EXECUTIVE Q&A: Conoco executive discusses the downstream sector

OGJ Online Managing Editor Anne Rhodes interviewed Jim Nokes, executive vice-president of refining, marketing, supply, and transportation for Conoco Inc., on Apr. 26 in Houston. Here's what Nokes had to say about the difficulties US refiners are facing and the strategy Conoco is using to succeed in that sector.


OGJ Online Managing Editor Anne Rhodes interviewed Jim Nokes, executive vice-president of refining, marketing, supply, and transportation for Conoco Inc., on Apr. 26 in Houston. Here's what Nokes had to say about the difficulties US refiners are facing and the strategy Conoco is using to succeed in that sector.

OGJ Online: What are the biggest issues US refiners are facing at the moment?

Nokes: The biggest issues right now are clean fuels, MTBE, community relations, and the New Source Review initiative by the US EPA. Those are all relatively near-term. Longer-term ones are the direction of transportation fuels and continuing margin pressure.

OGJ Online: With regard to clean fuels, is sulfur the most important pending change?

Nokes: The industry will now be working to reduce gasoline sulfur from 300 ppm to 30 ppm, average, by a phase-in time that will be either 2004 or 2006. The diesel sulfur rule is being discussed. It is a significant issue in the industry because the technology to reduce sulfur in diesel is a bit more challenging than removing sulfur from gasoline. There is some variability in gasoline solutions, too. We have known technology and emerging technology. Unfortunately, the EPA rule probably doesn't give us enough time to take advantage of emerging technology to the extent that we could have, had we been given another couple of years to prepare.

OGJ Online: What are some of the emerging technologies?

Nokes: Most of the technologies are catalyst-related improvements that allow refiners to not lose as much octane in the sulfur-removal process and use typically less-severe operating conditions, whether it be temperatures or pressures.

OGJ Online: What makes diesel more challenging?

Nokes: It may be that there has not been as much work done on diesel desulfurization, and we rely more on conventional technology. I believe that we will see some improved technology brought to bear on distillate, but, unfortunately, I'm worried about the timing of that also.

OGJ Online: What is Conoco's situation regarding reformulated gasoline production and MTBE use?

Nokes: We're not a big player in RFG. Only about 4% of our gasoline contains MTBE. We do use ethanol also. In terms of units, we just have small MTBE units in Ponca City and Lake Charles�very small units. So we're kind of a bit player.

We're presuming that MTBE will leave the gasoline pool, and at this point, given public concerns, I think it's prudent that MTBE leave the pool. I do think that a lot of those concerns are not necessarily founded in science, but given the public concerns, it will probably leave the pool. In our particular case, we're not overly concerned about that and would like some certainty about where we're going with oxygenates.

We do believe that the federal government being prescriptive about what refiners put in gasoline is not the most effective approach. A prescriptive kind of solution vs. a performance-based solution just doesn't allow refiners to optimize and lower costs. And we think that's particularly the case with all oxygenates.

OGJ Online: It seems like, if the EPA had let refiners to find the best way to make cleaner-burning gasoline when all this started, you wouldn't be in this mess now.

Nokes: You're exactly right.

OGJ Online: So until there's more information forthcoming about the details of the rule, you can't say how you're going to adjust to it?

Nokes: We really would like to see a performance-based rule. I think as an industry, and certainly I personally, get frustrated with the political issues around oxygenates�specifically ethanol. I question its economic viability without the government subsidies.

When you think about what the government is looking at�taking oxygenates out or mandating oxygenates without MTBE, which means ethanol [will be used]�we may get into a situation where the ethanol industry actually expands, which is costly.

We take MTBE out of the refineries, which is costly, and the US government increases its subsidies to ethanol producers, which is costly. So it may be a very expensive political solution to an issue that would be best left to a performance-based specification rather than a prescriptive one.

Subsidies will increase dramatically if the government moves to an oxygenate mandate.

OGJ Online: EPA's re-evaluation of the New Source Review rule is an issue that has arisen recently. It sounds like that could have an enormous effect on refiners.

Nokes: It is unclear what is going to happen with NSR. The EPA has requested data from several refiners, including Conoco, related to projects undertaken over the last 20-30 years to verify performance vs. emissions standards. One of the things that concerns refiners most about New Source Review is the shifting interpretation of the Clean Air Act and the change in methodologies.

OGJ Online: How are community relations changing for Conoco?

Nokes: For over a decade, we've had citizens' advisory panels at all of our refineries. We continue to work very hard to make very positive relationships with communities. Our view is that we're only in a location at the invitation of the community. It's not a regulatory or legal thing; it's more that you want to be a good corporate citizen. I think our advisory panels have helped us understand community issues, and we've worked hard to maintain a positive contribution to the community.

We've equally worked hard on our safety performance, and our company is known to be one of the safer operators in our industry. Every time there is a significant safety failure in our industry, it reflects poorly on the entire industry. In my view, it can lead to irrational behavior by communities. So it's extremely important, whether it be in the transportation business with pipelines or refineries or the local service station, that we really work diligently to keep our relationships solid. As an industry, we have more work to do there, and certainly we'll continue to work on that.

For our marine operations, we have an all double-hulled tanker fleet [of seven vessels]. And also our entire fleet of domestic barges�about 20�is doubled-hulled. The double-hulls have been really a nice success story for us. We've had two instances�one when one of our double-hulls hit an uncharted rock in a navigating channel estuary in France. It actually pierced the outer hull but not the inner hull, so we didn't have a spill. The second one was when a tanker was berthed at our Lake Charles refinery docks, and an out-of-control barge side-swiped the hull, ripping a gash in the side of the vessel that was some 5 ft tall and 100 ft long. The vessel was fully laden at the time, and we didn't spill a drop.

We basically reduce our environmental and safety focus to very simple terms: Don't spill a drop, and no one gets hurt.

OGJ Online: Conoco posted its highest earnings ever in the first quarter, and your downstream earnings were up 35% vs. the same period last year.

Nokes: We had a really good first quarter in Europe. The Humber refinery performed very well, and we're enjoying reasonable margins again for the first time in several years in Europe. We have good refineries in the US, but because of the crude margins and relatively long crude supply lines, our margins are squeezed much more.

OGJ Online: What are your major crude sources?

Nokes: In Europe, we run quite a bit of high-acid crudes, and the balance is North Sea sweet. At Karlsruhe, [Germany], we have a little more sour capabilities, and we process more sour crudes. In the US, our offshore crudes come primarily from Venezuela and Mexico. Our Lake Charles refinery has a lot of coking capacity to enable it to handle those crudes. The Denver and Billings refineries process crudes primarily from Canada. And the Ponca City refinery runs largely local crudes, although it can also get supplies from Canada, and from offshore via pipelines from the Gulf Coast.

OGJ Online: How has the merger and acquisition trend affected competition in the industry as a whole? Has it made Conoco look at possibilities in that area?

Nokes: Well, we continue to look. I think that we can be very viable and very value-added for our shareholders at our current size. From a size standpoint, it's interesting. A lot of companies got together to take advantage of size, but if you look at some of the new technology developing, it's allowing everyone access to those advantages of size. Take, for example, the recently announced venture on procurement in which we and eight or nine other international oil companies agreed to participate. [Editor's note: The venture now has 14 members, but Conoco was one of 10 founding companies.] We'll have the same buying power as those very large companies, but yet we'll have a size that we think will enable us to act much more quickly.

So some of the new technologies that are just now starting to come into play might make it more certain that a mid-sized player can be very effective. And when you have a very nice discovery, or a nice opportunity develop�such as Petrozuata [the extra-heavy oil project in Venezuela], or our carbon fibers business that we're developing now�it can be significant enough to really make a difference in the company. With these larger companies, they really have to do something off-the-scale to be able to impact their...shareholders. So, actually we like our size. Having said that, we continue to look at opportunities...

Conoco's downstream business
Conoco has extensive downstream operations in the US and Europe and start-up operations in Asia. It has four wholly owned refineries in the US�at Lake Charles, La.; Ponca City, Okla.; Commerce City, Colo.; and Billings, Mont.�and a wholly owned plant in the UK, the Humber refinery at South Killingholme, England. It owns interests in three joint-venture refineries in Europe�two in the Czech Republic and one in Germany�and a stake in a jointly owned refinery in Malaysia. These refineries have about 900,000 b/d of capacity, net to Conoco.

Conoco's retail products marketing system comprises about 5,000 outlets in the US, 3,000 in Europe, and 125 in Asia, mostly in Thailand. The firm is in the process of establishing a retail chain in Malaysia that will consist of 100 outlets. In the US, Conoco's sales are primarily wholesale-focused. The firm also has an extensive products pipeline system in the Midcontinent and Rocky Mountain areas.

Biography
J.W. (Jim) Nokes is executive vice-president of refining, marketing, supply, and transportation, for Conoco Inc., Houston. Nokes has been with Conoco since 1970. He has held various administrative, planning, and management positions with the firm over the years, and in 1994, he was appointed vice-president of refining and marketing�North America. He was promoted to his current post in 1999.

Nokes has a BS in business administration from Fort Hays State University in Kansas and an MBA from the University of Arkansas.

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