OPERATIONAL RISK ASSESSMENT
Company ConocoPhillips
Operational Risk Events
Business Disruption and Systems
Failures including cyber insecurity,
hardware failures, software failures,
or utility disruptions.
Clients, Products, and Business
Practice including antitrust
behaviour, market manipulation,
improper trade, or product defects
Damage to Physical Assets
including climate change, natural
disasters, terrorism, or vandalism
Employment Practices and
Workplace Safety including
discrimination, employee health
and safety or sexual harassment
Execution, Delivery, and Process
Management including accounting
errors, data entry errors, failed
mandatory reporting, inaccurate
data science or negligence loss of
assets
External Fraud including corporate
espionage, hacking or third-party
theft
Internal Fraud including breaches
of confidentiality, bribery,
embezzlement, or tax evasion
Market Volatility
Company-Specific Challenges
 System Failures can damage control over production, and distribution
systems which will prevent delivery of products to the market and affect
profitability.
 Software failures could delay the process of recording data on operations.
 Damage to reputation, litigation costs, regulatory fines or intervention.
 Business Disruptions like COVID-19 can lead to wide fluctuations in the
prices of oil and gas, which in turn affects the revenue and profitability, and
more largely the future estimate of growth of the company.
 Anti-competitive activities (Zarco 66, 2013) which can violate the
antitrust regulations like Sherman Act, Clayton Act etc.
 Natural disasters that cause loss of lives and billions of rehabilitation,
restructuring and social costs.
 Terrorism, civil unrest, war: Terrorist attacks target oil industry as they
drive the government revenue and the key infrastructures are based in
remote locations.
 Inadequate employee healthcare measures in oil rigs and refineries
resulting in fatal accidents, and operational hazards like the Bohai Bay,
China and 2001 Humber Refinery.
 Discriminatory employment practices (caste, creed, gender, race).
 Arithmetical errors, accounting errors which lead to inaccuracy and
incomplete information of general ledger accounts, assets and liabilities
(HIC Energy Partners).
 Corporate Espionage resulting in significant loss of proprietary
information.
 Hacking attacks by trade-disputed countries targeting the
topographical maps (November 2009 Hacking attacks on energy
companies)
 Embezzlement of funds by employees like the $7.3 million fraudulent
transfer of funds by 5 former employees throughout 2019.
 Offering or soliciting bribery by employees for accepting tenders,
raising inflated invoices (FH Bertling Ltd. Case, 2014).
 Trade disputes, political laws, economic policies, competition are
responsible for high volatility in the sector which influences the production
levels, revenue, cash-flow and potential dividends amongst others.
 Sector credibility in Energy  High methane emissions question the sector credibility and reduced
Transition demand by increasing green investors.

Non-Compliance with several laws  Growing regulations and laws concerning the Energy sector increase
and Regulations the risks associated with non-compliance and legal liabilities.

DETAILED REPORT: CONOCOPHILLIPS

Introduction:
This report provides an elaborate description of the operational risks faced by the company ConocoPhillips.

Operational Risks:
Operational risks are unfavourable events faced by a company in performing its day-to-day operations. The events
take the form of inadequate operational procedures, people, system failures, frauds whether internal or external which
adversely impact the businesses.

Industry Overview:
The Exploration and Production (E&P) Industry in the US became the world’s largest producer of Oil in 2019
producing over 19.51 million barrels per day. Simultaneously, it was the largest consumer (20% of demand) of oil
worldwide. The value added by the E&P Industry in the US reached $236.81 billion by 2018, highest since 2014 and
2016 oil-glut. As of 2020, the top five oil producers headquartered in the US are Chevron, ExxonMobil, EOG
Resources, ConocoPhillips and Anadarko Petroleum.
Since the Industry is involved in the exploration of natural oil reserves, which can potentially deteriorate the
environment, it is subject to stringent laws implemented by the federal governments, state governments, regulators
and other agencies. The most recent amendments which impact the E&P industry include the “International Maritime
Organization(IMO) 2020” and the “Green Deal”.

1. Business Disruption and Systems Failures including cyber insecurity, hardware failures,
software failures, or utility disruptions –
ConocoPhillips is largely dependent on its systems to ensure proper functioning of the business. The company relies
on digital technology and systems, which contain estimates on reserves, help in recording financial data on a timely
basis, analyse the seismic and drilling information and provide production, distribution information thereby rendering
its workforce incompetent if the systems were disrupted or breached Apart from internal system failures,
ConocoPhillips also faces supply chain attacks, where attackers permeate through third-party website.
Thus, hardware failures, software failures and cyber-attacks can damage the operations right from production up to
the delivery of the product to the markets. This can lead to loss of consumers, loss of trust, reputational damage,
reimbursement costs, litigation liabilities, increased compliance expenditure which materially affects the business of
the company.
On the other hand, Business Disruptions like COVID-19 has impacted the aviation sector, the second major consumer
demanding nearly 11% of total oil production. Reduced offshore productions have limited the supply of natural gas
and oil. Further, Factory shutdown and travel restrictions have further contributed to the declining demand of oil in
Asia-Pacific resulting in a $37.28/Barrel drop in Brent crude oil from February 2020 to April 2020.
Particularly for ConocoPhillips, a halt in demand during lockdown led to a planned reduction in production by 225,000
oil barrels per day. It also trimmed the estimated capital expenditures by $2.3 billion in 2020 which were responsible
for higher revenue, followed by higher profitability. Re-opening of the European Union also appears as a risk as large
European oil companies target the clients of its competitors thereby increasing their global market share. Severe
reductions in the production coupled with loss of revenue due to weakening demand can have adverse effects on the
operations of the company and hamper its future growth estimates and long-term goals.

2. Clients, Products, and Business Practice including antitrust behaviour, market manipulation,
improper trade, or product defects –
In US, significant emphasis is placed on consumer protection by promoting competition amongst firms in an industry.
Antitrust laws take the form of three Acts – the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade
Commission Act, 1914.
In 2013, Zarco 66, a franchise of ConocoPhillips, offered E15 fuel (blend of gasoline and ethanol) to its customers
which could be used in any light-duty vehicle. To maintain the demand of premium gasoline, ConocoPhillips
threatened Zarco 66 to terminate the franchise contract by entering into a tying arrangement (purchase one unrelated
product as a result of purchasing the tying product). This was a violation of the Sherman Act and the Clayton Act. As a
result, the Renewable Fuels Association (RFA) proposed an investigation into “the oil industry’s highly discriminatory
and unlawful conduct”. Therefore, ConocoPhillips faces the risk of non-compliance of antitrust laws in its business
practices which could result in legal liability, compensation costs to the defendant party, damage to the brand image
amongst others.

3. Damage to Physical Assets including climate change, natural disasters, terrorism, or vandalism –
Proven reserves serve as economic assets for the Oil & Gas Industry. Natural disasters cause huge damage to assets
and numerous loss of lives to E&P Companies. They result in reduction in revenue, increased restructuring and
fixation costs, environmental liabilities, relocation expenses, fines, intervention which adversely impact the business of
the company. Due to their unexpected and uncontrollable nature and significant impact on operations, they form a part
of the operational risks of such companies.

In 2018, Saudi Arabia was responsible for 12% of the world’s oil production. The oil dispute in 2019 took a worse turn,
when two oil infrastructure facilities of Aramco (Kingdom’s national oil company) were attacked. The Kingdom lost 6%
of its global output owing to the drone armed attacks. Though, the prices of oil barrels soared as high as $71.95, they
adjusted to the prices seen in May as investors grew concerned over US trade wars with other countries and the
weakened demand of oil. The Asia-Pacific locations of ConocoPhillips suffer from the risks of damage to physical
assets costing millions of dollars due to natural disasters, terrorism, vandalism and trade disputes.

4. Employment Practices and Workplace Safety including discrimination, employee health and
safety or sexual harassment –
Due to the hazardous nature, the E&P companies is expected to implement safety programs which ensure strong
employee health measures, minimal loss of ecosystems and lives of the people.
The 2001 Humber Refinery Explosion that occurred in Saturate Gas plant area in England, fatally injured 2 people.
Health and Safety Executive (HSE) ordered ConocoPhillips to pay around 1 million pounds for failing to monitor the
refinery pipework’s degradation. The explosion led to temporary shut-down of the refinery and increased oil prices.
ConocoPhillips was sued for $297 million to compensate the environmental degradation due to 3 incidents of oil spill
in Bohai Bay in 2011. The spill led to public outrage on the company for the lack of clean up efforts. The company
then agreed to provide 1.3 billion yuan for improving the fishery resources and conserve fishery in the Bay area. While
the number of oil spills have decreased during the years, the fines have increased manifold which significantly impact
the cash-flow, dividends to be announced, future capital expenditures as well as adversely affect the brand image,
and act as a hindrance in the growth of the company.

5. Execution, Delivery, and Process Management including accounting errors, data entry errors,
failed mandatory reporting, inaccurate data science or negligence loss of assets –
Accounting errors lead to material misstatements on both assertion level and financial level. These errors affect the
accuracy and completeness of financial assets such as cash, financial liabilities and classes of accounts.
Such an accounting error in the company’s system led to a $1.3 million overpayment to a natural gas broker HIC
Energy Partners. After several failed attempts to recover the funds, ConocoPhillips filed a case on 12 th November
2019 against HIC Energy Partners with the US District court. Hence accounting errors, data entry errors as an
operational risk affect legal liabilities, damage reputation, impose regulatory fines and intervention due to
misstatements in accounts.

6. External Fraud including corporate espionage, hacking or third-party theft –

External fraud refers to intentional act to misappropriate the assets or cause reputational loss to a firm by a third party.
ConocoPhillips is mainly dependent upon its systems for the smooth functioning of its operations. Hence, it is
vulnerable to hacking, information theft by third parties and corporate espionage which result in billions of losses due
to loss of strategic data. In 2008, Hackers targeted six companies including ConocoPhillips and stole proprietary
information as well as topographical maps that located potential oil reserves and costed millions. While the
undisclosed attack took place in 2008, it was in early 2009 that FBI informed the companies regarding this
sophisticated industrial espionage. According to the study by antivirus McAfee, Intellectual Property estimated at $1
trillion was stolen globally in 2008 through cyberspace. Based on National Cyber Security Alliance, 60% of
businesses, particularly small and mid-sized were shut down in 6 months from the time of the cyber-attack. Growing
trade disputes further aggravate infiltration and exploit strategic information of large companies, costing them huge
sums of money, and in extreme situations, shut downs.
Hence, ConocoPhillips is highly susceptible to external frauds which have the ability to impair assets of million dollars
to zero such as the Intellectual property in the above case, loss of client trust due to perceived weak system security,
huge expenditures associated with purchase of a new antivirus software, legal costs etc.

7. Internal Fraud including breaches of confidentiality, bribery, embezzlement, or tax evasion –

Internal Fraud refers to intentional act to misappropriate the assets or cause reputational loss to a firm by an insider,
i.e. employee or key management personnel or promoters. ConocoPhillips offers tenders for provision of goods and
services to its suppliers. Involvement of both, demand and supply side employees in the tendering process makes it
vulnerable to corrupt practices. As such, there is a risk that to secure tender offers, contractors would engage in
bribing the company personnel or top management. The solicitor or receiver of the bribe is as legally responsible as
the offeror or giver. In 2014, UK Serious Fraud Investigation (SFO) initiated an investigation against bribes offered by
FH Bertling employees to ConocoPhillips employees for securing a freight forwarding contract amounting to $20
million and approving the inflated invoices. FH Bertling Ltd was fined approximately $1 million for the approval of
tender and the employees were fined $500,000 for bribery.
Employee theft in US resulted in business losses averaging to $1.13 million in 2016, as per Hiscox study. Employee
theft refers to embezzlement of firms liquid assets such as cash or assets for personal use. In December 2019, in a
complaint filed with the US District Court, ConocoPhillips sued a former employee and his family members for creating
a fake contracting firm and submitting fake invoices to the company. The total damages in the complaint amounted to
$7.3 millions. Thus, along with bribed acceptances of tender offers, it also suffers from the risk of fake contracting
firms, which constitute a part of internal fraud and lead to losses as funds are misappropriated, damage to reputation
in cases where bribes are accepted, and in turn lowers the operating efficiency and effectiveness of the firm.

8. Market volatility:
The E&P market is highly volatile in nature. The prices for Brent crude oil recorded their highest in 2013, at $108.56
per barrel, with the lowest in April 2020, at $18.38 per barrel. Trade disputes between countries, environmental
reforms, political laws, economic policies are the main causes of market volatility. Market volatilities, particularly US-
China trade dispute declined the Global GDP growth from 2.9% in 2018 to 2.3% in 2019. This led to a further decline
in Oil demand, which grew by half of the forecasted rate for that year putting pressure on OPEC to manage an
oversupplied market. US-Saudi Arabia dispute and Saudi-Arabia-Russia dispute regarding the oil industry has further
driven volatility in share prices of E&P companies. Lower demand due to volatile markets can reduce the production
level leading to negative impact on the revenue, free-cash flow, earnings, liquid funds, dividend allocation, insufficient
capital for exploring potential reserves, future impairments of assets and accelerated depletion of existing reserves.

9. Sector credibility in Energy Transition:

In 2013, ConocoPhillips was rated as the “Leakiest Company” by Climatewire, as it emitted more methane (more than
double) than any of its peers. The company also set up key performance metrics & targets to ensure reduction in
methane and GHG emissions. However, the E&P industry at large, has failed in influencing the mindset of investors
that it could lead the energy transition plans of various governments (EU’s Green Deal) to limit the global warming
efforts to 1.5 degree Celsius.

Decreased demand of their shares, especially by green investors, questions the credibility of the sector and adversely
affects its share price as was evident when the share price of ConocoPhillips fell from $58.44 in Feb 2020 to $26.84
on 18th March 2020 (45% decline). Thus, it lowers the probability of additional financing which affects the future
viability of the company due to the “High-risk sector” perceptions by investment bankers, analysts, funds and market in
general.

10. Non-compliance risks:

As environmental regulations and laws increase, the risks of non-compliance increases, particularly for hazardous
industries including exploration and production industries. The total fines imposed by several regulators on
ConocoPhillips during the period 2000 to 2015 amounted to $275 million, mainly due to environmental and rail-road
safety violations. Even as ConocoPhillips established key metrics to measure its GHG and methane emissions, it still
remains the highest methane emission producer thereby attracting large fines, penalties and interventions. Significant
non-compliance can also lead to banning the operations of the company.

Conclusion:
The magnitude of losses arising due to these risks along with the reputational loss acts as a threat to the survival of
companies. Even though ConocoPhillips enjoys a stable position in the market due to its liquidity, repetitive
unfavourable events and non-compliance of several regulations will cause cash shortages, hindered growth and may
even impact the growing concern of the company.

References:

https://www.biofuelsdigest.com/bdigest/2013/03/20/antitrust-complaint-against-conocophillips-filed-over-anti-
competitive-activities/

https://www.bloomberg.com/news/photo-essays/2011-09-20/famous-cases-of-corporate-espionage

https://www.securitymagazine.com/articles/90493-cyber-attacks-cost-45-billion-in-2018

https://www.cnbc.com/2019/10/13/cyberattacks-cost-small-companies-200k-putting-many-out-of-business.html

https://www.businesswire.com/news/home/20200416005617/en/Impact-COVID-19-Global-Oil-Industry--

https://www.hydrocarbons-technology.com/news/covid-19-conocophillips-to-slash-spending/

https://www.csmonitor.com/USA/2010/0125/US-oil-industry-hit-by-cyberattacks-Was-China-involved

https://fcpablog.com/2019/06/03/sfo-fines-fh-bertling-1-million-for-freight-contract-bribes/

https://www.securitymagazine.com/articles/88432-employee-theft-costs-us-businesses-50-billion-per-year

https://www.adn.com/business-economy/energy/2019/12/13/conocophillips-says-a-former-employee-worked-with-an-
anchorage-police-officer-and-others-to-steal-more-than-7-million-from-the-oil-company/

https://www.scientificamerican.com/article/conocophillips-is-the-leakiest-gas-company/

https://www.statista.com/topics/1706/oil-and-gas/

https://www.statista.com/statistics/192910/value-added-by-the-us-oil-and-gas-extraction-industry-since-1998/

https://www.statista.com/topics/1706/oil-and-gas/

https://www.eia.gov/tools/faqs/faq.php?id=709&t=6

https://www.forbes.com/sites/kenrapoza/2012/04/30/conocophillips-pays-up-297-mln-for-china-oil-
spill/#79d501693298

https://www.forbes.com/sites/woodmackenzie/2019/12/13/what-are-the-5-key-risks-facing-the-energy-sector-in-
2020/#49f2b60b198a

https://www.livescience.com/414-scientists-natural-disasters-common.html

https://csis-prod.s3.amazonaws.com/s3fs-public/180308_Significant_Cyber_Events_List.pdf?

https://legalnewsline.com/stories/520344133-conocophillips-alleges-natural-gas-broker-took-more-than-1-million-by-
creating-false-invoice

https://violationtracker.goodjobsfirst.org/parent/conocophillips