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Presentation material given by Paul Smith, Controller, Senior Vice-president,
Finance and Administration, Imperial Oil Limited, to the RBC Capital Markets
2005 North American Energy Conference.
| | Boston, MA |
June 7, 2005
| Listen to an archive of
the webcast.
Download Paul Smith's remarks and slides in Adobe PDF format
Good morning. I always enjoy the opportunity to talk about Imperial Oil and
it's a pleasure to be here in Boston with you today.
I need to start by reminding 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.
My remarks to you today will be in Canadian dollars and where I reference oil
equivalent barrels, the conversion rate is stated here.
I'd
like to begin with a few comments on the oil and gas industry in general.
The oil and gas industry enjoys strong business fundamentals which offer the
opportunity for sustained long-term
growth potential -- and Imperial
is particularly well situated to participate in that growth.
Petroleum energy is essential for world economic and social development and,
on a worldwide basis, demand for hydrocarbons is rising with new supplies
required to satisfy this growing demand.
The North American
continent is the world's largest market -- requiring about 30% of world oil
and gas demand.
Canada is uniquely positioned in this
global market. Already a net exporter of all major energy forms, Canada has
the resource potential to become an even larger supplier and offers the
unique, valued advantages of proximity to North America and supply security
along with political stability.
And Imperial Oil -- with
strengths in all the major parts of the business - has the assets and the
resources to participate in Canada's growing petroleum sector and to continue
to deliver long-term earnings growth for its shareholders.
Fossil fuels are valuable resources and their efficient use will be
increasingly important as demand grows around the world.
Over
the past 30 years, the world has consistently become more efficient in the use
of energy. We assume that this trend will accelerate as a result of continuing
energy efficiency improvements and better technology in many applications,
including personal transportation.
However, economic growth
and energy demand are tightly linked. And with the anticipated growth in the
world economy over the next two and a half decades, we project that the
world's demand for energy will grow 1.7% a year. By 2030, the demand for oil
and gas will increase to 200 million oil-equivalent barrels a day -- almost
50% more than the roughly 135 million used in 2004.
As
you can see in this chart, oOil and gas will remain dominant energy sources --
not just for motive fuels -- but for the wide range of products that
hydrocarbons form the building blocks for.
As you can also
see in this chart, growing economies will increase the demand for all energy
sources. The "emerging renewables" such as wind and solar power, will see
large growth rates of 10% per year -- in part as a result of government
support -- but will still contribute only 1% of overall world energy supply by
2030.
New oil and gas supplies will be required to meet this demand. Natural field
declines are estimated at about 5% per year.
This
combination of demand growth and field decline creates a gap in the
supply/demand curve of nearly 100 million oil-equivalent barrels per day or
close to 80% of today's production levels.
Put another
way - about one-half of the oil and gas production required in ten years will
have to come from fields not currently on-stream.
Significant
industry investment will be required to meet this demand and technology
improvements and access to resources are critical to supply growth in the oil
and gas industry worldwide.
However, our industry has
demonstrated a steady determination to meet challenges put before it.
Research and commercialization of new technologies that expand
resource-capture capabilities are required -- as are advances in production
technology. But fundamentally, if the industry has access to oil and gas
resources in stable economic environments, we can successfully fill the coming
supply requirements.
However, the challenges are large and
not all companies will flourish. The successful companies in this business
will be those who can look beyond the short-term fluctuations and stay
focussed on the long-term fundamentals.
Canada is uniquely positioned to take advantage of this opportunity.
Canada is the only G-7 country with significant potential for growth in
hydrocarbon production. We have the resource base to support increased
production -- and we also have the educated, skilled workforce and industrial
capacity to develop that resource efficiently.
Canada's
fiscal regime is sound, consistent, and not prone to sudden "overnight"
changes in the regulatory framework.
As you can see from this
chart, an efficient, reliable pipeline infrastructure already connects the
Canadian and US markets for oil and natural gas, providing producers with
access to customers continent-wide.
And, important in a world
of continuing geopolitical uncertainty and instability, Canada represents a
uniquely secure source of future energy supply - in both a physical and
political sense.
In summary, Canada is in an enviable
position to participate in the growing market for hydrocarbons and I'd now
like to show you the unique qualities and assets that position Imperial to
play a major role in this growth.
Imperial is Canada’s largest integrated oil company - with interests ranging
from oil and gas production to refining, marketing and petrochemical
manufacturing.
The company's market capitalization exceeds
$30 billion with 2004 earnings after tax at a record $2.1 billion and a return
on capital employed of almost 28% -- an industry-leading performance.
At year-end 2004, Imperial's total proved reserves stood at just over 1.7
billion oil-equivalent barrels (before 2004 year-end price and cost revisions)
while the non-proved resource base was six times larger at about 11.5 billion
barrels.
Imperial is a major upstream producer, with average
production last year of about 360,000 oil-equivalent barrels a day, more than
half of which came from oil-sands operations.
The company is
the largest refiner and marketer of petroleum products in Canada, with a
substantial base in petrochemical operations.
Imperial is distinguished in the market in many ways. But fundamentally it is
our disciplined management approach that sets us apart.
The
company has a solid track record of enhancing shareholder value through a
consistent management approach and 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.
The third is to
achieve and maintain a best-in-class cost structure in every part of the
business.
And finally, the fourth is to improve the
productivity of our asset mix. This includes further investments in
high-performing assets, divestment of non-core assets and acquisition of new
opportunities.
It is this commitment and approach over many
years that distinguishes Imperial Oil and provides a significant advantage to
our shareholders.
While a disciplined approach is undertaken to investment, we also apply this
to managing our operations every day. The focus on improving the base business
is woven through the company with well-established, proven management systems
focussed on improving ongoing operations.
A set of management
systems forms the basis for our standard of "operational excellence" -- simply
put, running our base business to the highest industry standards in all key
aspects.
At the same time, a relentless focus on cost
contributes to improvements in base operating performance.
This chart shows ongoing operating expense normalized for energy price in the
blue bars. In 2004, opex was basically unchanged from 1995 -- the company
offset over $750 million in inflation impact while growing total volumes.
The shift in upstream production from lower cost conventional production to
the higher cost oil sands in this timeframe made this cost performance even
more commendable.
Imperial's business model is also designed to look beyond short-term
fluctuations and to focus on long-term fundamentals.
This
investment approach coupled with a focus on operational excellence and quality
returns on capital have led to strong results while maintaining superior
shareholder returns and distributions.
As you can see on this
chart, the first and best use of cash is to fund all quality investment
opportunities. These investments are expected to generate double-digit
returns.
After all good investments have been funded,
if surplus cash is available our investment criteria are not watered down in
the belief that we must find ways to spend it.
Rather we
return it to shareholders through dividend payments or share repurchases.
$5.3 billion has been returned to shareholders from 2000 to 2004 and annual
dividend payments have increased every year for the last 10 years.
Imperial has always been a technology leader in the Canadian oil and gas
industry with a long-standing commitment to proprietary research carried out
in our own 2 research centres.
The company has been involved
in oil sands research for almost 40 years and has developed some of the most
significant advancements in this area including the SAGD process, cyclic steam
stimulation and produced water recycling.
At Cold Lake alone,
more than $250 million was invested on research and technology development
before the start-up of the commercial project in 1985. And since project
start-up, expenditures in research and development continue and have averaged
more than $25 million per year.
The graph on the bottom left
illustrates the increase in recovery from bitumen-in-place stemming from our
continued efforts in research. Advances in technology have increased current
expected recovery rates to 25 percent, from 13 percent in 1977. Pilot work is
underway to further increase that recovery rate.
In addition
to our own in-house research, the relationship with our major shareholder,
ExxonMobil, allows for the opportunity to participate in over $1 billion of
research worldwide and provides for full access to their industry-leading
technology.
In October 2004, Imperial and the University of
Alberta announced the creation of The Imperial Oil Centre for Oil Sands
Innovation. We have pledged to contribute $10 million over the next five years
to establish this new research facility at the university with a mandate to
find more efficient, economically viable and environmentally responsible ways
to develop Canada's oil sands resource.
We continue to
believe that technology is the key to the profitable and responsible
development of the oil sands.
As I have mentioned, Imperial has not lacked quality investment opportunities
and we invest in a prudent manner looking to ensure sustained earnings growth.
Imperial holds the leading resource position in Canada. The size and diverse
asset base of our resource portfolio will enable us to grow in a measured and
productive way.
The chart shows our annual oil and gas
production on an oil-equivalent basis for 2004 at over 115 million barrels. By
comparison, our net proved reserves were over 1.7 billion barrels at year-end.
Imperial's proved reserves have a reserve life index of almost 15 years based
on current production levels.
But proved reserves are only a
portion of Imperial's total resource potential. At the end of 2004, non-proved
resources totaled about 11.5 billion barrels including an increase last year
of some 2.5 billion barrels resulting from activities on our oil sands leases,
most notably the delineation drilling at Kearl.
Imperial has long been a leader in the development of Canada's upstream.
As you can see from this map, our current areas of focus include activity in
oil sands interests in northern Alberta, conventional oil and gas assets in
the far north and investments off the East Coast.
Let me
provide some further detail on each of these, starting with our oil sands
operations in western Canada.
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 heavy oil recovery operations in the world.
There are 13 phases of commercial development in operation and these have been
developed in a phased approach over the last 20 years.
Imperial has 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 operating and investment
risks associated with a multi-billion dollar development of this size.
Imperial operated a number of field pilots during the 60's and early 70's on
the site, which were the precursors to the commercial phases.
Shipments of bitumen blend from Phases 1 and 2 of the commercial project
started in July 1985 and Phases 11-13 were brought on production (on-budget
and on-schedule) in late 2002. Over these years Imperial has constantly
pursued technology improvements on site and has continued to optimize
investment.
In March of 2004, regulatory approval was
received for further expansion, to Phases 14-16. The focus in the near-term
will be on further development of these phases taking advantage of existing
infrastructure.
This approach is consistent with the
disciplined strategy Imperial pursues. Commercial development and investment
for a stand-alone project or expansions will be taken forward only when they
are seen to yield attractive returns at long-term prices.
As I mentioned earlier, Imperial has 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
investment criteria.
This map shows the locations of current
operations at Cold Lake, as well as those at the northern end of our leases.
A significant development drilling program was conducted in 2004 within the
approved development area (outlined in red), using up to three rigs, including
a new rig specifically designed for service at Cold Lake.
Looking ahead, current plans are to drill up to 200 new wells per year for the
next 15 years.
The 2005 program will involve the first
development activity in the northern extension of our main development area
(the smaller ellipse), and will utilize horizontal wells more extensively.
In addition to the 2005 drilling activity, Imperial is also assessing a number
of capacity enhancement initiatives aimed at de-bottlenecking and
interconnecting the four existing plants. These enhancement opportunities will
lower operating costs and allow for more development.
Cold
Lake is a monster asset, and will be around for a long time. It has provided
average production growth of about four percent per year since the early
1990s, and we have plans to continue that level of growth through the end of
the decade.
Now, I'll turn to our other main oil sands
interest in operation -- 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 in the world.
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 KDB to 350 KBD.
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, early last year the Syncrude owners received a
revised cost (C$7.8 billion) 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.
To date the
expansion project is tracking well to this revised schedule.
The mining and upgrading operation at Syncrude is high-cost relative to 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.
Currently, Imperial
is working with Syncrude management to focus on operating reliability and cost
efficiencies using proven technology and operating practices.
Imperial holds extensive oil sands interests outside of Cold Lake and Syncrude
Canada.
This chart outlines the Kearl region northeast of
Fort McMurray, Alberta near the Syncrude operation.
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.
The design basis for the proposed project
-- the Kearl Oil Sands Project -- involves a phased development approach with
an initial development of 100,000 barrels a day, and later expansions to
300,000 barrels a day. Delineation drilling has established that there is
enough resource on these leases to support production of 300,000 barrels a day
for over 40 years.
A range of upgrading options are being
evaluated including potential leveraging of North American refineries owned by
Imperial and ExxonMobil. The current design approach does not include any
on-site upgrading as part of the initial regulatory application.
The projected cost for Kearl is $5 to 8 billion and will be highly dependent
on the upgrading strategy ultimately pursued.
This chart illustrates the preliminary project schedule for Kearl.
The second phase of the core-hole delineation drilling program was concluded
this past winter to further define the resource potential on the 100-percent
Imperial portions of the lease area.
This program confirmed
that Imperial's Kearl leases have resource quality at the upper end of the
remaining undeveloped mining resources in the Athabasca region.
Currently the project team is conducting baseline environmental work, public
consultation activities and advancing conceptual engineering. All of this work
will position the project for a target regulatory filing in the next few
months.
Given timely regulatory approval and favourable
business conditions, construction could begin in 2007, with first production
by 2010.
Imperial's oil-sands holdings are extensive and I'd like to briefly outline
our interests in addition to Cold Lake, Syncrude and Kearl.
Imperial holds over 460,000 acres of oil-sands leases, situated in the
Athabasca and Cold Lake regions illustrated on this map.
In
terms of acreage, some of it is amenable to mining, but as you can see from
the table in the bottom left-hand side of the slide, the majority of
Imperial's acreage is more suitable for in-situ development.
Including Cold Lake and Kearl, there are up to 10 billion barrels of
potentially recoverable resource on Imperial's undeveloped acreage, a
significant inventory of future opportunities for the company.
Let me turn now to our major interest in Canada's Far North....the Mackenzie
Gas Project.
In October 2004, Imperial Oil as project lead and operator of the proposed
Mackenzie Gas Project filed the regulatory applications on behalf of the
project co-venturers -- Imperial, ConocoPhillips, Shell Canada, ExxonMobil
Canada and the Aboriginal Pipeline Group.
This project
is focused on development of Canadian onshore gas resources discovered in the
Mackenzie Delta region in the early 1970s.
The project
application is based on a 1.2 MCF/day pipeline that is expandable to 1.9
MCF/day with additional compression. The pipeline will be open to other
potential shippers.
Looking at the map on the right, gas
produced will be transported through a gas-gathering system to a common
facility located near Inuvik. In the common facility, the gas will be
separated from the NGLs and compressed before being sent south in a buried
pipeline through Imperial's operations at Norman Wells and ultimately connect
with existing gas pipeline systems in Alberta. Natural gas liquids will be
transported in a separate, buried NGL line to Norman Wells and connect with
the existing Enbridge oil pipeline.
This concept utilizes
proven technologies and includes specialized measures to mitigate
environmental impacts.
Total project investment is estimated
at $7 billion and is shown in round numbers as roughly:
3 anchor
fields - $1.6 billion
Gas gathering system - $1.6 billion
Mackenzie Valley Pipeline - $3.8 billion
To date,
over $350 million has been spent by the project co-venturers on field work,
environmental assessments, public consultation meetings and preliminary
engineering in support of the project.
On April 29 of this
year, Imperial Oil on behalf of the Mackenzie Gas Project co-venturers
announced a decision to halt project execution activities due to insufficient
progress on key areas critical to the project. In particular, the finalization
of benefits and access agreements with the four First Nations affected by
construction of the proposed pipeline and the establishment of a clear
regulatory process, including timelines.
The project is now
focusing its efforts in these key areas, and substantial progress will need to
be made prior to the start of public regulatory hearings, expected as early as
late summer, to allow the project to continue.
Turning to the East Coast of Canada, this map illustrates the newest area of
exploration for Imperial -- the Orphan Basin off the East Coast of
Newfoundland.
This is a large, unexplored frontier basin that
has exhibited favourable characteristics for hydrocarbons -- source, structure
and reservoir. All have a chance of being present.
Eight
deepwater parcels were acquired in early 2004 and are being explored with
co-venturers ExxonMobil Canada, Chevron Canada Resources and Shell Canada.
The co-venturers have entered into a work commitment of $673 million (Cdn.)
over 5 years with the first seismic shoot conducted last year. A second 3D
seismic program has just begun in the area.
The Orphan Basin
is in a very challenging and high-cost environment -- with deep water (1,500 -
2,500 metres), icebergs and a short weather "window" to complete work. These
are the types of challenges Imperial and its co-venturers are prepared to
address, pending exploration success.
From a corporate perspective, in a capital intensive, long-term focussed
industry like energy, return on capital is one of the key measures of success.
It reflects more than just strong short-term earnings; it demonstrates to
shareholders that their capital has been used wisely.
As you can see on this chart, Imperial has exhibited a leading return on
capital employed amongst its competitors.
A straightforward
approach to financial management and a disciplined investment strategy has
resulted in a very efficient capital base -- one of the best in the industry.
The company's size and the complementary nature of the upstream, downstream
and chemical businesses helps mitigate the risk from changes in interest
rates, currency rates and commodity prices.
The bottom-line
-- a significant advantage for the investor.
For shareholders, Imperial's strategy of continually improving base operations
and investment discipline in quality future opportunities has translated to
superior returns.
These charts show the total shareholder
return for investors in Imperial both on the TSX and the AMEX. As you can see,
whether over the past year or the past 10 years, investors in Imperial have
enjoyed very favourable returns for their investment.
On
average, Imperial shares have seen returns of 20 percent per year over the
past decade.
Let me close with a summary of the key points that distinguish Imperial Oil in
the marketplace.
Imperial maintains a strong financial
position and possesses a disciplined management approach focussed on growing
shareholder value.
Earnings are excellent and the return on
capital employed is the highest of the Canadian integrated oil group.
Imperial shareholders enjoy superior distributions through a sustained
increase in annual dividend payments and an ongoing share repurchase program.
An outstanding resource base represents significant future development and
growth opportunities.
Imperial is an industry leader in
technology and continues to demonstrate a high commitment to research and
technology development.
Imperial's continued strong financial
position has earned and sustained a triple-A rating from Standard & Poor's --
the only Canadian industrial with this rating.
And the bottom
line for any investor which underpins all Imperial's strengths is our
continued focus on long-term quality earnings growth.
That
concludes my formal remarks.
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