| Imperial Oil -- Focused on Long-term Growth
Remarks by Paul Smith, controller and senior vice-president, to CIBC World
Markets Institutional Investor Conference
| | Whistler, B.C. |
February 23, 2007
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Listen to the Web cast of Paul Smith's presentation.
Download the remarks and slides.
Good morning. I'd like to thank CIBC for the opportunity to speak to you today
and to share with you an update on Imperial Oil's current status and future
opportunities.
Following my remarks, I'd be pleased to
address your questions.
However, 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.
Let me begin with an overall look at Imperial Oil...
Imperial
has been a leader in Canada's petroleum industry for over 125 years -- we
remain one of the largest producers of crude oil and a major producer of
natural gas.
Net proved reserves totaled over 1.6 billion
oil-equivalent barrels at the end of 2005, with a reserve-life index of 14
years. 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 -- said
another way -- our resource base represents over 130 years of production at
current levels -- all in all a leading resource position in Canada.
We are a major oil-sands producer with nearly 220,000 barrels a day produced
last year from our wholly owned Cold Lake operation and our 25 per cent
interest in Syncrude Canada. We achieved record production from our Cold Lake
operations in 2006.
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.
We achieved record
earnings in 2006 of over $3B.
And -- a fundamental
competitive advantage for Imperial -- we remain the leader amongst our
competitors in Canada with the highest return on capital employed at over 35
percent.
As you can see, Imperial is distinguished in the market in many ways. But
fundamentally it is our disciplined management approach that sets us apart and
provides a significant advantage to our shareholders.
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.
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 in the marketplace.
I'd like to say a few words about our downstream operations before I focus on
Imperial's upstream business...
Imperial is a market leader
in the downstream in Canada - and some of the components of that leadership
position are listed on this chart:
The leading market share
in the retail service station business at about 19%.
The
largest refiner with over 500,000 barrels per day of capacity and the largest
producer of asphalt.
The number one position in finished
lubricants at more than 30% share 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.
The largest share of the domestic solvents market in Canada.
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, respectively.
Turning to the upstream....
Imperial Oil is developing one of
Canada's leading resource bases -- a high quality, diverse portfolio of
opportunities which 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 --
one of the largest and highest quality proved reserves base in Canada with a
reserve life index of 14 years.
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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 of about 12 billion barrels,
shown in the blue bar. We are pursuing many opportunities, including the
Mackenzie Gas Project, the Kearl Oil Sands Project and the Orphan Basin. I
will talk more later about our efforts to migrate these resources to reserves
and ultimately to production.
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Conventional oil and gas remains a profitable business for us, and delivers
strong returns. Current conventional production is about 150,000
oil-equivalent barrels per day.
This is a mature business
that provides strong returns, and our underlying strategy is to maintain focus
on keeping 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.
Where oil reserves have been
economically depleted, we are selectively producing the remaining gas caps,
including Wizard Lake -- shown just southwest of Edmonton on the map -- which
will be complete later in 2007.
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. After participating in approximately 300 wells in 2006, we plan to
participate in approximately another 300 wells this coming year.
East Coast production remains stable, and additional compression facilities
are being installed at Sable to maintain production levels.
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Let me now turn to opportunities in oil sands...
Imperial has
been a pioneer in development of Alberta's vast oil sands -- both mining and
in-situ -- and our assets are enormous in size, scope and growth opportunity.
This map shows the three major oil-sands and heavy oil deposits and
illustrates how we are positioned in both current heavy oil and oil-sands
production shown as the red stars and in undeveloped leases shown as the gold
stars.
The table in the lower right shows that Imperial holds
about 465,000 acres of leases including Cold Lake -- the largest in-situ heavy
oil operation in the world and the premier in-situ project in Canada.
Imperial also has extensive interests which are currently undeveloped --
mostly in the Athabasca area of Alberta.
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Record volumes were produced at our Cold Lake field in 2006 -- more than
150,000 barrels per day.
Net proved reserves remain
enough for 15 years of production at today's rates.
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.
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. Currently we are producing from 13 commercial phases, with
Cold Lake blend being marketed 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 reversal of the
20-inch ExxonMobil pipeline south from Patoka, Illinois, Canadian heavy crudes
can now reach the Gulf Coast -- the single largest high conversion market in
North America.
As you can also see from the chart, Cyclic
Steam Stimulation lives up to its "cyclic" nature, of fluctuations over a
given period based on steaming and production schedules. We will continue to
increase volumes through the disciplined addition of new pads and application
of new technology to increase recovery rates.
Shown across
the top of this graph are the changes in bitumen recovery factor over the last
20 years. The increase from 13 percent to over 30 percent is a direct result
of our continued focus on research and technology development and our
industry-leading expertise in thermal operations.
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The circles at the top of this chart highlight the numerous technology
milestones we have achieved at Cold Lake.
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 field
pilots at Cold Lake.
This month we will officially open the
Imperial Oil Centre for Oil Sands Innovation at the University of Alberta that
was initiated in 2004. 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.
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. Our process to develop
new technology is as disciplined as our major project management and we take a
staged "gate-based" approach to bring new technology on-stream.
These "gates" start with testing the fundamental physics of a project and
progress through analytical modeling and lab-based simulations before a field
pilot is launched. The interaction between the recovery methods and reservoir
characteristics is key to optimizing the recovery performance and this is
ultimately tested in the field.
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As one recent example, we patented a process to enhance CSS recovery with
(diluent) addition. This new process fits into the normal CSS operation, shown
in the diagram on the left. A field pilot has been in operation since 2002 and
the results are encouraging. Shown on the right is the production profile of
the test well versus a baseline well. The production uplift is illustrated as
the area between the two production curves. Commercial implementation will
begin later this year. This technology has the potential to increase recovery
in late-cycle areas already developed, using existing wells and facilities.
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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 few years, we will continue to develop 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. These pads are producing today.
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;
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The well design and layout in this development has been custom-fit to the
resource.
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Looking at the illustration in the bottom right of this slide, you can see
that 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.
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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 prominent lease position. Syncrude holds 8 leases covering an
area of about 252,000 acres. The map shown here illustrates the leases and
their proximity to the existing mines sites, with producing areas covered in
polka-dots (there are 3 of them). These mines are well connected with existing
infrastructure, including a slurry pipeline accessing the Aurora North Mine.
Annual production from Syncrude has steadily increased since its start-up 25
years ago.
Stage 3 expansion included the addition of a
third, 100,000-barrel a day coker which increased the site capacity by 40% to
350,000 barrels a day.
The expansion project was
completed and started up in 2006. Volumes ramped-up in the fourth quarter and
are expected to continue to increase towards achieving full capacity.
In late 2006, Imperial announced plans to enter into a management services
agreement with Syncrude. Imperial is currently involved in an opportunity
assessment study, and has a final checkpoint in the second quarter of this
year to confirm or cancel the agreement.
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.
Public hearings by a joint provincial/federal
panel were held in November, concluding within a month. We expect to have a
decision by the Alberta Energy and Utilities Board shortly.
Kearl is arguably the best undeveloped resource in the Athabasca region.
This chart plots projects based on the relative size and quality of the
bitumen resource.
The "x" axis plots "TV to BIP" (total
volume to bitumen in place) -- a key quality metric for mineable oil sands.
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.
The "y" axis plots
recoverable resource. The "sweet spot" on this graph is the upper left hand
corner indicating high quality and large recoverable resource.
The red circles represent industry projects -- both producing and proposed.
The blue and green symbols represent the projects that Imperial is
participating in -- you can see that Syncrude and Kearl are both high quality
projects and Kearl is the best of the bunch.
For the entire
Kearl resource -- the average TV to BIP is 7.8. using current regulatory
cutoffs. The combination of the high quality of the Kearl resource on the site
and large recoverable resource -- 4.6 billion barrels -- is a significant long
term economic advantage for development of this project. Imperial Oil is a 70%
owner of this resource.
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.
Development plans for volumes from additional phases are being assessed.
I'd now like to update your 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.
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,
with the ultimate capacity potential of the pipeline being more than twice
that volume -- 1.8 billion cubic feet a day.
Much
progress has been made on this project in the past year. Imperial carried out
engineering, geotechnical and environmental fieldwork in support of project
definition and permit applications, and advanced benefits and access
agreements.
Regulatory hearings began in January 2006 and the
National Energy Board completed their scheduled hearings in December. The
Joint Review Panel, tasked to assess the environmental and socio-economic
matters, extended their hearings into 2007, as they announced it would require
several extra months of hearings, and additional time to compile its report.
And in November, a federal court ruling, relating to traditional land use by a
First Nation along the existing pipeline route in Northern Alberta, added
further delay to the process.
As with all major energy
projects today, the Mackenzie gas project is facing significant cost and
schedule pressures brought on by unprecedented global demands for energy
infrastructure. Bringing the project to completion will take co-operation
among many different parties, including energy companies, northern
communities, regulatory agencies and governments. Current work efforts are
focused on completing regulatory hearings, finalizing remaining benefits and
access agreements, and establishing an appropriate fiscal framework with the
federal government.
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. A map of Alberta shown as an overlay provides
some perspective on this broad lease position.
3D seismic was
acquired in 2004 and 2005 and the first exploration wildcat well, operated by
Chevron, was spud in mid-August and should conclude in the near-term.
Two additional wells are planned, one in 2007 and one in 2008.
Let me close with a summary of the key points that I believe distinguish
Imperial in the marketplace.
Our resource base is huge and
represents significant 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.
Annual per share dividends have increased for thirteen
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. I would be pleased to answer any questions that you may have.
For more information:
Imperial Oil Limited’s site on the
World Wide Web contains a variety of corporate and investor information.
For more detailed investor information, or to receive annual and interim
reports, please contact:
Dee A. Brandes
Manager,
Investor Relations
Imperial Oil Limited
237 Fourth Avenue SW
Calgary, Alberta T2P 3M9
Email:
investor.relations@esso.ca
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