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J. Michael Yeager, senior vice-president and director, Imperial Oil Limited,
speaks to the Raymond James Oil Sands of Canada Conference.
| | New York, New York |
May 9, 2005
| Listen to the archived
version of the webcast.
Download J. Michael Yeager's remarks and slides in Adobe PDF format.
Good afternoon. It's a pleasure for me to be here today, and I want to thank
Raymond James for this opportunity.
As you know Imperial is a
pioneer in the development of Canada's oil sands. We have a wealth of
expertise and experience, an industry-leading commitment to research and
technology development, and a lease position in the oil sands that's second to
none.
So, I'm pleased to take a few minutes today to discuss
Imperial's large asset base, some of the challenges and opportunities
associated with the further development of Canada's oil sands, and remind you
of Imperial's unique approach that we feel has given us, and will continue to
give us a leading position in Canada's oil and gas industry.
I want to leave you with one clear message -- Imperial has been the leader in
Canadian oil sands development, and we have strategies and plans in place to
maintain this leadership position as the oil sands move to centre stage in the
global energy picture.
Let me begin by briefly setting this
stage.
As has been discussed, Canada holds a significant advantage in its endowment
of hydrocarbon resources, especially in the Alberta oil sands. While
significant quantities of conventional oil resources remain, about one
trillion barrels have already been produced and new production is increasingly
in more marginal areas. I know, I have worked in most of these areas.
In contrast, the roughly four trillion barrels of heavy oil and oil sands has
barely been scratched. Canada's portion of the known oil sands is significant.
A recent study by the Canadian Energy Research Institute put the volume of
bitumen in-place in Canada at 1.6 trillion barrels -- a major resource from
any view.
Of course, how much of that resource can be
technically and economically recoverable will depend upon a host of factors.
The challenge is to develop these new supplies in a timely, cost-effective and
environmentally sound manner.
My next chart outlines some of
the investment attributes and challenges of oil-sands development.
Let me begin with some of significant advantages of oil-sands development.
First, as the location and extent of the oil sands are clearly defined, there
is no exploration risk. And as I stated earlier, these resources are truly
enormous -- billions of barrels of recoverable resource. This translates into
very long-life production, with significant potential for improvement in
overall profitability through technology development.
Among
the more significant challenges is the fact that the oil-sands business can be
a high cost proposition -- particularly for bitumen to be upgraded to light
sweet crude oil.
Development of large-scale oil-sands
operations have capital costs that are typically several billion dollars --
among the most expensive oil and gas developments in the world. They are also
among the most complex onshore operations in the industry today -- highly
technical, large workforce, remote and huge logistical challenges.
Production costs and daily operating expenses can also be high when compared
to other sources of production.
The size, cost and complexity
of oil-sands development translates into long development cycle times --
typically five to seven years -- or more for pay-out -- leading to a
significant exposure to factors such as commodity price and market
fluctuation. So, it's best to know what you're doing when you get into this
stuff.
Now, before I discuss Imperial's oil-sands operations
and opportunities in detail, let me provide a very quick overview of the
company as a whole.
Imperial is Canada’s largest integrated oil company with interests from oil
and gas production to refining, marketing and petrochemical manufacturing.
Our market capitalization exceeds $30 billion (Cdn.), and our financial
strength is unequalled in the industry. The company has earned and sustained a
triple-A credit rating by Standard and Poor's -- the only Canadian industrial
with this rating.
We have a uniquely disciplined investment
approach that translates to leading returns on capital employed while
maintaining sustained growth in shareholder value. We pride ourselves on
flawless execution and having the best technology in the industry.
Using this approach, over the years we have built a large profitable company
and have an enormous asset base yet to be developed. At year-end 2004,
Imperial's total proved reserves stood at about 1.7 billion oil-equivalent
barrels (before 2004 year-end price revision) and a remaining reserve life, at
today's production volume, of 15 years. And if you think that is big, and it
is, our current non-proved resource base is six times larger than our proved
reserves at more than 11 billion barrels.
We are a major
upstream producer, with average daily production today of about 360,000
barrels a day, more than half of which comes from our oil-sands operations.
We are also Canada's leading downstream company with industry-leading
refining, marketing and petrochemical operations.
My next
chart looks at our resource portfolio in more detail.
Imperial's total resource base is second to none in Canada.
The pie charts on this graph illustrates our proved reserve and non-proved
resource position and highlights the major portion represented by our
oil-sands resources, both mineable and in-situ. As I mentioned, Imperial's
proved reserves total 1.7 BBOE at the end of 2004. The size of our non-proved
resource base is enormous. We will continue to explore, but the need to find
more resource for our immediate future can obviously be put in perspective
with this chart.
Our challenge is to efficiently deplete our
proved reserves and to convert these very large non-proved resources to proved
reserves, a challenge that will require sustained focus on technology
development to increase recovery from existing production and to make new
resource opportunities economically attractive.
Among these
new opportunities are the Kearl oil sands project, the ongoing expansion at
Syncrude Canada, enhancement initiatives at our Cold Lake in-situ operation,
and some additional in-situ opportunities in the Athabasca region.
I'll focus the balance of my presentation on these new opportunities. But
first, I want to spend a moment outlining the disciplined approach that I
believe gives Imperial a distinct advantage over our competitors. I want to
talk about this approach because I believe it is one of the critical strengths
we bring to the specialized challenges of the huge oil-sands development. It
has been proven over a long period of time and makes us who we are.
This chart lists the basic components of our approach to achieving superior
results in every part of our business, both established operations and pursuit
of new development opportunities.
We work in a proven,
standard way. We work with common engineering and geoscience tools and
methods. We measure the economics of our projects the same. We are able to put
all of our opportunities on the wall, ranked from best to worst -- on a common
basis.
We are very detailed. We do not say "yes" until we
understand the opportunity from top to bottom. Ask any of our competitors --
Imperial works the details harder and is known for our thoroughness and our
uncompromising standards.
As I mentioned earlier, our
commitment to research and technology development is industry-leading. We do
our own Imperial proprietary research and we work toward breakthrough
technologies every day.
We use established best practices,
processes and standards from the global ExxonMobil network in all phases of
the upstream business model -- exploration, development, operations and
marketing. This access to global experience and expertise provides us with a
competitive advantage unmatched in the Canadian, upstream industry. We can and
do access knowledge from expertise gained all over the world. If it happens in
Australia or Nigeria today, we are using it in Imperial in a very short period
of time.
After we get our ranked list of projects, we have
the discipline to not do the bottom of the list. We will commit only when we
know a project meets our quality of investment. We measure our execution
against the best world-wide performance available, and we formally report the
findings to the senior management for follow-up and improvement.
By repeating this year-after-year, we have achieved a higher quality outcome
than our competition. The result is a disciplined, focused approach to capital
management that we think cannot be duplicated.
Now, let's
look at our specific major oil-sands opportunities.
Imperial's oil-sands assets are enormous in size and scope, and offer
strategic long-term growth opportunities.
Our Cold Lake
project is one of the largest in-situ oil sands operations in the world. This
asset is wholly owned and operated by Imperial. Cold Lake produces over five
percent of Canada's crude oil -- with production of over 45 million barrels in
2004.
Imperial also holds the second-largest interest , 25
percent, in the Syncrude project. The Syncrude project is the largest producer
of synthetic crude oil from Canada's oil sands -- accounting for over 10
percent of Canada's crude oil production -- with production in excess of 85
million barrels in 2004.
Production from these two operations
in Alberta's oil sands are the cornerstones of our current oil-sands business,
and account for more than 50 percent of our total upstream production. As
noted on the bottom of this chart, they also accounted for 20 percent of
Canada's daily oil-sands production in 2004.
Imperial also
has extensive oil-sands interests outside of these two projects.
Our most advanced initiative, the Kearl oil sands mining opportunity is an
oil-sands mining development jointly owned by Imperial and ExxonMobil Canada,
with Imperial having 70 percent interest and serving as operator.
As I'll outline later, we are progressing the evaluation of a phased
development approach to Kearl, with ultimate production potential of about
300,000 barrels a day, on a resource base that can support this production for
well more than 40 years.
Now let me tell you about Cold Lake
-- the backbone of our oil-sands investments to date.
Imperial's 100-percent owned and operated Cold Lake development is the premier
oil-sands asset. It is the largest in-situ recovery operation in Canada and
one of the largest thermal heavy oil recovery operations in the world. We now
operate 13 phases of commercial development that have been developed over the
last 20 years.
We have been very deliberate, and successful,
in pursuing a phased development approach at Cold Lake. This approach has
allowed us to maximize value by learning as we go, while minimizing the
production, operating and investment risks associated with a multi-billion
dollar development of this size.
Imperial operated a number
of field pilots during the 1960's and early 1970's, and the importance of
these pilots cannot be overstated. These pilots were the precursors to the
commercial phases, and they gave us the confidence to move forward with
large-scale development. We are still using this tactic of piloting our
research today.
Shipments of bitumen blend from phases 1 and
2 of our commercial project started in July 1985. We are now up to phases
11-13, and have constantly pursued technology and continued to optimize our
investments over this time.
In March of 2004, regulatory
approval was received for further expansion, phases 14-16. The focus in the
near-term will be on further development of existing phases taking advantage
of existing infrastructure. This approach is consistent with the disciplined
strategy I outlined a second ago -- we will only do a project or an expansion
when it is economically attractive, and we will only pursue investments that
yield attractive returns at our long-term price view.
Let me
explain what we do at Cold Lake.
This chart provides an overview of the CSS -- or cyclic steam-stimulation --
technology that Imperial developed at Cold Lake, and which we continue to use
today.
On the left is a simple schematic depicting the
reservoir process. Steam -- up to 600,000 barrels a day -- is produced in
large steam generators and is carried to wells through insulated, above-ground
pipelines. It is injected down the wellbores and into the Clearwater oil-sands
formation at temperatures of about 300 degrees Celsius and pressures averaging
1,600 psi.
To mobilize the bitumen and provide drive energy,
cyclic steam-stimulation uses periods of steam injection, followed by periods
of “soaking”, and then periods of production. The illustration shows the three
phases - steam injection on the left, the "soak" period in the centre, and
bitumen production on the right.
The cyclic nature of the
process provides for multiple drive mechanisms -- compaction drive, solution
gas drive, and gravity drainage -- which in turn deliver higher early
production rates than other thermal technologies. The nature of the Clearwater
formation allows for high pressure injection and higher oil rates of
production.
The nature of this business does not yield a
continuous volume of production -- it cycles, with bitumen production
variations from year to year and even quarter to quarter. In fact, it's not
uncommon to experience changes in production of as much as 20,000 barrels a
day from one quarter to another. But on a long-term basis, Cold Lake has
provided average production growth of about four percent per year since the
early 1990's.
On the right side of the chart, are a number of
key operating parameters for the Cold Lake operation. Without discussing each
in detail, let me summarize. We operate a very large number of wells, all at
different stages of injection-soak-produce. Up to 95 percent of the water we
use to generate steam is produced and re-used. The operation consumes large
quantities of natural gas as fuel and, by virtue of the new cogeneration plant
we started up in late 2002, we are now generating all of the electrical power
we require for current and anticipated future operations. In fact, we are
currently a producer of electrical power in Alberta, selling about 40-50
megawatts into the Alberta Power Pool.
As you can imagine, a
small technology gain in steam generation, gas usage or water treating goes a
long way. That is why we have 40 PhDs in Imperial, and can call on several
hundred more within ExxonMobil to focus on these opportunities.
If you think about it, we can make a major "discovery" of new reserves to be
recovered right in our current operations.
This chart highlights some of the major, proprietary technological advances
that helped make commercialization at Cold Lake possible. As you can see, our
research efforts didn't stop with the successful start-up of the commercial
production project.
Imperial spent more than $250 million on
research and technology development at Cold Lake before the start-up of the
commercial project in 1985. And since project start-up, expenditures in
research and technology development at Cold Lake have averaged more than $25
million per year at Imperial's own upstream research centre in Calgary and in
field pilots at Cold Lake.
I'm not aware of any other
major producer in Canada who continues to maintain a similar research facility
into in-situ bitumen recovery and production methods -- something we believe
to be a unique, competitive advantage.
And let me give you
another practical example of this commitment. In late 2004, Imperial announced
that the company is contributing $10 million over the next five years to the
University of Alberta to establish a new research facility called the Imperial
Oil Centre for Oil Sands Innovation. It is the largest investment we've ever
made in a university, and substantially increases the university's capacity
for research and education on the orderly development of the oil sands.
Across the middle of the chart are the "technology firsts" that resulted from
this research. You will note the CSS patent in 1966, commercial start-up in
1985, and our continued technology achievements in between.
Lastly, the picture in the bottom left is a current pilot in progress. The
graph on the right shows the early pilot results versus our traditional cyclic
steaming. This is one of several pilots in progress.
As I mentioned earlier, we have been very deliberate -- and successful -- in
pursuing a phased development approach at Cold Lake, to manage the risks
associated with development and to bring on new volumes as they meet our
quality of investment.
This map shows the locations of our
current operations, as well as those potential developments at the northern
end of our leases.
We conducted a significant development
drilling program in 2004 within our approved development area (outlined in
red), using up to three rigs, including a new rig specifically designed for
service at Cold Lake. Not only is it specifically built for our drilling, it
also incorporates state-of-the-art safety features to protect workers from
injury.
Looking ahead, we plan to drill up to 200 new wells
per year for the next 15 years.
Our 2005 program will involve
our first development activity in the northern extension of our main
development area (the smaller ellipse), and will utilize horizontal wells more
extensively. As I mentioned, in March of 2004, we received regulatory approval
for two future expansion areas. We are currently doing our normal intense
technical work to ensure quality.
In addition to the
2005 drilling activity I mentioned, we are also assessing a number of capacity
enhancement initiatives aimed at debottlenecking and interconnecting our four
existing plants. These enhancement opportunities will lower operating costs
and hopefully allow for more development at even lower investment per barrel.
Cold Lake is a monster asset, and will be around for a long time. As I
mentioned, it has provided average production growth of about four percent per
year since the early 1990's, and we have plans to continue that level of
growth. Every one of our Cold Lake investments today yield very acceptable
results at oil prices far below today's prices.
Now, let's
look at our interests in Syncrude.
Imperial -- with a 25-percent ownership -- is the second largest owner of
Syncrude Canada Limited, Canada's largest oil production operation and the
largest oil-sands project, globally.
Syncrude is a
high-quality oil-sands mining operation, with a resource base to support
decades of production. Current production is about 250,000 barrels a day.
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 project will take production from 250,000 barrels a day to
350,000 barrels a day. The Aurora 2 mine is now operating, and was completed
within budget and on-schedule. The upgrader expansion will not only increase
capacity by 100,000 barrels a day upon completion, it will also improve
overall synthetic blend quality for the entire Syncrude site.
As you are likely aware, about this time last year the Syncrude owners
received a revised cost, $7.8 billion (Cdn.), and schedule estimate for the
upgrader expansion project indicating higher costs and a later start-up.
Since that time, a team of experts from the project owners and Syncrude have
taken intervention steps to ensure the remaining project work is adequately
managed to achieve the revised cost and schedule.
The mining
and upgrading operation at Syncrude is high-cost relative to conventional
heavy oil production like Cold Lake, but the resulting synthetic bitumen is a
high-value product, superior in a number of respects to conventional light,
sweet crude and commands a higher price.
We are working with
Syncrude management on our approach to business, and the use of our operating
procedures as ways to improve reliability. In addition to offering new
knowledge to Syncrude, we are obviously learning ourselves, for application to
our new opportunities.
Syncrude's very unique production profile is worth a mention.
Syncrude's resource base is sufficient to support decades of production, even
with current and future expansions. Unlike the ongoing production decline
experienced by conventional oil fields, Syncrude's long life reserves lead to
a flat producing profile over the life of the facilities.
This graph illustrates a production profile for Syncrude, with base production
from the existing operation on the bottom and forecasted future production
increases resulting from current expansion on top.
Now, let
me turn to the Kearl oil-sands mining opportunity we are currently working on.
As I mentioned, Imperial holds extensive oil sands interests outside of Cold
Lake and our ownership position in Syncrude Canada.
This
chart outlines the Kearl region northeast of Fort McMurray, near Syncrude.
Imperial and ExxonMobil Canada are progressing work on a potential joint
mining development on the leases shown here, with Imperial serving as operator
for the joint venture.
Our design basis involves a phased
development approach, with an initial development of 100,000 barrels a day,
and later expansions to as much as 300,000 barrels a day. We have enough
resource in the ground for 300,000 barrels a day for over 40 years.
We are evaluating a range of upgrading options, including potential leveraging
of North American refineries owned by Imperial and ExxonMobil. Our design
approach is not to include any on-site upgrading as part of the initial
regulatory application. We plan to apply the "best of the best" technology at
Kearl. We will use our proprietary technology or the leading technology in use
today in every single part of the development. There are a number of issues in
the Fort McMurray area that might make it a low productivity area. We intend
to prevent these issues.
As you can see, the projected cost
of Kearl is $5.8 billion (Cdn.). We will fine tune this figure as we know more
of our intentions. Let me state again that our goal here is to develop the
best project in the industry -- and the decisions we make in areas such as
upgrading strategies and the scheduling of phased development will be driven
by our goal of delivering the most attractive returns at our long-term price
view.
This chart illustrates our preliminary project schedule for Kearl.
We concluded the second phase of a core-hole delineation drilling program this
past winter to further define the resource potential on the 100-percent
Imperial portions of our lease area. This further delineation confirmed that
our Kearl leases have resource quality at the upper end of our estimates and
we believe it to be the best of the remaining undeveloped mining resources in
the Athabasca region.
We're also conducting baseline
environmental work, public consultation activities and advancing conceptual
engineering. All of this work will position us to file regulatory applications
for the project later this year. Given timely regulatory approval and
favourable business conditions, construction could begin in 2007, with first
production by 2010.
Cold Lake, Syncrude and Kearl are world
class in size -- but that's not all we have.
Imperial holds close to 462,000 acres of oil-sands leases, some of this in the
Athabasca region in the vicinity of and south of Fort McMurray, which you see
illustrated on this map. You can see the red-shaded areas that delineate
additional Imperial acreage in the oil-sands region. Some of it is amenable to
mining, but as you can see, the majority is more suitable for in-situ
development.
Including Cold Lake and Kearl, there are up to
10 billion barrels of potentially recoverable resource on our undeveloped
acreage, a significant inventory of future opportunities for us.
We will talk more about these possible developments as the analysis we are
doing ensures an Imperial quality project.
Let me close by re-stating a couple of points.
First,
Imperial has been a pioneer and continues to be the leader in development of
Canada's oil sands, a resource that represents a truly enormous opportunity.
Second, we are uniquely and strongly positioned to continue our leadership --
through our assets at Cold Lake, Syncrude, Kearl and other future
opportunities.
To continue our success, we will follow the
deliberate, disciplined approach I've outlined to you, and continue our focus
on excelling in technology development, project management and operating
performance efficiency. These are the particular attributes and strengths that
Imperial brings to oil-sands development.
We are the
largest, have the highest return on capital employed in the industry, and have
every intention of staying there.
Imperial is truly excited
about the growth potential of our oil-sands assets. We will continue our
efforts to responsibly exploit this enormous resource, with a continued focus
on quality earnings growth, now and for the long term.
That
concludes my formal remarks. I'd be happy to entertain any questions you may
have.
Disclaimer
This presentation contains forward-looking
information on future production, project start-ups and future capital
spending. 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. Oil-equivalent barrels
(OEB) may be misleading, particularly if used in isolation. An OEB conversion
ratio of 6,000 cubic feet to one barrel is based on an energy-equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the well head.
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