| Imperial Oil -- Focused on Long-term Growth
Remarks by R.L. (Randy) Broiles, senior vice-president, resources division, to
the 18th Annual CAPP Oil & Gas Investment Symposium
| | Calgary, Alberta |
June 14, 2006
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Good morning. I'd like to thank CAPP for the opportunity to speak to you
today and to share with you an update on Imperial Oil's current production and
future opportunities.
Following my remarks, I'd be pleased to
address your questions.
Before we begin, I want to remind you that the presentation this morning
contains forward-looking information and actual results could be different as
a result of many factors -- which are noted on this slide.
I want to begin by taking a look at the "big picture" for energy. Each year my
company prepares a detailed outlook for global energy supply and demand based
on population, economic growth and energy intensity analyses for all major
regions of the world.
The conclusions of the energy demand
analysis are summarized on this slide.
We expect total energy
demand to increase by about 50 percent from today's level of about 225 MBDOE
to roughly 335 MBDOE by 2030.
Of the major primary energy
sources, oil will remain the largest single form of energy in 2030.
Transportation use is clearly the big driver of oil demand. Liquid fuels such
as gasoline, diesel and jet fuel offer an ideal combination of high energy
density, ease of storage and handling, and well-developed infrastructure that
leave few competitors in this sector.
As shown on the slide,
oil, (shown in green) together with natural gas (in red) will continue to
supply about 60 percent of the world's energy needs through this period.
With coal added (in blue), fossil hydrocarbon will maintain an 80 percent
share of world energy markets.
The remaining 20 percent (in
gray) will largely be supplied by nuclear, hydro and biomass.
Other renewables, particularly wind and solar may see strong growth rates --
aided by supportive government policies -- but will still only be able to
contribute about 1 percent of total energy by the end of this outlook.
Clearly, all economic forms of energy will be required. However, fossil fuels
— especially oil and gas – will remain the backbone of the energy system for
decades to come.
Canada and its petroleum industry are
uniquely positioned to take advantage of the opportunities to meet growing
demand.
Canada has the resource base to support increased
production -- and the educated, skilled workforce and industrial capacity to
develop the resource efficiently.
Canada's fiscal regime is
sound, consistent, and not prone to sudden "overnight" changes in the
regulatory framework.
An efficient, reliable pipeline
infrastructure already connects the Canadian and U.S. markets for oil and
natural gas, providing producers with access to customers continent-wide.
And, notably 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.
Moving to Imperial Oil...
Imperial has been a leader in
Canada's petroleum industry for over 125 years.
Net proved
reserves totaled over 1.6 billion oil-equivalent barrels at the end of 2005.
However, this is just a portion of our potential. Our non-proved resource base
was more than 12 billion oil-equivalent barrels, yielding a total resource
base of over 13 billion barrels at the end of last year -- a leading resource
position in Canada.
The company is one of the largest
producers of crude oil and a major producer of natural gas.
We are also a major oil sands producer with almost 200,000 barrels a day
produced last year from our wholly owned Cold Lake operation and our interest
in Syncrude Canada.
We are the leading refiner and marketer
of petroleum products in the country and supply about 25 percent of total
demand.
The company's total chemical sales were over 1.1
million tonnes and polyethylene operations remain among the most
cost-competitive in North America.
A key differentiator for
Imperial is the underlying attributes that support this performance: a
thorough, consistent approach to financial management, coupled with a
disciplined investment ethic. This has resulted in a very efficient capital
base -- one of the best in the industry.
Imperial has the
leading return on capital employed amongst our competitors at about 25
percent.
The company's size and integrated nature of the
upstream, downstream and chemical businesses, helps mitigate the risk from
changes in interest rates, currency rates and commodity prices and represents
a sustained competitive advantage for Imperial and a significant advantage for
our investors.
Imperial is set apart from its competitors on many metrics, but we feel it is
the consistent management approach we apply to our business that truly
differentiates us -- and represents a significant advantage to the long-term
investor.
This strategic approach has been tested through
times of high prices and low prices, and has delivered long-term growth in
shareholder value.
A very tangible example is our focus on
continually improving cost management of ongoing, base operations.
This chart shows ongoing operating expense in 1995 and 2005 -- with energy
costs normalized to 2005.
Over this period, we've captured $2
billion in efficiencies. This has allowed us to keep costs flat even though
we're running more energy intensive operations, particularly in the oil sands,
and also as a result of regulated refining investments.
This
cost performance has been achieved while volumes have grown by five percent.
Our objective is to keep costs flat with the expense of new projects being
offset by a reduction in base costs.
We have done this
through many initiatives, including:
-
improving energy efficiency;
-
leveraging ExxonMobil's worldwide scale and expertise in areas such as
procurement and transaction processing, and most importantly;
-
engaging the workforce in a continuous improvement process that generates
thousands of ideas and hundreds of actual projects to continuously improve
every aspect of our operation.
There are a number of ways to grow earnings, including volume growth, cost
reduction, upgrade of sales mix and margins and supply chain management to
name a few.
Let's move to the upstream...
Imperial Oil is developing one of Canada's leading resource bases -- a high
quality, diverse portfolio of opportunities that will enable us to sustain
long-term volume growth.
This chart shows our annual oil and
gas production on an oil-equivalent basis for 2005 at over 115 million barrels
(shown in the red bar). By comparison, our net proved reserves were over 1.6
billion barrels (shown in the green bar). This represents one of the largest
and highest quality proved reserves base in Canada with a reserve-life index
of 14 years.
But the proved reserves are only a small
portion of our total resource base. At the end of 2005, we had a non-proved
resource base of about 12 billion barrels, shown in the blue bar, of which
over 10 billion barrels are in the oil sands. We are pursuing a number of
opportunities to migrate these resources to reserves and ultimately
production, and I will outline these opportunities to you over the next few
minutes.
Imperial's current conventional production is about 160,000 oil-equivalent
barrels per day. Conventional oil and gas is a profitable business for us,
and delivers strong returns.
Because this is a mature
business, our underlying strategy is to maintain a strong focus on expenses.
Our objective is to take actions that will keep unit costs flat, regardless of
price. We have also divested selective assets recently to take advantage of
the premium the market sees on some of these assets.
Growth
potential is limited in the mature Western Canada Basin and, where oil
reserves have been economically depleted, we are selectively blowing down the
remaining gas caps.
The current blowdowns have been
performing very well, but our expectation is that the largest of these --
Wizard Lake, shown just southwest of Edmonton on the map -- will be complete
later in 2007.
While the gas blowdowns are contributing to
current production, we continue to pursue new gas development to offset the
inevitable decline.
An active shallow gas drilling program in
southeastern Alberta is highlighted in gold on the map. We will be
participating in more than 300 wells this year, with additional drilling
planned for 2007 and beyond.
East Coast production remains
stable, and additional compression facilities are being installed at Sable to
maintain production levels.
Let me now turn to our
opportunities in oil sands...
Imperial's oil-sands assets are enormous in size and scope, and offer
strategic long-term growth opportunities for the company.
We
have been a pioneer in the development of Alberta's vast oil-sands resources
for many decades -- in both in-situ and mining projects. In fact, we played a
leading role in some of the first oil-sands developments in the early 1960s.
This map shows the three major oil-sands deposits and illustrates how we are
positioned in both current oil-sands production (shown as the red stars) and
in undeveloped oil sands leases (shown as the gold stars).
The table in the lower right shows that Imperial holds about 465,000 acres of
oil sands leases including Cold Lake -- the largest in-situ oil-sands
operation in the world and the premier in-situ project in Canada. This asset
is wholly owned and operated by Imperial.
Imperial also has
extensive oil-sands interests which are currently undeveloped -- mostly in the
Athabasca area of Alberta.
Cold Lake is a world-class oil-sands asset, and produces as much as all other
Canadian in-situ thermal operations combined.
Net proved
reserves at the end of 2005 were about 700 million barrels, enough for 15
years of production at today's rates. There is considerable non-proved
resource in addition to proved reserves and we will continue to develop this
site in a measured, productive way.
We have taken a
deliberate, phased approach to developing this high-quality asset -- bringing
on production in stages over the past 20 years. This has allowed for advances
in technology -- many of them developed and patented by Imperial -- to be
fully incorporated into new production phases.
You can see
changes in production on this graph as we brought on more phases since
commercialization in the mid-1980's.
Volume has come on in
measured, staged additions and has been absorbed into the North American
refining markets. We currently market Cold Lake blend to refineries here in
Canada -- including our own Sarnia, Nanticoke and Strathcona refineries -- as
well as refineries in PADD II (Chicago) and PADD IV (Rocky Mountain). And,
with the recent reversal of the 20-inch ExxonMobil pipeline south from Patoka,
Illinois, Canadian heavy crudes can now reach PADD III (the Gulf Coast) -- the
single largest high conversion market in North America.
We
have been active at Cold Lake since the mid-1960s when we started up our first
pilot plant on the site producing an average of 150 barrels a day. Currently
we are producing 150,000 barrels a day from 13 commercial phases.
In 2002 we brought on phases 11-13 – on-schedule and on-budget – which
included a 170-megawatt co-generation plant that meets the full site
electricity needs. This project was named "Project of the Year" by Alberta
Construction magazine for 2003.
Across the top of this graph
are listed the changes in bitumen recovery factor over the last 20 years. The
increase from 13 percent to 30+ percent is a direct result of our continued
focus on research and technology development and our industry-leading
expertise in thermal operations.
The circles at the top of this chart highlight the numerous technology
milestones we have made at Cold Lake since the 1960s.
Imperial invested $250 million on research and technology development before
the start-up of the commercial project in 1985. Since then, expenditures have
averaged more than $25 million per year -- both at our research centre in
Calgary and in field pilots at Cold Lake. This sustained commitment to
development of technology is a unique competitive advantage for Imperial.
Many may not be aware that Imperial invented and held patents on both cyclic
steam-stimulation (CSS) and steam-assisted gravity drainage (SAGD), the
processes underpinning all commercial in-situ thermal production in Canada
today.
Our on-going commitment to technology is unwavering.
As one recent example, we patented a process late last year to enhance CSS
recovery with liquid addition. In the bottom left is a picture of this pilot
-- in operation since 2002. Results are encouraging and plans for
larger-scale implementation are now being developed. This technology has the
potential to increase recovery in late-cycle areas already developed, using
existing wells and facilities.
The diagram on the lower right
is a schematic representing another recovery process we are also investigating
which will be pilot tested on company leases in the near future. This pilot
is focused on improving the economics for resources where SAGD is currently
the leading recovery technology for development. This is an enhancement to the
SAGD process that was patented by Imperial in 1982. The enhancement involves
the addition of solvent to the injected steam, and is currently being tested
in scaled models at Imperial's research centre in Calgary.
In addition to our in-house research expertise, we also have access to global
research through our relationship with ExxonMobil, our major shareholder and
the leader in energy development worldwide.
And in 2004, we
established the Imperial Oil Centre for Oil Sands Innovation at the University
of Alberta. With a funding commitment of $10 million over five years, the
Centre's mandate is to focus on breakthrough research to develop more
efficient, economically viable and environmentally responsible ways to produce
Alberta's vast oil sands resource.
The Cold Lake lease area (shown as the dashed black line on the map) is about
300 square miles. The approved development area shown as the solid black line
is about 140 square miles and we are currently active in about half of that.
Our efforts from now to the end of the decade are to develop the area shown in
red, one of the new areas which we received regulatory approval for in 2004.
Over the next five years, we plan to develop 10 new pads in this area. The
first investments were made in 2005 with the drilling of two new pads in the
southern part of this area.
This development is another
example of our commitment to continuous improvement through technology
application and shows how we continue to apply new technology at Cold Lake
today.
-
The well design and layout in this development has been custom-fit to the
resource.
-
Looking at the illustration in the bottom right of this slide, you can see
that these new 'mega' pads use horizontal as well as vertical wells. One pad
can now access the same resource as three standard Cold Lake pads, which
reduces the overall capital required -- and the surface footprint -- for this
development.
-
For successful thermal operations, it is essential to control the steam
distribution in a horizontal well to achieve optimal production results.
Imperial has developed a patented completion technique with a unique wellbore
assembly to achieve this objective.
Imperial is a founding member of the Syncrude consortium established in 1964
and remains the operation's second-largest owner, holding a 25 percent
interest.
Syncrude is the largest oil-sands operation in the
world, with a resource base to support decades of production. Annual
production from Syncrude has steadily increased since its start-up 25 years
ago.
The recently completed Stage 3 expansion included the
addition of a third, 100,000-barrel a day coker. As a result, site production
will ultimately increase by about 40 percent. As well, the quality of the
entire synthetic crude output will be improved to capture higher realizations.
The expansion project was completed and started up on May 6, but unfortunately
had to be brought down on May 18 to deal with a persistent odour problem
associated the start-up of the new Flue Gas Desulphurization unit.
Syncrude has been working with experts from ExxonMobil to resolve this
unexpected problem, and the current expectation is that the underlying problem
can be rectified in about one to two months.
Let me turn now to Kearl, a proposed bitumen mining project in Fort McMurray.
Imperial owns a roughly 70 percent interest and is operator of the project.
The remaining 30 percent is held by ExxonMobil Canada.
The
Kearl leases hold sufficient bitumen to support a 300,000 barrel-a-day mine.
We plan to develop the Kearl project in phases with the initial phase sized at
100,000 barrels per day, and two subsequent phases to follow.
To date, we have completed conceptual engineering and process selection for
the project.
The regulatory application was filed in July
2005 and we have completed responding to the information requests from the
regulator. We expect public hearings to begin this fall, and anticipate a
decision by the Alberta Energy and Utilities Board by year-end.
Kearl is arguably the best undeveloped resource in the Athabasca region.
A key quality indicator for mineable oil sands is a metric referred to as "TV
to BIP". This measures the total volume that has to be mined -- overburden
plus ore -- relative to the amount of bitumen-in-place. Low numbers are
better. Less material is handled for each barrel of bitumen produced, so there
is a natural operating expense advantage for a mine.
For the
entire Kearl mine -- all three phases -- TV to BIP is 7.8 (shown in red on the
left-hand chart).
The combination of the high quality of the
resource on the site and large resource size -- 4.6 billion barrels (shown in
red on the right-hand chart) -- is a significant economic advantage for
development of this project.
Although the mine plan filed in
our regulatory application for Kearl is 4.6 billion barrels of recoverable
bitumen, total bitumen-in-place on the Kearl leases is over 13 billion
barrels, and we plan to develop this resource using proven processes including
truck and shovel mining, hydro-transport and paraffinic froth treatment
conditioning.
For the first phase of Kearl, we plan to market
the bitumen as a blended heavy or sour crude, selling into the increasingly
expanding North American markets for Canadian heavies. Marketing plans for
volumes from additional phases are being developed.
Our assessment is that the most economic approach for the first 100,000 barrel
per day phase of Kearl bitumen is to market to existing upgrading facilities.
Imperial refineries already process a significant amount of heavy crude oil
and we will advance low-cost expansions to take more. But, more broadly, we
expect that there will be additional heavy crude capacity in the markets we
currently sell into.
For capital-intensive industries, the
most attractive investment is incremental expansion, or "creep" -- and this is
especially true for the refining business.
The blue bars on
this chart illustrate current coking capacity, expressed in thousands of
barrels of Heavy Crude Equivalent - over 7.5 million barrels per day in the
North American market.
Modest creep shown in the blue hatched
bar of only two percent a year will yield an additional 1.7 million barrels
per day of capacity by 2015. In addition, there are proposed upgrading
projects in Canada, shown in the red checkered bar -- either stand-alone or
with dedicated bitumen supply -- that could deliver an additional two million
barrels per day by 2015.
We'll continue to evaluate upgrading
facilities at our Edmonton refinery. But a decision to do so will not be made
until we're convinced that this capital investment will be profitable,
competitive and yield attractive returns for our shareholders.
I'd now like to update you on our opportunities outside of oil sands.... I'll
start with the Mackenzie Gas Project.
The Mackenzie Gas Project is an important new source of gas for North America.
This multi-billion dollar initiative proposes to develop six trillion cubic
feet of onshore gas from three "anchor" fields in Canada's north.
With three trillion cubic feet of natural gas, the 100-percent Imperial-owned
Taglu field accounts for half of the discovered gas resource in the Mackenzie
Delta, and is one of the continent's best undeveloped gas resources. And it
represents a major portion of our future conventional production and reserves.
Provision is being made to accommodate other companies' natural gas as well.
Anchor field production is projected to be about 830 million cubic feet a day,
while the ultimate capacity of the pipeline could be more than twice that
volume -- 1.8 billion cubic feet a day. This expansion would be accomplished
by adding additional compressor stations on the planned route.
The technology to develop this resource and bring it to market is in use right
now in pipelines in Russia, and while complex, is a proven approach to
developing this type of resource.
The pipeline itself will be
buried -- allowing for less disruption to natural habitats and migration paths
for wildlife. The natural gas that is produced will be chilled while shipped,
protecting the permafrost.
Much progress has been made on
this project in the past year. Regulatory hearings began in January, and
between the National Energy Board and the Joint Review Panel, a total of 135
hearings days will take place this year in some 26 communities. Hearings will
conclude in mid-December, and we anticipate a regulatory decision early in
2007.
We continue to progress negotiations on benefits and
access agreements and we have negotiated agreements in principle with four of
the five First Nations groups affected by the pipeline.
We
are encouraged by the recent Deh Cho land claim settlement offer tabled by the
federal government.
This would appear to be a positive
development in that it has the potential to clarify land issues between the
Deh Cho and federal government, and help to progress discussions between the
Deh Cho and the Mackenzie project.
Our intent remains, as it
always has, to negotiate benefits and access agreements in the Deh Cho
territory and to have those agreements fully ratified and executed.
As with all major energy projects today, the Mackenzie project is facing
significant cost and schedule pressures brought on by unprecedented global
demands for energy infrastructure. The upfront capital costs for frontier
pipeline projects are significant and the Mackenzie Gas Project is facing
upward pressure on costs, including commodity pricing for equipment, steel,
labour and fuel, with an unprecedented regulatory process.
We
continue to develop action plans aimed at reducing all aspects of cost. We
will pursue cost reduction opportunities in all areas of the project,
including incorporating learnings from engineering studies and procuring goods
and services through competitive bidding to achieve best total value.
Our cost estimate for the Project will continue to be refined, and we expect
to have a revised cost and schedule estimate later this fall.
Once we have regulatory approval to proceed and understand the conditions
associated with this approval, we will be in a position to make a decision on
the project.
The Mackenzie project represents the most advanced project we have
in the Arctic, but our position in this exciting region extends far beyond the
delta of the Mackenzie River.
Imperial has an interest in
some one million acres of resource in Canada's Arctic, shown on this map in
yellow (industry in green).
We have interests in 44
significant discovery licenses and we operate over half of these (shown as the
yellow blocks outlined in black).
There are many barriers to
cross before we are able to see the true potential of this resource but it
remains another future source of production in our diverse and high-quality
resource portfolio.
Finally, turning to the East Coast, I'd like to update you on our efforts in
the Orphan Basin.
This large, unexplored frontier basin
offshore Newfoundland's east coast has favourable characteristics for
hydrocarbons.
Eight deepwater parcels -- shown in yellow --
were acquired in 2004. The project co-venturers include ExxonMobil, Chevron
and Shell. Imperial's interest position is 15 percent.
The
leases cover over five million acres -- a very large position in a promising,
unexplored basin.
3D seismic was acquired in 2004 and 2005
and the first exploration wildcat well, operated by Chevron, is scheduled to
be drilled this summer by the 'Eirik Raude' -- a deepwater drill rig pictured
in the bottom right. There is the potential for two or more additional wells
on these leases in the future.
Icebergs and a short weather
window in this deepwater area present challenges. However, should a discovery
be made, the technology exists to progress a development.
This chart illustrates our near-term production profile, with conventional oil
and gas operations in Western Canada in red, and the oil-sands contribution in
green.
The far right is a projection of potential production
by 2015.
Conventional volumes are expected to decline over
time, but this decline will be more than offset by growth from the oil sands,
Mackenzie gas and other opportunities.
I want to point out
that there is essentially no resource risk for most of the components of this
projection. All of this resource has been delineated and our focus now is on
development.
Everything below the top orange portion --
which is indicative of some success in the Orphan basin or other frontier
areas -- is already in our non-proved resource base.
This
projection illustrates that Imperial's resource base and potential new
discoveries would support an increase in upstream volumes of almost 50 percent
over the next 10 years.
I would remind you that actual
results could differ materially from this projection due to changes in project
schedules, operating performance, demand for oil and gas, commercial
negotiations or other technical and economic factors.
Let me close with a summary of the key points that I believe distinguish
Imperial in the marketplace.
Our resource base represents
significant future development and growth opportunities.
We
have industry-leading technology and operating experience with a high
commitment to research and technology development.
We are
financially strong and possess a disciplined management approach focused on
growing shareholder value.
Imperial's strong financial
position has earned and sustained a triple-A rating from Standard & Poor's --
the only Canadian industrial with this rating.
Earnings are
excellent and our return on capital is the highest of the Canadian integrated
group.
We constantly pay a dividend -- annual per share
dividends have increased eleven years in a row -- and we have an ongoing share
repurchase program.
And the bottom line, for any investor,
underpinning our strengths is the continued focus on long-term quality
earnings growth.
Thank you.
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