|
J. Michael Yeager, senior vice-president and director, Imperial Oil Limited,
speaks to the Canadian Association of Petroleum Producers (CAPP) Oil & Gas
Investment Symposium.
| | Calgary, Alberta |
June 15, 2005
| Download Michael
Yeager's remarks and slides in Adobe PDF format.
Listen to the webcast.
Good morning. Imperial appreciates the opportunity to be part of the 2005 CAPP
Oil and Gas Investment Symposium.
For the few of you who
may not be familiar with Imperial, we are Canada’s largest integrated oil
company - with interests from oil and gas production to refining, marketing
and petrochemical manufacturing.
We have the resource base,
the financial strength and the expertise to enhance shareholder value through
industry-leading performance in all aspects of our business.
My focus today will be on the upstream, where we have large, highly profitable
base operations and significant long-term growth potential, which I am pleased
to show you today.
Before I do, I need to remind you that this presentation does contain
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.
As I mentioned, Imperial is Canada’s largest integrated oil company.
Our market capitalization exceeds $30 billion (Canadian), 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 has resulted in industry-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 oil-equivalent 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.
This chart lists the basic components of our approach to achieving
superior results in every part of our business, both established operations
and the 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 everyday.
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
worldwide 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.
Imperial has a tradition of leadership in the upstream industry, and we remain
strongly positioned to continue as a leader in the areas that, I believe,
represent the future of Canada's upstream.
We have large base
production today, a combination of conventional production in Western Canada
and growing production from Alberta's oil sands.
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.
And off Canada's East Coast, we hold a
strong exploration position in the deepwater offshore Newfoundland.
This chart illustrates our large base production today.
As
you can see, we currently produce over 330 KBOED today, and last year had
record earnings of over $2 billion for the corporation.
This
gives us an enormous platform from which to fund our huge growth
opportunities, yet meet our other financial obligations.
The
graph on the left illustrates Imperial's near-term production profile, with
conventional oil and gas operations in Western Canada in red on the bottom,
and the oil sands contribution in green on top.
The bar on
the far right is a projection of potential production by 2015. The lower red
portion of this bar shows the contribution expected from the conventional oil
and gas business.
Conventional volumes are expected to
decline significantly toward the end of the decade. However, this decline
will be more than offset by growth from the oil sands, Mackenzie gas and other
opportunities.
The significant growth that we project for the
oil-sands segment of the business, shown in green, will more than double the
volume we realized from this segment last year.
I want to
point out that there is essentially no resource risk for all components of
this long-term volume projection, except for the top, red cross-hatched
portion, representing exploration opportunities, such as the East Coast
deepwater plays, and other potential new additions.
Obviously, this timing and volume projection is dependent on a number of
technical and commercial 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.
I
must remind you here that, these types of projections are just that, and
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.
Now, let me turn
briefly to our resource base.
Imperial's total resource base is second to none in Canada.
The bars on this graph illustrate our proved reserve and non-proved resource
position and highlights in blue the major portion represented by our oil-sands
resources, both mineable and in-situ.
Imperial's proved
reserves total 1.7 BBOE at the end of 2004, with a reserves-to-production
ratio of 15 years.
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.
Let me begin with a
look at our Cold Lake operation.
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 60's and early 70'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.
This chart illustrates the cyclic nature of the production that I mentioned
earlier.
The graph shows total bitumen production over the
past dozen or so years.
You can see that the average annual
production growth over the past decade has been about four percent per year
(illustrated by the solid black line). Within that overall growth there is
significant bitumen production variation over time. 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.
The bottom line is that,
despite the cyclic production, Cold Lake provides an opportunity for
long-term, production growth, but there will be swings in production due to
the recovery process that we utilize.
Remember this when you
look at our quarter-to-quarter results.
This chart highlights what I believe is one Imperial's unique strengths and
competitive advantages -- an industry-leading commitment to research and
technology development, and in particular to oil-sands development.
Along with our own proprietary research program, our affiliation with
ExxonMobil worldwide provides us access to a research and technology base that
is unparalleled in our industry.
I'm not aware of any other
major producer in Canada who continues to maintain a comparable research
effort into in-situ bitumen recovery and production methods.
Let me give you a 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 bottom of this chart are shown some
of the major, proprietary technological advances that helped make
commercialization of our Cold Lake heavy-oil production project possible.
Cold Lake is the largest in-situ project in Canada, and Imperial's largest
source of production. Development of the Cold Lake resource has been driven
by technology development.
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.
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 1990s, 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 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, about this time last year the Syncrude owners
received a revised cost ($7.8 billion Canadian) 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.
One of these new
opportunities is the Kearl oil-sands project.
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.
As you can see, the projected cost of Kearl is $5-8 billion (Canadian) -- 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 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 is 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 turn now to
another major growth opportunity -- the Mackenzie gas project.
I assume you're all somewhat familiar with the history of this opportunity.
This chart summarizes the concept being pursued by the project co-venturers
-- Imperial, ConocoPhillips, Shell Canada, ExxonMobil Canada and the
Aboriginal Pipeline Group. As well, under a funding agreement signed last
year, TransCanada Pipelines plays a very important role in funding the
Aboriginal Pipeline Group during the permitting phase, and they have an option
to obtain an interest in the pipeline. Imperial is the project lead and
operator for the gas-gathering system and the Mackenzie Valley pipeline.
This project is focused on development of Canadian onshore gas resources
discovered in the Mackenzie Delta region of Canada's Far North in the early
1970s. At present, we have no offshore gas as part of the scope of the
project. As many of you know, development of this resource has been the
subject of much discussion over the past couple of decades.
The three anchor fields on-shore are Taglu, Parsons Lake and Niglintgak.
Taglu, with recoverable resources of 3 TCF (trillion cubic feet), was
discovered by Imperial in 1971. Taglu is 100 percent owned and operated by
Imperial, and accounts for 50 percent of the onshore discovered gas. For
reference, Taglu is also equivalent to twice Imperial's current proved gas
reserves.
Parsons Lake - 2.3 TCF -- discovered by Gulf in
1972. 75 percent owned by ConocoPhillips Canada, and 25 percent by ExxonMobil
Canada.
Niglintgak - 1 TCF -- discovered by Shell in 1973.
100 percent owned by Shell.
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.
The pipeline will be open to other
potential shippers and takes advantage of spare capacity in existing pipeline
systems.
The project is initially being filed for a capacity
of 1.2 BCFD, but is expandable to 1.9 BCFD with additional compression.
Let me add a word about this project and our technical evaluations to date.
The project we have described in our regulatory applications and outlined here
is a different project than the one we originally envisioned. The scope of
the project has changed considerably from a single pipeline that carries both
natural gas and liquids together, to two individual pipes that carry gas and
liquids separately. This provides for more overall capacity -- transmission
pipeline capacity is now 50 percent greater -- and is expandable.
And even today, we continue to assess the technical issues and costs versus
efficiency for an optimum project.
We do have pressures on
costs, and we are pulling in our worldwide learnings through ExxonMobil to
offset these pressures as best we can. Whatever the final cost, we are in a
position to do it as well as any company could.
This chart provides some detail on Imperial's operated Taglu field resource,
which is the largest of the three anchor fields, accounting for about half of
the discovered resource associated with the Mackenzie gas project.
The Taglu field is about 32 square kilometres, which is roughly twice the size
of downtown Toronto. It is 100 percent Imperial. Taglu has recoverable
resource estimated at 3 trillion cubic feet of natural gas, with initial
production estimated at 400 million cubic feet per day.
The
right-hand portion of this chart illustrates Imperial's other discovered
resources in the Mackenzie Delta region, both on and offshore.
As you can see from the map, Imperial holds a number of significant discovery
licences, both on and offshore, with our ownership position accounting for
about 40 percent of discovered onshore resources and about 30 percent of
discovered offshore resources.
Now, before I leave the
Mackenzie gas project opportunity, let me say a brief word about where we are
today.
As I'm sure you're aware, on April 28 this year,
Imperial announced on behalf of all the co-venturers that the Mackenzie gas
project is halting project execution activities due to insufficient progress
on some key areas that we consider critical to the project's ability to
proceed.
Let me be frank in telling you why we made this
decision. This decision to continue and not stop, but focus on priority
issues is based on one thing -- we have not made satisfactory progress on key
fundamentals.
Since then, we have met with many key leaders,
and there is a lot happening now to better support the project.
As we've said from the outset more than four years ago, this project
represents a significant opportunity -- for the people of the North, for
Canada, and the companies involved.
So, since our
announcement we have been working with the federal government and the
Government of the Northwest Territories, and we are gaining understanding.
We have said all along, and we continue to be prepared to address issues
within the project's responsibility -- and these areas are outlined in our
comprehensive socioeconomic impact statement. But we continue to believe it
is the role of governments, who will collect considerable taxes and royalties
from this project, to assume ownership of socioeconomic responsibilities
beyond those associated with the project.
Our project needs
to stand on its own merits and be competitive in the long term with other
sources of natural gas supply -- such as Alaska gas and LNG, to name a couple.
For our companies to commit the huge investment the project requires, we need
certainty of process and schedule, and confidence that our investment will
make a reasonable return. We don't have that certainty and that confidence
today.
Do we believe that certainty and confidence can be
re-established? Absolutely. We have met with federal and territorial
governments, asking that they take ownership of matters that are beyond the
scope and responsibility of the project owners. We're encouraged by what they
told us, and by the actions taken since then by governments.
Imperial and its co-venturers remain committed to the Mackenzie gas project. I
continue to believe it's a project that can succeed -- for all stakeholders.
And I continue to believe that all parties have the ability to work together
to make it succeed. The next few months will be critical, and much needs to
happen.
This map illustrates a new area of exploration for Imperial off the
East Coast -- the Orphan Basin.
In a December 2003 licence
offering, Imperial (25%) along with ExxonMobil Canada (25%) and Chevron Canada
Resources (50%) were successful in acquiring exploration rights for eight
deepwater parcels in the Orphan Basin offshore Newfoundland. These eight
blocks are shown on this map. Four are operated by ExxonMobil and four by
ChevronTexaco.
Imperial and its co-venturers were awarded
exploration licenses for the eight Orphan Basin parcels in January 2004, after
proposing exploration spending of $673 million (Canadian). Imperial's 25
percent share would be $168 million. License terms are such that Imperial's
minimum commitment is 25 percent of its share, or $42 million.
This is a large, unexplored frontier basin, and we think this has favourable
attributes for hydrocarbons -- source, structure and reservoir. All have a
chance of being present.
The Orphan Basin is also in a very
challenging and high-cost environment -- with deep water (1,500 - 2,500
metres), icebergs and a short weather "window." These are the types of
challenges Imperial and its co-venturers are prepared to address, pending
exploration success.
We conducted the initial 3-D seismic
shoot during the summer of 2004 and are currently conducting the second
program.
Let me close by re-stating a couple of points.
Imperial has
been a pioneer and continues to be the leader in Canada's resource industry.
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.
We have unparalleled financial strength -- including the only Standard and
Poors' triple-A rating in our industry.
We have a history of
superior shareholder returns, including both dividends and share repurchases,
that provides an excellent reason for all categories of investors to want to
hold a long-term position in Imperial shares.
We have the
highest ROCE in industry and have every intention of staying there.
We are uniquely and strongly positioned to continue our leadership in the
industry -- through our assets at Cold Lake, Syncrude, Kearl, the Mackenzie
Delta and other future opportunities.
Imperial is truly
excited about the growth potential of our oil sands and other assets. We will
continue our efforts to responsibly exploit these resources, 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.
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