potential for international arbitration, to secure prompt, adequate, and effective compensation. The impairment reflects the accounting requirements under U.S. GAAP, which do not presume realization of compensation from disputed or litigated claims.

Key Highlights

  • 1ConocoPhillips' significant Venezuelan oil interests have been expropriated by the Venezuelan government, effective June 26, 2007.
  • 2The company was unable to reach an agreement to transition its operations to the mandated 'Empresa Mixta' joint venture structure.
  • 3PDVSA or its affiliates will take over operations for the Petrozuata and Hamaca heavy-oil ventures and the Corocoro development project.
  • 4A non-cash impairment charge of approximately $4.5 billion is expected in Q2 2007, including $2.6 billion in investments and $1.9 billion in goodwill.
  • 5Negotiations for appropriate compensation are ongoing, with ConocoPhillips reserving all legal rights, including the possibility of international arbitration.
  • 6The impairment charge does not consider potential compensation as per U.S. GAAP accounting for disputed claims.
  • 7ConocoPhillips' 40 percent interest in a Venezuelan natural gas project (Block 2 of Plataforma Deltana) was not included in the expropriation.

Frequently Asked Questions

The primary reason for this filing is to report the mandatory expropriation of ConocoPhillips' heavy-oil ventures and oil production risk contracts in Venezuela. Due to the inability to agree on a new operating structure mandated by the Venezuelan government, the company's interests in these projects have been taken over by the state oil company, PDVSA, or its affiliates.

The expropriation will result in a significant non-cash impairment charge of approximately $4.5 billion in the second quarter of 2007. This charge includes the carrying value of the Venezuelan investments and an allocation of goodwill. The company will no longer recognize production or net income from these Venezuelan operations.

Yes, ConocoPhillips is actively negotiating with Venezuelan authorities for appropriate compensation. The company is preserving all its rights and reserves the option to pursue international arbitration to secure prompt, adequate, and effective compensation for its oil investments and operations in Venezuela.

No, the impairment charge, as determined under U.S. generally accepted accounting principles (GAAP), does not consider any potential compensation. U.S. GAAP requires that claims subject to litigation or dispute are presumed not to be probable of realization, meaning compensation is not recognized prior to its actual receipt.