| Notes for remarks by T.J. Hearn, Chairman, president and chief executive officer to the RBC Capital Markets North American Energy and Power Conference
| | Boston, Massachusetts | June 7, 2004
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Slide # 1. Title slide
Good morning, ladies and gentlemen. I’m pleased to be here and grateful to RBC Capital Markets for the opportunity to speak to you.
My subject today is the importance of reliable supplies of energy to the world, and to North America, with special emphasis on the role that Canada will play.
In this context I hope to leave three key messages with you today. First, the outlook for increasing global energy use presents the petroleum industry with a major challenge in continuing to provide reliable and affordable supplies.
Second, it is a challenge and an opportunity that the industry is capable and prepared to meet. And third, when it comes to meeting North America's energy needs, Canada and the United States have a tremendous opportunity to work together, for our mutual benefit.
Before addressing these subjects, I would like to briefly comment on the current situation regarding petroleum prices.
With national elections on both sides of our border, higher energy prices -- especially gasoline -- are getting even more public, government and media attention than normal. In addition to the cartoons and editorials about taking a second mortgage to fill up the gas tank....we’re seeing speculation about the long-term sustainability of oil. Even the National Geographic has run a cover story announcing “the end of cheap oil.”
Behind this speculation is the volatile state of oil markets in the world today. As everyone knows, crude oil prices have recently reached levels not seen since the 1990 Gulf War, and prices for refined products have risen even more.
I would quickly point out, however, that today's prices are not the highest we've known. Adjusted for inflation, the 1990 peak crude oil price of about $36 a barrel equates to more than $50 in today's currency. The 1980 peak of $38 a barrel equates to $86 -- more than double the current level.
Clearly, we are in a period of uncertainty, which have often led to short-term price increases. These periods are not uncommon historically. And every time we have one we get speculation over whether it reflects short-term issues or signals a long-term trend. Do we have a spike, or a new plateau, or are we at the start of a ramp to even higher prices in the future?
Oil markets always reflect a combination of reality and perception. On the reality side today, demand for oil has been growing more rapidly in the last couple of years than it did in the decade before. This has been particularly true in China, India and other parts of Asia, but it has also been the case in North America.
Perhaps even more importantly for short-term market behaviour, it has been growing more rapidly than most forecasters and market participants anticipated.
As a result, the price of West Texas Intermediate rose from an average of less than $20 a barrel between 1986 and 1999 to about $27 a barrel between 2000 and 2002, and about $31 last year. Since the beginning of this year it has averaged close to $37 and has exceeded $40.
It has not only been demand for oil that has been growing faster than expected. Steel, base metals, gold, grains, lumber and oil seeds have all seen substantial increases in demand and prices. For the first time since the late 1980s, almost the entire world economy is in a period of generalized growth.
Welcome as that might be, it is unlikely to last. I think it would be naive to assume that we have eliminated business cycles. What we are seeing in oil markets is not necessarily a harbinger of fundamental change. It is a normal market reaction to an unusually strong economic backdrop.
Talking specifically about petroleum product prices, they reflect a combination of increased world-wide demand, low inventories, a weak U.S. dollar, OPEC discipline and, of course, taxes. In both the U.S. and Canada, crude and taxes make up a large proportion of the pump price of gasoline -- about two-thirds in the U.S. and around 75 to 80 percent in Canada.
Another factor contributing to current gasoline prices, especially in the United States, is the increasingly complex supply system required to cope with a fragmented set of product specifications in differing jurisdictions.
The patchwork quilt of different gasoline standards impedes efficient delivery and helps push up local prices. In addition, changing sulphur-content specifications have lessened the availability of gasoline basestock imports when they are needed.
Turning back to crude oil, on the perception side there are concerns over the stability of supply from the Middle East -- especially Iraq and Saudi Arabia -- as well as from Venezuela and West Africa. Attacks on oil facilities and foreign residents obviously contribute to this atmosphere of instability.
Leaving these geopolitical factors aside, if you stand back and look at the supply-demand fundamentals, the world has more than enough crude oil to meet today’s needs. The industry's ability to supply the world with oil is increasing, not decreasing. Global non-OPEC oil supply has grown by almost nine percent since 2000.
One consequence is that the world's "call on OPEC" has fallen since then. Moreover, our medium-term outlook does not foresee significant growth in the call on OPEC through 2010, as non-OPEC production keeps pace with global demand.
All of this would suggest that there is not a strong market basis for sustained upward pressure on oil prices. Market economies have always shown great resilience in reacting to higher prices, with thousands of small actions on both the supply and demand sides having a moderating effect. I would therefore caution against predictions of an irreversible shift into an era of sustained higher oil prices.
At least through the middle of this century, we forecast that the world has sufficient resources to allow oil and gas to continue to be the world's primary sources of convenient, efficient -- and affordable -- energy.
This brings me to a broader theme, which bears on the medium- and longer-term outlook. By stepping back from today’s immediate uncertainties, we get a clearer picture of the fundamentals and where they are leading.
One thing that is certain is that the world's need for energy in all forms will continue to grow. Energy is vital to everyday modern life. Virtually everything we do, use or make involves consumption of energy for heating or cooling, lighting, electrical power or motive fuels... and usually all of them.
It's important to remember that petroleum provides more than just fuel. It provides the feedstock for literally thousands of products we use every day. These include fertilizers, building materials, automobile parts, computer components and wiring, synthetic fibres for clothing, food service equipment, housewares, medical supplies, insulating materials, and many more -- including the most important consumer product of all, golf balls.
Some in our society would like to see the end of the so-called "oil age." As you reflect on all the uses for petroleum, I think you have to seriously wonder how they could be replaced.
As in the past, the principal drivers of energy demand will be population growth and economic growth. The fundamental connection is firmly established.
This is borne out by history. Since the 1970s, the global economy has grown by an average of 3 percent per year, and global energy consumption has grown at about 2 percent per year. Over the next two decades, we expect both to continue to grow at about the same pace.
The world's population is projected to grow from about 6 billion people today to more than 7.5 billion by 2020. About 85 percent of people live today in developing countries, many of them in desperately poor conditions.
Billions of people have no access to sanitation or safe drinking water, let alone the comforts we take for granted. Meeting their needs and aspirations will require vast amounts of additional energy and petroleum products.
Slide # 2. Global Energy Demand to 2020
This chart shows the projected increase in global use of energy by 2020. Demand for energy from all sources will increase from the equivalent of about 205 million oil-equivalent barrels a day in 2000 to about 290 million oil-equivalent barrels a day by 2020, an increase of 40 percent.
Meeting this demand will require contributions from all available energy forms -- oil, gas, coal, and other sources including nuclear, hydro, wind, solar and biomass fuels such as wood. All will be needed. However, most of the world's energy will continue to come from oil and gas. They account for about 60 percent of total energy needs today, and this is not forecast to decrease.
Petroleum has the enduring advantages of high energy density, ease of handling, and an efficient, well-established delivery infrastructure. The world's current and untapped petroleum resources are sufficient to meet the world's needs through to the middle of this century. Ongoing technological developments will ensure that petroleum remains competitive with other forms of energy.
There are some who say that economic growth and an increase in petroleum use are incompatible with sound environmental management. I do not agree.
I believe we can achieve economic growth, which requires increased energy use, while improving the environment. In fact, there is clear evidence that economic growth and higher standards of living lead directly to better environmental performance.
Slide #3: Projected Oil and Gas Supply
However, meeting increased demand for petroleum is not without its challenges. About one-half of the oil and gas volume that will be needed just ten years from now must come from sources that are not in production today. This results from a combination of rising demand and declining productivity of existing fields.
To meet this challenge, the International Energy Agency has estimated that the industry will have to invest at a rate of around 200 billion U.S. dollars a year going forward -- trillions of dollars over the next several decades. In Canada, investments in upstream oil and gas projects are currently running at about 20 billion U.S. dollars a year.
In addition to greater production from the Middle East, new resources must be found and developed -- for example in Russia, West Africa and the Caspian Sea region. It also means additional frontier exploration and development, and tapping more of the world’s heavy-oil resources.
Against this outlook, the magnitude of the challenge to the industry becomes clearer -- it is enormous. But it’s worth remembering that our industry has taken on huge challenges before. Just meeting the world’s rising demand for petroleum energy over the last 120 years has been, in a sense, epic.
Consider that in the early 1930s, world oil and gas production was less than 6 million oil equivalent barrels a day. Today, it is about 120 million barrels a day. And despite the “higher” prices prevailing right now, petroleum energy has remained not only plentiful, but affordable.
In spite of steadily rising consumption, there are more proved oil reserves in the world today than there were thirty years ago. That hasn’t happened by accident. It reflects a willingness to take risks, go almost anywhere, and undertake almost any project.
Turning to North America, economic and population growth will lead to increasing energy consumption here, as well. Total energy demand for the United States and Canada combined is projected to increase from about 53 million oil-equivalent barrels a day in 2001 to about 66 million by 2020, or by about 25 percent. Oil and gas will remain the primary sources.
Declining productivity of existing conventional oil and gas fields on this continent will create a widening supply gap, and a increasing role for imports. That is part of a global trend of growing interdependence between importing and exporting regions.
Inevitably, this raises concerns about longer-term oil supply security. The real answer to energy security, however, is not expensive efforts at domestic independence from imports, but rather supply diversity and smoothly functioning international markets.
At this point I think it's appropriate to make a few comments on the North American natural gas scene. Currently the market for natural gas, unlike crude oil, tends to be continental in nature because of transportation considerations. For many years North America had an excess of gas, and prices were below parity with heavy fuel oil.
However, in recent years demand has risen, especially due to increased use of gas for power generation. In spite of increased drilling activity, supply has leveled off as production from mature fields has declined. This has driven up both costs and prices to the point where gas prices are more in line with refined products.
Since gas demand is expected to continue to grow, new supplies will be needed, which leads to the role that Canada can play in both natural gas and oil.
Slide #4. U.S. Imports by Country of Origin
Canada can, and will, play an increasingly important role in ensuring that Americans and Canadians benefit from reliable, secure and affordable oil and gas supplies.
Today, Canada is the eighth-largest producer of crude oil and natural gas liquids in the world, with around 3 million barrels a day of production. It is the third-largest producer of natural gas, at more than 6 trillion cubic feet a year. Exports to the U.S. include two million barrels a day of oil and refined products and three trillion cubic feet a year of gas.
I would guess that most Americans, if asked to name the largest single supplier of petroleum energy to the U.S., would say Saudi Arabia. In fact, as this slide shows, it is Canada, by far.
Canada is the only G-7 country with the resource potential to become an even more significant exporter of petroleum energy. This presents a tremendous shared opportunity for both Canadians and Americans.
Consider these factors…First, Canada has abundant undeveloped oil and gas resources. In particular, the oil sands of Western Canada represent one of the three great deposits of petroleum resources in the world. The challenge here is not exploration but the development of technologies that will improve recovery and reduce costs.
Turning to natural gas, Canada has substantial untapped resources in our northern, Arctic regions. Imperial is leading a consortium to develop some six trillion cubic feet of discovered gas resources in the Mackenzie Delta region of our Northwest Territories and bring it to southern markets by pipeline.
Slide # 5. Canadian/U.S. Integrated Pipeline Systems
Another distinct advantage is that with a common border, we have an existing infrastructure of pipelines and other facilities that can be expanded to handle growing volumes of oil and gas.
We also have the technical capability and the know-how to undertake and complete very large development projects. Syncrude, for example, is the largest oil-sands mining project in the world. Imperial’s in-situ bitumen recovery operation at Cold Lake, Alberta, is the largest in the Western Hemisphere and the second largest in the world. Canada leads the world in oil-sands technology and research.
Perhaps the most distinct advantage that Canada offers is simply that we are a stable, democratic country with a healthy, free-market economy that is hospitable to investors. That’s an advantage that many other oil-producing countries do not offer, and in today’s world it is not an insignificant consideration.
The security and reliability that Canada offers is further reinforced by important multilateral arrangements. The North American Free Trade Agreement, for example, has helped to cement the integrated and market-based relationship between our two countries.
I and many other Canadian CEOs will continue to support and speak out for market-based policies on both sides of the border. We will also support a strengthened North American security framework. Issues of trade and investment are now inextricably intertwined with those of defense and security.
These advantages add up to a tremendous opportunity for both Canada and the United States. From a Canadian perspective, we can realize the full value of our resources by developing them in line with increasing energy demand.
And from an American perspective, there is the benefit of secure and reliable supplies of vital energy from a neighbour with a shared history of democracy, free markets, mutual interests and cooperative relations.
Imperial Oil, as Canada's largest integrated oil company, will be at the forefront of this opportunity. As our senior vice-president Paul Smith will outline later in the conference, we have a strong resource base, a slate of attractive opportunities in all of Canada’s prospective regions, financial strength and proven human resource and technical capabilities.
Let me close these remarks by recapping my three key messages.
First… throughout the world, and in North America, our industry today faces both major challenges and unprecedented opportunities. With population and economic growth, the world’s need for reliable and affordable energy will continue to increase, with oil and gas remaining the dominant source. Significant new supplies will have to be brought on stream – with all that implies in terms of investment and technological development.
Second… there’s no question in my mind that the industry is equal to the challenge. We can meet the needs of the world and North America for increasing supplies of petroleum. We have a record and a legacy of doing what needs to be done – technologically, financially, managerially and with a commitment to excellence.
And third…I believe we will see greater cooperation and inter-reliance between Canada and the United States in jointly meeting the energy challenge that faces us. We share this continent, so in some respects we have no choice but to cooperate. But more importantly, it is in our respective interests, and to do so is consistent with our history.
Finally, let me say that having lived and worked around the world, in the United States, in Canada and in other countries as well, I know that Canadians and Americans share the same aspirations...We can be anything, dream anything, and achieve anything. And I know that when our interests coincide, together we can overcome any obstacle and realize our opportunities.
Thank you for your attention.
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