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Presentation materials given by Paul Smith, Controller, Senior Vice-president,
Finance and Administration, Imperial Oil Limited to the Peters & Co. 2005
North American Oil & Gas Conference
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September 13, 2005
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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 back here in Toronto 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 today will be in Canadian dollars and where I reference oil
equivalent barrels, the conversion rate is stated here.
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 is over
$40 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 this
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.
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 11 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. Some of these are shown across the
bottom of this chart, including the SAGD process, cyclic steam stimulation and
produced water recycling. These developments represented major, proprietary
technological advances that helped make commercialization of Imperial's own
Cold Lake heavy-oil production project possible -- and in fact -- paved the
way for the large-scale commercialization of Canada's oil sands industry.
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.
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.
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.
This 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.
Said another
way, our total resource base represents over 100 years of production at
current rates.
Imperial is a market leader in the downstream in Canada.
We
have the leading market share in the retail service station business in Canada
at about 19%.
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 capability in Sarnia Ontario, coupled with
manufacturing and technical capability second to none, we have the number one
position in finished lubricants at more than 30% and growing. We are the only
Canadian competitor with manufacturing, blending and packaging capability for
lubricants in both the east and the west -- a key strategic advantage.
We have the largest share of the domestic solvents market in Canada at close
to 50%. This product finds its way to a multitude of end uses from adhesives,
to paints and the like. When you buy a bottle of Varsol anywhere, that is not
a product name, that is our brand name.
And we have the #1
and #2 North American market share positions for the two key end use
polyethylene segments that we participate in -- rotational molding and
injection molding applications.
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 over 20 percent per year over
the past decade on both the TSX and the AMEX.
I'd like to
turn now to a review of some of the key assets in the upstream side of our
business.
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.
Since we began pilot production at Cold Lake in the mid-1960's we have
produced over 750 MB of bitumen from this vast reservoir. And as you can see
from the chart on the left, there is still more to come. At the end of 2004,
net proved reserves at Cold Lake were about 700 MB and there is significant
non-proved resource also associated with this site.
Cold Lake
production is currently trending at about 145 kbd for the first half of 2005.
To put this in perspective, Cold Lake produces more than all other thermal
in-situ projects combined in Canada.
We produce Cold Lake
using our own in-house developed Cyclic Steam Stimulation process -- a
high-pressure, high-production technique that combines multiple recovery
mechanisms including compaction, solution gas expansion and gravity drainage.
The CSS process is not available to all in-situ operations in Alberta as you
need a deep reservoir with a substantial capping shale barrier as exists at
Cold Lake and in some areas of the Peace River. In the Athabasca region, where
the reservoir is shallower, CSS is not an option and operators must use SAGD.
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.
There are 13 phases of commercial development in operation which have been
developed over the last 20 years and Cold Lake has delivered a very attractive
life-cycle return on our investment.
Looking forward, our
focus in the near-term will be on further development of these phases
leveraging existing infrastructure on site.
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.
This chart illustrates the production trends at Cold Lake and highlights the
cyclic nature of the cyclic steam stimulation process at the site.
The green line on the graph shows bitumen production from 1992 to the second
quarter of 2005.
You can see that the average annual
production growth over the past 12 years 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. As you can see, we were on a cyclic low for most of
2004, but began an upturn at the end of the third quarter, which continued
into early 2005.
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.
Which is a point to remember when you look
at our quarter-to-quarter results.
Imperial is the second largest owner in Syncrude with a 25-percent ownership
in this long-life, high-quality mining resource.
Syncrude is
the largest oil-sands project in the world, with a resource base to support
decades of production. Production was about 87 million barrels for the site as
a whole last year or about 60,000 barrels a day for Imperial.
The focus at Syncrude continues to be operating reliability and cost
efficiencies using proven IOL practices. As you can see from the chart on the
left, annual production has steadily increased over the past 20 years but
there have been some bumps along the way.
The Stage 3
expansion at Syncrude that is currently underway was approved in 2001 and
includes the Aurora 2 mine and Upgrader expansion. The Aurora 2 mine has been
operating since late 2003 and was completed within budget and on-schedule.
The upgrader expansion, which includes the addition of a third, 100,000-barrel
per day fluid coker, will increase site production by about 40% once we start
up in early 2006 and 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 Stage 3 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 to this revised schedule.
The Syncrude operation continues to develop and evaluate new mining and
upgrading technology and these developments will be leveraged for other
IOL-owned mining resources.
Imperial holds extensive oil sands interests outside of Cold Lake and Syncrude
Canada.
Currently, we are developing a proposed mining
project 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.
Regulatory application for the project
was filed in July of this year.
The map on the left gives more detail on the proposed mining site.
Let me first say that this is an excellent resource by any standard. The Kearl
project would develop a high quality ore body with over 4.4 billion barrels of
recoverable bitumen on the combined leases -- this would support production of
300,000 barrels a day for over 40 years.
In terms of quality,
Kearl is a top-tier mining asset with a TV: BIP of only 7.9 and a bitumen
grade of 11.3%. For those not familiar with the term TV:BIP, it is basically
the ratio of the "total volume" of material -- overburden and oil sands --
that must be moved per volume of bitumen produced (or "in place"). The lower
the ratio the better. To put this in perspective, current projects under
construction are working with TV:BIPs in the range of 10 to 11.
The design basis for the proposed 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.
No on-site upgrading was
included in the application and a range of upgrading options is being
evaluated.
At this point in the development, the estimated
cost for Kearl is between $4.5 and $6.5 billion.
Before I
finish my discussion of Kearl, I would like to make a few comments on our
approach to upgrading for the project.
Imperial and
ExxonMobil have unparalleled business and operational experience with
upgrading and the financial capacity and project know-how to deliver a major
facility expansion.
Any refiner will tell you that the most
economic upgrading investment is made as "creep" capacity -- small,
incremental increases to existing capacity. This is always the first and best
investment to make.
Given that Imperial already processes
about 80 kbd of heavy crude within our own refining circuit, we are working to
assess and develop all incremental investment opportunities we have for heavy
crude.
Also, we are assessing all market creep that we expect
to see within the larger existing market for Canadian heavy crudes -- PADD II
and PADD IV -- as well as those in PADD III with the reversal of the Corsicana
80 KBD pipeline south from PADD II to the Gulf Coast refining centre later
this year.
Bottom line, we are working to minimize front-end
investment with the first 100 KBD phase of Kearl and better assess the growing
market opportunities for heavy crudes.
Detailed studies
continue and we have not ruled out upgrading facilities associated with the
Kearl project.
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 other 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 BCF/day pipeline that is expandable to 1.9
BCF/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 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 connects with the existing
Enbridge oil pipeline from Norman Wells to Alberta.
This
concept utilizes proven technologies and includes specialized measures to
mitigate environmental impacts.
Total project investment is
estimated at $7 billion with the 3 anchor fields at about $1.6 billion, the
gas gathering system at $1.6 billion and the Mackenzie Valley Pipeline itself
at $3.8 billion.
To date, over $350 million has been spent by
the project co-venturers on fieldwork, environmental assessments, public
consultation meetings and preliminary engineering in support of the project.
On April 28 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:
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the finalization of benefits and access agreements with the four aboriginal
regions affected by construction of the proposed pipeline,
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the establishment of a clear near-term regulatory process including timelines,
and
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fiscal terms consistent with the risk of the project.
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
to allow the project to continue.
Turning to the East Coast of Canada, this schematic 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 -- shown in yellow here -- 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 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, 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.
This chart 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 Orphan Basin, 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 doubling over the
next 10 years.
However, 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 close with a summary of the key points that distinguish Imperial
Oil.
In summary, Imperial maintains a strong financial position and possesses a
disciplined management approach focussed on growing shareholder value. E
arnings 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.
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