| Bruce H. March, Chairman, president and chief executive officer, Imperial Oil Limited, presented at the Peters & Co. 2008 North America Oil and Gas Conference in Toronto.
| | Toronto, Ontario | September 9, 2008
| Listen to an archive of the webcast.
Download Bruce H. March's remarks and slides in Adobe PDF format.
Good morning. I want to thank Peters and Company for the invitation to speak at this North American Oil and Gas Conference. My name is Bruce March and I am the Chairman, President & Chief Executive Officer of Imperial Oil Limited.
Before I begin, I would like to indicate that the material in this presentation contains forward-looking information and actual results could be different as a result of many factors, some of which are noted on this slide.
In addition, Canadian reporting standards require that we provide more clarity with respect to the non-proved resource base. The third paragraph provides for this requirement.
The amount and type of energy used around the world is closely linked to economic progress. Forecasts of future energy use are based on a growing population where reliable and affordable energy is essential to improve people's quality of life.
It is always important to remember just how essential energy is in today’s world. In the developed world we live in, access to energy is taken for granted. People in the developing world know how fortunate we are as many people live a daily struggle without sufficient energy.
Today, the world uses the energy equivalent of about 250 million barrels of oil every day. By 2030, as populations grow and economies expand, global energy demand is expected to be about 40 percent higher.
Meeting this demand will require us to use and grow all economic forms of energy. Oil and natural gas are indispensable and they alone are expected to maintain close to a 60 percent share of the energy demand, as illustrated on the chart.
Even with energy efficiency gains, meeting the growing needs for affordable, reliable energy supplies through 2030 will not be easy. This will require massive investments, technology advances, and timely execution of projects.
Canada represents a uniquely secure energy supply source from both a physical and a political perspective, which is notable in a world of continuing geopolitical uncertainty. When reserves from the oil sands are included, Canada ranks second only to Saudi Arabia.
Note that over 90 percent of Canada’s recoverable oil lies in the vast oil sands area in northern Alberta.
When we look at current oil and gas production, Canada also ranks favorably amongst the world’s top producers. Imperial Oil is a large player in Canada’s liquids production with approximately 10 percent of Canada’s crude oil and natural gas liquids production.
Canada is a large exporter of energy, exporting nearly two-thirds of its produced crude oil and nearly one-half of its natural gas. Furthermore, imports of energy into the United States are twice that of the next largest U.S. energy supplier.
Canada is well positioned to address world energy demand. It can continue to develop reliable and affordable energy for its own population AND play a key role in improving the living standards of a growing population in the developing world.
Imperial Oil shareholders are extraordinarily well positioned to take advantage of these opportunities and I would like to now elaborate on why.
This chart provides an introduction to Imperial Oil, using year-end 2007 data.
Imperial Oil is a large and fully integrated energy company.
We have industry leading safety and environmental performance. I highlight this point because quite frankly, if we can’t operate safely and environmentally sound, other critical operations will be impacted.
We had a record financial year in 2007. Earnings were a record, about 3.2 billion dollars. Return on capital employed, a key metric for how well we are managing the business, was 38 percent. Nearly all of our earnings were returned to shareholders, 2.7 billion dollars through dividends and share repurchases.
Capital and exploration expenses were around one billion dollars and we have a proved resource base of 1.5 billion oil equivalent barrels, after accounting for royalties.
Finally, our investors have been rewarded with an annualized return over the past ten years of over 20 percent.
Imperial is distinguished in the market in many ways, however, it is our disciplined management approach that sets us apart and provides a significant advantage for 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 listed on the right. It has stood the test of time through periods of both high prices and periods of low prices.
It is this commitment and approach over many years that positions us to continue to deliver the highest quality returns and superior distributions to shareholders.
The disciplined management approach leads us to be best in class for each business segment. We have achieved excellent earnings growth over the past five years, the largest portion of this year-over-year growth coming from Upstream operations. We also recorded strong earnings growth in the Downstream segment. As you can see, superior returns on invested capital has been achieved.
Also included on this chart are the mid-year earnings for 2007 and for 2008. Imperial is on track to further improve on the record 2007 results.
Our resource portfolio is industry leading in terms of size, quality and diversity. The sum of the proved and non-proved resource base is approximately 13.5 billion barrels. Said another way, the resource base represents nearly 100 years of production at current levels, all-in-all a leading position in Canada.
The value of this large and high quality resource base is maximized by Imperial’s focus on operations excellence, having best in class project execution, and integrating technology solutions. These attributes will also provide the means to move non-proved resources to the proved reserves side of the bar-chart.
Future additions to this resource base will come from our exploration portfolio, which we have significantly increased in recent years. These additions have included unconventional gas in the area called Horn River, oil sands mining, off-shore in the Beaufort Sea, and off-shore in the Orphan basin.
This chart illustrates our current production profile on the left, comprised of conventional oil and gas operations, the Cold Lake in-situ oil sands, and Syncrude oil sands mining.
On the far right is our 2020 projection. Conventional volumes are expected to decline over time, but this decline will be more than offset by growth from the oil sands - particularly from our Kearl project.
I want to point out that there is essentially no resource risk for most of the components of this projection. Eighty percent has been approved by or is currently before regulators, and our focus now is on maximizing the resource value through smart development.
This projection illustrates that Imperial's resource base and potential new discoveries would support more than doubling our upstream volumes over the next 10 to 15 years.
Cold Lake is a premier in-situ heavy oil field owned 100 percent by Imperial. A thick capping shale enables the company to utilize high pressure cyclic steam stimulation - a technology invented in Imperial's research lab. A new production record was set in 2007 at 154 thousand barrels a day.
We have taken a deliberate development approach here -- bringing on production in phases over the past 20 years by applying learnings to future development.
The chart shows our success over time in increasing both production volumes, shown by the red line, and recovery levels, shown by the bars.
On-going investment will both maintain current production and pursue new projects to increase production.
Technology development has been the critical ingredient to our success, and we are not running short of new ideas. The recovery enhancements being pursued include applications using solvent recovery, infills, and late-life recovery enhancements.
Three new phases named Nabiye, already approved by regulators, have started development. Using a “design one - build many” concept, approximately 30 thousand barrels a day of production and 250 million barrels of resource are progressing through our internal gate review process.
Imperial is the second-largest owner of Syncrude, with a 25-percent interest in this 350,000 barrel per day oil sands mining and upgrading facility. Syncrude owners entered into a management services agreement in April 2007 which places Imperial and ExxonMobil staff in key leadership roles.
The key activity is to focus on improvements to operations integrity and reliability to achieve higher production and lower operating costs. This is a multi-year plan to make Syncrude a world class operation. Listed here are a number of measures that illustrate early success:
- Record synthetic crude oil production was achieved in 2007, with recent production near design capacity.
- Energy efficiency has been improved by 10 percent. In fact, Syncrude has eliminated the use of the flare other than for safety reasons.
- Syncrude's safety performance is improving and they achieved best-ever total recordable injury rate in 2007.
- The recent coker turn-around was completed on budget and on schedule.
The chart on the left illustrates synthetic crude oil yields from bitumen. In the second quarter, 86 percent was converted to synthetic crude oil, up from 84 percent in 2007. The remaining part of the bitumen goes to lower valued sulphur, coke, and refinery fuel gas.
Another key activity is related to advancing major projects.
On behalf of the Syncrude owners, Imperial is advancing several projects, including:
- Mine relocations, to supply new bitumen resource;
- two new mine trains in Aurora South;
- and, the environment is a significant focus area with two major projects to retro-fit older cokers to reduce air emissions, and projects to manage tailings.
Syncrude is an important component of Imperial's oil sands portfolio, one that holds considerable long-term promise.
Kearl is an oil-sands mining project north of Fort McMurray. Imperial has a 70-percent interest in the project; ExxonMobil Canada holds the remainder.
As shown by the graphic on the left, Kearl is arguably one of the best undeveloped resources in the Athabasca region. The sweet spot on this graph is at the upper right hand corner. The black diamonds represent industry projects, both producing and proposed. The red diamond represents the Kearl project that Imperial is participating in; you can see that it is a high-quality project and arguably the best of the bunch.
The project is a three phase development with a total capacity of 300,000 barrels per day, sustained for at least 30 years.
For the first phase of Kearl, we plan to market our share of over 100,000 barrels per day of bitumen into Imperial Oil refineries and North American markets, where logistical access continues to grow. For example, Enbridge’s planned “trailbreaker project”, known as the line 9 reversal, combined with reversal of a Portland-Montreal line, will increase access for heavy crude to Atlantic Basin markets and to the U.S. Gulf coast, as early as 2010.
Project activities were disrupted earlier this year surrounding legal challenges associated with the Joint Review Panel report. The matter has since been resolved and in June we were able to continue with site preparation work. Additionally, long-lead procurements have been initiated.
The Alberta Energy Resources Conservation Board estimates that more than 80 percent of the recoverable reserves from oil sands will require in-situ methods. The yellow lease areas shown in this chart indicate the large lease position that Imperial holds for oil sands mining and in-situ recovery. The in-situ leases in the Athabasca area are circled.
Starting this year, we are piloting a new recovery method, called solvent assisted – steam assisted gravity drainage or SA-SAGD. The objective of this will be to accelerate productivity at the beginning of the well’s life and will have application in those future in-situ leases.
The Mackenzie Gas Project will develop six trillion cubic feet of onshore gas from three "anchor" fields in Canada's north.
The Imperial-owned Taglu field accounts for roughly half of the discovered gas resource behind the proposed Mackenzie Gas project.
As you know, we have been studying the feasibility of developing Mackenzie Delta gas for several years. The commercial viability of the natural gas resources and the natural gas pipeline required to transport gas to markets is dependent on many factors. Our focus is on developing a commercially sound project by working with all partners, stakeholders, and the federal government.
We are disappointed to hear that the Joint Review panel report has been delayed and is now expected in 2009.
Imperial remains committed to the project, and current work efforts continue to focus on establishing an appropriate fiscal framework, as well as achieving access agreements and aboriginal support for the project.
Imperial has been acquiring licenses in the Horn River Basin since September 2007. Exploration rights of over 115,000 contiguous acres have been acquired on a 50:50 basis with ExxonMobil Canada.
The acquisition is located in the northeast corner of British Columbia. The licensed area is highlighted in yellow on the map to the left. This is an area that has demonstrated promise for significant natural gas resources through pilots by others in the areas identified with red outline.
During the upcoming winter season, we will drill exploratory wells to begin delineating the resource quality and productivity. Success will be driven by applying ExxonMobil technology that is well suited to developing the tight shale gas geology.
One of Imperial’s key strengths is its ability to identify and successfully develop high-potential, technology intensive opportunities in frontier areas. Last year, the exploration rights for such an opportunity were captured offshore the Mackenzie delta, in Canada’s Far North.
Imperial already had a strong lease position in the region, as shown by the yellow patches on the map.
This position was augmented by a 500,000 acre license, acquired 50:50 with ExxonMobil Canada.
The United States Geological Survey estimates that this Basin has the potential to hold 10 billion barrels of crude oil and 57 trillion cubic feet of natural gas.
Imperial is currently conducting a 3-D seismic program, to better quantify the resource potential.
Imperial has a 15-percent interest in more than 5 million acres in the deepwater Orphan Basin near Newfoundland.
3D seismic was first acquired in 2004 and again in 2007. The first exploration well was drilled over 2006 and 2007 and, the co-venturers applied an ExxonMobil advanced technology that goes beyond 3-D seismic used successfully in other deepwater plays.
A second exploration well is planned for next summer.
Turning to the Downstream and Chemicals, we maintain a leading Canadian industry position in every business we participate in, with considerable opportunity to improve on this leading position. It starts with a leading market share and profitability in the retail service station business. We use proven convenience retailing strategies, and we focus on growing in profitable urban markets across the country.
We're the largest refiner in Canada, and our sites have the capability to process a variety of heavy, sour and synthetic crude feedstocks.
Our finished lubricants market share is the largest in the country at more than 30 percent and continues to grow due to our differentiated product offer.
We have the number one and number two North American market share positions for the two key end use polyethylene segments, which are rotational molding and injection molding applications.
We have the largest share of the chemicals solvents business. These products find their way into a multitude of end uses ranging from adhesives to paints.
And, we hold the leading market position in domestic asphalt sales.
As the largest refiner in Canada, Imperial has been well positioned to capture value from the favorable market conditions in 2004 to 2007. Our business plans, however, also ensure that we will be resilient in less favourable market conditions, such as we are currently facing. The path to sustainable and profitable growth in this business lies in delivering self-help improvements from the business strategies that you see on this slide.
We have an opportunity to grow our refinery processing capacity in the next 5-10 years through these business strategies.
Finally, I would note that Imperial’s refineries are well positioned to respond to Canada’s changing crude slate, as conventional Western Canadian light crude shifts to more synthetic and heavier bitumen feedstocks.
Our customers, shareholders, the public and our employees expect us to meet the increasing demand for energy in an environmentally responsible way. This growing expectation is aligned with Imperial Oil’s long-time focus to deliver strong environmental performance.
One part of our focus to “protect tomorrow, today” is our goal to achieve zero spills. We have made great progress towards this goal by reducing the number of spills by 65 percent since 2002.
Also illustrated is our progress on reducing gas flared from our oil producing sites. Recovering this gas, wherever possible, avoids the loss of an energy resource and reduces emissions of GHGs and air pollutants.
Additional environmental reductions include: total GHG emissions, SO2, NOx, VOCs, energy intensity, and water use.
Imperial has undertaken a number of initiatives, some of which are listed here, to improve a wide range of environmental priorities.
In closing, the following is a summary of some of the factors that distinguish Imperial Oil in the marketplace.
First of all, our resource base represents significant future development and growth opportunities.
In support of that, we have industry-leading technology and operating experience with an unwavering commitment to research and technology development.
Financially, we’re very strong - and possess a disciplined management approach focused on growing shareholder value. Our strong financial position has earned a sustained triple A credit rating from Standard & Poor's, the only Canadian industrial with this rating.
Our return on capital employed is the highest of the Canadian integrated oil group and one of the highest of global integrated oils.
Cash generation is strong, with a high percentage returned to shareholders through 13 consecutive years of increased annual per share dividends paid and an ongoing share repurchase program.
Not listed on this chart - but the essential element for converging all of these attributes to shareholder value - is our talented, committed, and engaged work-force that delivers superior results with a relentless focus on long-term quality earnings growth.
Thank-you again for the invitation to speak and I’d be pleased to take any questions that you might have.
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