| Notes for remarks by G.E. Bezaire, Director, Corporate Planning & Communications, Imperial Oil Limited, to the Scotia Capital Integrated Oil Conference, Toronto, Ontario, February 17, 2004.
| | Toronto, ON | February 17, 2004
| Audio web cast:
Scotia Capital Integrated Oil Conference February 17, 2004 9:00 AM - 12:00 PM ET
Listed below are the presentation slides of G.E. Bezaire in the February 17, 2004 Scotia Capital Integrated Oil Conference:
Slide #1 - Title page
- Good morning. I'd thank the organizers for the opportunity to meet with you today.
Slide #2 - Disclaimer
- I remind you that this presentation contains forward-looking information. Actual results could differ materially due to changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.
- Let me now broadly outline the scope of Imperial Oil.
Slide #3 - Imperial Oil Limited
- Imperial was founded in 1880 and is Canada’s largest integrated oil company - with interests in oil and gas production, refining, marketing and petrochemicals.
- The company's market cap is about 20 billion Canadian dollars. All numbers in this presentation are in Canadian dollars.
- Imperial is an affiliate of Exxon Mobil Corporation, which owns 69.6 percent of the outstanding shares.
- The company is one of the largest producers of crude oil in Canada and a major producer of natural gas.
- Imperial is the largest refiner and marketer of petroleum products in the country, supplying about 25 percent of total demand.
- And the company's polyethylene operations are among the most cost-competitive in North America.
- Much of my presentation today will focus on the upstream, which we see as an area of significant future growth.
- But let me start with a few introductory comments to set the stage.
Slide #4 - Disciplined Management Approach to Grow Shareholder Value
- Our business model is designed to look beyond short-term fluctuations and to focus on the long-term fundamentals.
- This disciplined investment approach coupled with a focus on operational excellence and quality returns on capital employed has led to superior results.
Slide #5 - Consistent Strategic Focus
- Imperial has a solid track record of enhancing shareholder value through a sustained emphasis on four corporate priorities.
- The first priority is to achieve operational excellence and strive for flawless execution in all we do. This means carrying out the day-to-day fundamentals of the business better than the competition -- ranging from safe and reliable operations to providing our customers with high quality products and services.
- A second priority is to grow profitable sales volumes. For example, in 2003, we ramped up production from phases 11 to 13, a major heavy oil expansion at Cold Lake.
- A third corporate priority is to achieve and maintain a best-in-class cost structure in every part of the business. Many of our business units have already achieved a cost level that is best-in-class today, and all business units are relentless in their pursuit of further cost structure improvements.
- The fourth priority is to improve the productivity of our asset mix. This includes further investment in high-performing assets, divestment of non-core assets and acquisition of new opportunities.
- I believe it is the commitment, over many years, in the execution of these strategies that distinguishes Imperial Oil.
Slide #6 - Leveraging the ExxonMobil Relationship
- We are also aided in the execution of our corporate priorities in that one of our shareholders is a global leader in the energy business.
- Our relationship with ExxonMobil provides us with leverage unavailable to most of our domestic competitors.
- Imperial has about 200 employees, including 25% of our executives, working outside the country. This international exposure combined with extensive training provides unparalleled human resource depth and strength. And when activities are undertaken which are outside of our day to day expertise, we have access to ExxonMobil's world-class skills.
- Imperial has both access to and participation in global centres of excellence. These centres in locations such as Bangkok and Curitiba in Brazil, are charged with driving down the cost of essential services such as information systems and procurement.
- Imperial has undertaken research in Canada for decades. But in addition, we also participate in all of ExxonMobil's research at a cost much less than if we were to do it on our own.
- ExxonMobil's procurement clout enables Imperial to purchase goods, such as the gas turbines for cogeneration units, at preferred rates.
- Our management systems are honed by worldwide practices. And we also have access to all global best practices.
- All in all, we get tremendous leverage from our ExxonMobil relationship.
- Turning to cash flow ...
Slide #7 - Effective Use of Cash Flow
- Our industry leading returns have delivered consistently strong cash flow. And cash flow has been relatively strong through both the peaks and valleys - we have not lacked cash for quality opportunities.
- A large portion of our cash has been reinvested back into the business. These investments are expected to generate double digit returns.
- When surplus cash is generated, we don't water down our investment criteria in the belief that we must find ways to spend it.
- Rather we return it to shareholders through dividend payments or share repurchases.
Slide #8 - Increasing Investment Opportunities
- Our financial strength enables us to invest in quality opportunities in good times and bad. And because we take a long-term view, we are selective about the investments we advance and disciplined in their execution.
- Our portfolio of quality opportunities has driven capital spending from $1.1 billion in 2001 to $1.6 billion in 2002 and $1.5 billion last year. This represents a level of investing more than double that of the 1990's. It also represents more than twice the current rate of depreciation and depletion.
- These investments maintained and expanded crude oil and natural gas production, upgraded refineries to meet low sulphur fuel requirements and improved the productivity of the company's service station and rural distribution networks.
- Capital and exploration expenditures for this year are expected to total about $1.5 billion and will be financed from internally generated funds.
Slide #9 - Double-Digit Returns
- In our drive to enhance shareholder value, we strive for continuous improvement in business results - and in doing so improve the bottom line.
- The blue bars on this graph show Imperial's total earnings for each of the past ten years. Earnings in 2003, at over $1.6 billion and $4.52 per share were the highest ever.
- The red line shows return on average capital employed over the same period. You will note the significant improvement in both earnings and return on capital. You will also see that earnings will exceed 1.2 billion dollars for four straight years.
- The yellow squares show the average return of all Canadian integrated oil companies (including Imperial) over the same period. Imperial has consistently outperformed its peers since the mid-1990’s.
- Our shareholders have benefited from this performance.
Slide #10 - Delivering Shareholder Value – TSX
- Good value continues to be delivered to shareholders, certainly in 2003 but over the long term as well.
- The bar chart on the left compares Imperial's returns to shareholders with both the Toronto Stock Exchange energy index and the composite index. Imperial’s total return to shareholders, including dividends and share price appreciation, was 31% percent in 2003.
- More importantly, our total return has averaged 21 percent over the past 5 years and 18 percent over the past 10 years. For comparison, the TSX composite index and the TSX energy index are shown for the same periods.
- Let me turn now to comments on the components of the business starting with the downstream.
Slide #11 - Market Leader in the Downstream and Chemicals
- With retail sites in every province marketing Esso gasoline, we're well known to consumers. We have the leading retail market share in Canada at over 19%, and we've increased that position in each of the last two years as we've continued to enhance our offer.
- But with over 700 products used for transportation, heating, and industrial purposes, we're more than just a marketer of gas.
- We are the largest refiner in Canada with over five hundred thousand barrels per day of capacity with facilities in Western Canada, Central Canada and Eastern Canada.
- Because of our industry leading research in Sarnia, Ontario coupled with manufacturing and technical capability, we have the number one position in finished lubricants at 30%. And we are the only Canadian company with manufacturing, blending and packaging capability for lubricants in both the east and the west -- a key advantage.
- We have the largest share of the domestic solvents market in Canada at close to 50%. These products have a multitude of end uses and are found for example in adhesives and paints. And when you buy a bottle of Varsol, that is not a product name, that is our brand name!
- And we have the #1 North American market share for the two key end use polyethylene segments that we participate in -- rotational molding applications and injection moldings. If you buy a Little Tyke toy, that's a rotationally molded product made with our polyethylene resin. If you buy any of Rubbermaid's products, those are injection molding products made with our resin. How have we captured such a large share of the North American market? Our facility in Sarnia is in the heart of the polyethylene end user market. 70% of the demand for polyethylene in North America is within one days trucking from Sarnia.
Slide #12 - Financial Performance - Products and Chemicals
- Despite our good position, success does not come easily in this business. These are mature markets with growth rates comparable or a little less than the increase in Canada's GNP. Competition, much of which is in the room this morning, is tough. And margins typically decline year over year.
- Our focus has been to deliver self help by growing sales, reducing costs, shrinking working capital, divesting underperforming assets or businesses and deploying new capital effectively.
- This chart shows how we've been doing. It highlights earnings and returns for the products and chemicals business.
- Both earnings and return continue to improve. And, in spite of the recent ramp up in our Capex for new low sulphur fuel facilities in our four refineries, we continue to generate free operating cash for other corporate needs.
- Turning now to the upstream ...
Slide #13 - Upstream Best in Class Strategies
- Our upstream strategy is based on straightforward business fundamentals that have stood the test of time.
- We work at continually improving our base operations.
- And we also invest in quality opportunities.
Slide #14 - Industry-Leading Canadian Reserves Position
- Looking at one element of our current upstream business, this chart compares proved reserves in Canada with those of our competitors. Liquids are shown in green and gas in gold.
- At year-end 2002, Imperial's total stood at 2.2 billion oil-equivalent barrels with a reserves life index of 18 years. The oil sands account for about 80 percent of Imperial’s proved reserves. We don't yet have enough information to compile this chart for 2003 but preliminary data would suggest that Imperial's leading position has not changed.
- Our goal is to maximize the value of these assets by improving base operations.
- Our objective is to have a best in class cost structure. But the focus is not only on cost, it's on operations excellence, reliability, productivity and growing volumes.
- These proved reserves do not include a number of significant resource addition opportunities that Imperial is currently advancing. It's our resource base which represents more than four times our proved reserves that provides opportunity for the future.
Slide #15 - Positioned to Continue as Upstream Leader
- Imperial has a tradition of leadership in the upstream industry, and is strongly positioned to continue as a leader in development of the areas that represent the future of Canada's upstream.
- In the oil sands of northern Alberta -- an area in which Imperial has long been dominant -- we have the wholly owned Cold Lake in-situ operation, a 25-percent ownership position in Syncrude Canada, and a new opportunity, still in its early stages -- the Imperial-operated Kearl oil-sands mining project.
- In Canada's Far North, Imperial holds half of the total discovered, on-shore natural gas resource and is leading the group advancing development of the Mackenzie Gas Project.
- Off Canada's East Coast, we hold an interest in the Sable offshore and a strong exploration position in the deepwater. And in December last year, we acquired an interest in eight deepwater leases in the Orphan Basin, off the coast of Newfoundland.
- I will now address each of these areas.
Slide #16 - Imperial’s Oil Sands Production
- This map shows the location of the major bitumen producing areas in Alberta and the extent of the oil-sands deposits. Recovery techniques range from surface mining to steam stimulation, depending on the depth of the oil sands deposit.
- The yellow symbols illustrate the existing operations at Cold Lake and Syncrude.
- The yellow arrow points to the location of our latest initiative, the Kearl oil-sands mining opportunity.
- Now, I'll discuss each of these opportunities, starting with the success we've achieved with the in-situ development at Cold Lake, and future plans to further grow production.
Slide #17 - Cold Lake Overview
- Imperial's 100-percent owned and operated Cold Lake development is a premier oil-sands asset. It is the largest in-situ recovery operation in Canada and one of the largest thermal operations in the world.
- We now operate 13 phases of commercial production -- including a $650-million, three-phase expansion that started up at the end of 2002, as shown in the two photos on this chart.
- We have been very deliberate - and successful - in pursuing a phased development approach at Cold Lake. This approach has enabled us to maximize value and minimize the risks associated with a development of this size. Phased development has also enabled us to bring on new volumes as market conditions allow, using the most advanced technology available.
- The Cold Lake leases were acquired by Imperial over 40 years ago. This was a vast resource, but with the technology available at the time, there was little to indicate that it would ever be commercially viable. At the time, oil was $3 U.S. per barrel, and Cold Lake was hundreds of kilometres from any pipeline infrastructure.
- Pursuit of this opportunity is indicative of the long term disciplined perspective that the company takes toward opportunities. Delineation drilling began in the early 1960s and research began with mathematical and laboratory models, and our first field pilot in 1964.
- Imperial operated a number of field pilots during the 60s and early 70s, and the importance of these pilots cannot be overstated. They gave us the confidence to move forward with large-scale development.
- Shipments of bitumen blend from Phases 1 and 2 of our commercial project started in July 1985. Matching increases in bitumen demand, 10 phases were in operation by 1995.
- The latest expansion - phases 11 to 13 - started up in late 2002.
- Cumulative investment in Cold Lake to date is about $2.6 billion (CDN).
- Throughout this period, we maintained a proprietary research program, developing technologies such as cyclic steam-stimulation, once-through steam generation from produced water, produced water treatment and recycling, and the pad drilling concept, which reduces cost and environmental disturbance.
Slide #18 - Cold Lake Production
- The cyclic steam stimulation recovery process used at Cold Lake is efficient and effective. But there is one significant difference from other technologies. Because wells cycle from steam injection to production, there is more variation in production rates than in conventional fields.
- The graph shows total bitumen production over the past 10 years, with a projection for the expected variability in the near-term future.
- The average annual production growth over the past decade has been about five percent per year illustrated by the dashed grey line. Within that overall growth, however, there is significant bitumen production variation. It's not uncommon to experience changes in production of as much as 20,000 barrels a day from one quarter to another.
- The bottom line is that, despite the cyclic variation in production, Cold Lake has provided and will provide long term production growth.
Slide #19 - Cold Lake Development Plans
- As I mentioned earlier, we have been deliberate - and successful - in developing Cold Lake on a phased approach. This has enabled us to use the latest technology on new pads and manage market risks.
- This map shows the locations of our current operations, as well as those of some proposed expansions.
- Phases 11-13 shown by the green symbol were started up, on-schedule and on-budget. The 250 million barrel expansion includes more than 500 wells, drilled from 21 surface pad locations, and new steam-generation, oil processing and electrical cogeneration facilities. The 170-megawatt cogeneration plant will meet all of the electrical needs for the entire Cold Lake operation for the foreseeable future.
- We have a significant development drilling program underway for 2004 within our approved development area, outlined in red, with over 300 wells planned.
- In 2002, we applied for regulatory approval for two additional expansions, shown by the green areas. These expansions will add 350 million barrels of proved reserves and, when implemented, will increase Cold Lake production to as much as 180,000 barrels per day.
- We're also pursuing capacity enhancement initiatives aimed at debottlenecking our existing operations. We believe there are significant incremental gains to be made from optimizing the natural synergies and efficiencies of the four existing plants.
Slide #20 - Syncrude Development Plans
- Imperial has a 25-percent ownership of Syncrude Canada Limited, Canada's largest oil production operation and the largest oil-sands project on the planet.
- Imperial became involved in the Syncrude Project in 1959. Design and construction occurred in the mid 1970's with initial production in 1978.
- In 1996, the Syncrude owners embarked on a multi-phase expansion program. The first two phases of this expansion -- the North mine and the Aurora mine and upgrader debottleneck -- were completed in 1998 and 2000, respectively.
- In 2001 the Syncrude owners approved the Aurora 2 mine and Upgrader expansion, which includes the addition of a third, 100,000-barrel per day fluid coker. This expansion will also improve crude quality and value in the marketplace.
- The Aurora 2 mine is now in operation and was within budget and on-schedule.
- The upgrader expansion is 30% complete and will start up in 2005.
- In the last quarter of 2003, we experienced cost pressures on the upgrader, exacerbated by the unplanned shutdown and turnaround of one of the existing cokers. A team is currently in place updating costs and initiatives to manage the remaining work.
- A team is currently in place updating costs for the remaining work.
Slide #21 - Kearl Oil Sands Project
- While Cold Lake and Syncrude are the cornerstones of our current oil-sands business, Imperial also has extensive oil sands interests outside of these areas.
- This map shows one of these, the Kearl area northeast of Fort McMurray and Syncrude. Imperial holds 100 percent of the two leases on the right, 87 and 6, and ExxonMobil Canada owns the rights to lease 36.
- Several years ago ExxonMobil Canada initiated work on development of a mining and upgrading project on Lease 36.
- Imperial and ExxonMobil Canada are now progressing work on a potential joint mining development on these leases, with Imperial acting as operator for the joint venture.
- We are drilling 200 core-holes this winter to delineate the resource potential on the Imperial lease areas. The red triangles indicate the extent of this winter's program.
- We've also initiated baseline environmental work, launched a public consultation program and begun conceptual engineering.
- We expect this corehole drilling will verify that there is sufficient resource on these leases to support production rates of 200,000 barrels per day or even higher.
- However, our expectation is that this asset too will be developed in a phased manner.
- We're evaluating a range of upgrading options, from partial upgrading on-site to potential integration with North American refineries owned by Imperial and ExxonMobil.
- An important unknown at this time is the impact of Kyoto compliance. Clearly, this, along with many other technical and commercial factors, must be fully understood prior to making a development decision.
- Now I'd like to turn to Imperial's large gas resources in Canada's Far North.
Slide #22 - Mackenzie Gas Project - Regulatory and Engineering Work Progressing
- As many of you know, development of gas in the Mackenzie Delta has been considered since the 1970s, when large on-shore gas reserves were discovered.
- Many of you are familiar with this initiative. I do want to emphasize that, from the outset, we have maintained that Aboriginal support is essential to any Mackenzie gas development. And to date, we've had strong support.
- This chart summarizes the concept being advanced by the project co-venturers -- Imperial, ExxonMobil Canada, ConocoPhillips, Shell Canada, and the Aboriginal Pipeline Group. Imperial is the project lead and operator.
- The project includes development of Canadian onshore gas, with three anchor fields. Imperial's 100-percent owned Taglu field contains approximately 3 TCF or 50 percent of the onshore discovered resources.
- As shown in red on the map, a gas pipeline will run from the Arctic and connect into existing infrastructure in Alberta. A liquids line will run to Norman Wells where it too will connect to existing infrastucture. Both pipelines will run along the east side of the Mackenzie River.
- The pipelines using proven technology will be buried to minimize the environmental footprint.
- Recognizing that additional natural gas has been, and will be, discovered, this concept is expandable and accessible to others.
Slide #23 - Mackenzie Gas Project - Recent Highlights, Ongoing Activity & Plan
- So, with that basic understanding, let me say a few words about where we are today and what lies ahead.
- The proponents have engaged in extensive consultations -- over 500 meetings -- with a wide variety of interested parties -- including Aboriginal leaders, communities, governments, regulators, explorers and pipeline companies. And this process will continue.
- Regional offices have been opened in Inuvik, Norman Wells and Fort Simpson. Thirteen community representatives have been hired for outlying areas. This consultation is an important measure. One of the strengths of our initiative is that we have maintained significant Aboriginal involvement with the project. .
- Mid last year, the APG funding issues were resolved and the Preliminary Information Package was submitted to the various regulators.
- This was a significant step forward for the Mackenzie Gas Project. The commercial agreements enabled the APG to become a full participant in the Mackenzie Valley Pipeline. And it allowed the project to move forward with the work required to support preparation and filing of the regulatory applications.
- Under the category of ongoing activity:
- We are collecting geotechnical and field data in some areas not addressed by previous programs.
- We are actively gathering baseline environmental data.
- We are progressing benefits and access agreements and continue to progress pipeline commercial agreements with potential shippers.
- The Mackenzie Gas Project proponents continue to advance work to support filing regulatory applications in this year. The specific timing will be dependent on the support and cooperation of all parties -- including the project proponents, regulatory authorities, landowners and governments.
- For those of you interested in more detail on the project, information is available on-line, at www.mackenziegasproject.com.
- Turning to the East Coast
Slide #24 - East Coast
- Imperial holds a nine-percent working interest in the Sable Offshore Energy Project, which started production in late 1999.
- Production from the Alma field began in November 2003 and will help maintain existing production levels for the Sable project.
- Development of fifth field Venture is expected to be completed in 2006.
- In addition, Imperial holds interests in the exploration rights of eleven offshore parcels in the vicinity of the Sable project.
- Offshore Newfoundland, last December, Imperial acquired a 25-percent interest in the exploration rights for eight deepwater parcels in the Orphan Basin.
- Recognizing the positive long term fundamentals of our industry, that is increasing demand for energy products, we continue to have interest in untested basins that have favourable, albeit untested, play elements.
Slide #25 - Production Outlook
- This chart illustrates an oil-equivalent production outlook for Imperial. (Production volumes are Gross, Before Royalty)
- The graph on the left illustrates our near-term growth profile, with our conventional oil and gas operations in Western Canada in red on the bottom, and the oil sands operations in green on top.
- The bar on the far right is a projection of potential production by 2012. The lower red portion of this bar shows the contribution expected from our conventional oil and gas business -- essentially our conventional business in Western Canada, and gas volumes from the Sable project.
- As you can see, our conventional oil and gas volumes are expected to decline significantly toward the end of the decade. However, this decline should be more than offset by growth from the oil sands and Mackenzie Gas.
- I want to point out that there is essentially no resource risk for all components of this long-term projection, except for the top, red cross-hatched portion, representing exploration opportunities, such as the East Coast deepwater play, and other potential new additions.
- Obviously, this timing and volume projection is dependent on a number of factors. But what this projection illustrates is that Imperial's resource base is such that we could potentially see our production volumes nearly doubling over the next 10 years.
Slide #26 - Strongly Positioned for the Future
- Let me close with a summary of the key points that distinguish Imperial.
- Our financial position is rock solid and we possess a highly disciplined management approach focussed on growing shareholder value.
- Our earnings are strong and our returns are the highest of the Canadian integrated oil group.
- We constantly pay a dividend that has increased nine years in a row and have bought back more than 35 percent of our shares.
- Our resources base represents more than 100 years of production.
- We have an excellent base of technology with a high commitment to research and technology development.
- Our focus is on long term earnings growth.
- And not listed on the chart, but the essential element for converging all of these attributes to shareholder value, is our talented, engaged and innovative workforce that delivers superior results.
- And now I will be pleased to answer your questions.
|
|  |  |
