| Notes for remarks by K.C. Williams, Director and Senior Vice-President, Imperial Oil Limited, to the Canadian Association of Petroleum Producers Investment Symposium 2004
| | Calgary, AB | June 15, 2004
| CHART #1 -- Title Page
Good morning. Imperial appreciates the opportunity to be part of the 2004 CAPP Oil and Gas Symposium.
Imperial is Canada’s largest integrated oil company - with interests from oil and gas production to refining, marketing and petrochemical manufacturing. Imperial is listed on the Toronto and American Stock Exchanges.
We have the resource base, the financial strength and the expertise to enhance shareholder value through continuous improvement in all aspects of our business.
Imperial's total resource base --only a portion of which is proved -- is second to none in Canada. Our total resource base represents more than five times our proved reserves, which at year-end 2003, stood at about two billion oil-equivalent barrels.
My focus today will be on the upstream, which we see as an area of significant future growth.
But first, let me start with a few introductory comments about Imperial as a whole to set the stage.
CHART #2 -- Imperial's Strategic Focus - Canada
I should remind you that Imperial operates only in Canada, with a broad exposure to all major growth areas.
The company has a solid track record of enhancing shareholder value in all areas of the marketplace through a sustained emphasis on our four corporate priorities.
Our first priority is to achieve operational excellence and strive for flawless execution in all we do. We start with a commitment to industry-leading safety, health and environmental performance. This focus on operational excellence is the yardstick against which we measure every other aspect of our performance.
Our second priority is to grow profitable sales volumes. And as I'll outline in the balance of my presentation, we see our upstream business as a key source for future growth.
A third corporate priority is to achieve and maintain a best-in-class cost structure in every part of our business.
And finally, our fourth priority is to improve the productivity of our asset mix. This includes further investment in high-performing assets, divestment of non-core assets and acquisition of new opportunities.
In 2003, Imperial’s capital investments exceeded one and a half billion dollars – with anticipated capital spending for 2004 to be in this same range. The majority of this investment is targeted at attractive growth opportunities in the upstream.
You should note that all numbers in my presentation are expressed in Canadian dollars.
CHART #3 -- Delivering Improved Earnings and Returns
In our drive to enhance shareholder value, we strive for continuous improvement in our business results - and in doing so - our bottom line.
The bars on this graph show Imperial's total earnings for the past decade. Earnings in 2003, at over $1.6 billion and $4.52 per share were the highest ever.
The hatched portion of the bars illustrates the contribution to total earnings from upstream operations.
The red line shows Imperial's return on average capital employed over the same period. You will note the significant improvement in both earnings and return on capital employed over the last decade. You will also note that Imperial’s earnings have exceeded 1.2 billion dollars in each of the last four years.
While we haven't plotted it on this graph, with earnings of over $500 million in the first quarter -- more than two-thirds of that ($366 million) from the upstream -- we are off to a very good start for 2004.
Now, I'd now like to talk in more detail about our upstream business.
CHART #4 -- Positioned to Continue as Upstream Leader
Imperial has a tradition of leadership in the upstream industry, and we remain strongly positioned to continue as a leader in the areas that, I believe, represent the future of Canada's upstream.
In the oil sands of northern Alberta -- an area in which Imperial has long been dominant -- we have the wholly owned Cold Lake in-situ operation, a 25-percent ownership position in Syncrude Canada, and a new opportunity, still in its early stages -- the Imperial-operated Kearl oil-sands mining project.
In Canada's Far North, Imperial holds half of the total discovered, on-shore natural gas resource and is leading the group advancing development of the Mackenzie Gas Project.
And off Canada's East Coast, we hold a strong exploration position in the deepwater offshore Newfoundland.
I will address each of these areas with my remaining time, starting with the oil sands -- and Cold Lake.
CHART #5 -- Cold Lake Overview
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 North America.
We have been very deliberate - and successful - in pursuing a phased development approach at Cold Lake. This approach has allowed us to maximize value by minimizing the production, operating and investment risks associated with a development of this size.
The Cold Lake leases were acquired by Imperial between 1958 and 1962. A number of field pilots during the 60s and early 70s developed the technology that allowed us to move forward with a phased commercial development.
The first phases of our commercial project started in 1985, and by 1995, we were operating 10 phases of production.
We now operate 13 phases of production -- including a $650-million, three-phase expansion that started up at the end of 2002, shown in the two photos on this chart. The top photo is the plant site; the lower photo is one of 21 initial well pads.
We have also maintained a proprietary research program, developing technologies such as the cyclic steam-stimulation (or CSS) process Imperial uses to recover bitumen at Cold Lake. You hear much today about steam-assisted gravity drainage -- or SAGD-- which is now seeing application in a number of new in-situ projects in the Athabasca basin. You may not be aware that Imperial was granted the original patent for SAGD in 1982, and while SAGD is well-suited for some Athabasca reservoirs, CSS (which Imperial patented in 1966) remains the superior recovery process for the Cold Lake deposit.
CHART #6 -- Cold Lake Development Plans
This map shows the location of current operations, as well as those of potential future expansions.
Phases 11-13 (shown by the green symbol) started up in 2002, on-schedule and on-budget. The 250-million-barrel expansion includes three new phases of bitumen production and cogeneration. The 170-megawatt cogeneration plant will meet all of the electrical power needs for the entire Cold Lake operation for the foreseeable future.
We have a significant development drilling program underway in 2004 within the area outlined in red, using up to three rigs, including a new rig specifically designed for service at Cold Lake (Akita 32E). Not only is it specifically built for pad drilling, it also incorporates state-of-the-art safety features to protect workers from injury.
Our 2004 program will involve more than 300 productivity-maintenance wells drilled from some 13 pads.
We are currently assessing a number of capacity enhancement initiatives aimed at debottlenecking and interconnecting our four existing plants. These enhancement opportunities -- which we believe can be accomplished without significant new infrastructure -- may be the next most economically attractive expansion option for Cold Lake.
And finally, in March of this year, we received regulatory approval for two future expansion areas, shown by the green hatching. These expansions could involve the addition of three more phases of commercial development, as well as the extension of two of our existing phases.
While this approval is a significant positive step for the continuing development of Cold Lake, we have not made the decision to commit funding. Further engineering assessments, analysis of markets and business conditions will need to be performed prior to our decision to fund.
CHART #7 -- Syncrude Development Plans
I know that Canadian Oil Sands Trust is presenting later this morning, so I won't go into great detail on Imperial's interest in Syncrude Canada, but I want to briefly address development plans and base business performance.
Imperial -- with a 25-percent ownership -- is the second largest owner of Syncrude Canada Limited, Canada's largest oil production operation and the largest oil-sands project on the planet.
In 2001 the Syncrude owners approved the Aurora 2 mine and Upgrader expansion, which includes the addition of a third, 100,000-barrel per day fluid coker.
The Aurora 2 mine is now operating, and was completed within budget and on-schedule.
The upgrader expansion will not only increase capacity by 100,000 barrels a day upon completion, it will also improve overall synthetic blend quality for the entire Syncrude site.
As you are likely aware, earlier this year the Syncrude owners received a revised cost and schedule estimate for the upgrader expansion project indicating disappointing cost performance, significantly higher than previous estimates.
Since that time, Syncrude Canada has drawn a team of experts from its own ranks and from the project owners to take intervention steps and ensure the remaining project work proceeds to a successful completion and start-up. As a result of this team's work, numerous initiatives are in place to manage cost pressures and effectively execute the remaining work.
Currently, work on the upgrader expansion is more than 40 percent complete and will start up about one year later than previously scheduled, by mid-2006.
CHART #8 -- Syncrude Performance
This chart illustrates some key performance data for Syncrude over the past decade. -- grouped as three, three-year segments (the green bars) - reflecting the cycle time of major facility maintenance schedules.
For comparison, the blue bars on the right of each graph illustrate performance in the first quarter of 2004.
The graph on the left, illustrates the continuous, long-term rise in production, averaging three percent per year growth.
The graph on the right illustrates what I'd describe as a significant opportunity for improvement. Through much of the 1990's Syncrude made excellent progress in reducing unit costs. However, during the last three-year period shown, 2000-2002 -- the result of a combination of reliability issues with base operations, and start-up costs associated with integrating the new Aurora mine -- Syncrude has experienced a unit-cost increase that is clearly not sustainable, and is being actively addressed.
You can see from the blue bar illustrating performance in 2004 that efforts to address this situation are proving effective, and unit costs are coming down. And while the reduction you see illustrated here may not look significant when compared with the average for the three-year period of 2000-2002, the improvement versus 2003 performance (not on the chart), is dramatic - about $7 a barrel.
Let me now turn to Kearl - a new oil-sands mining opportunity for Imperial.
CHART #9 -- Kearl Oil Sands Project
While Cold Lake and Syncrude are the cornerstones of our current oil-sands business, Imperial also has extensive oil sands interests outside of these producing areas.
This map illustrates one of these, the Kearl Lake region northeast of Fort McMurray, near Syncrude. Shown in yellow on the right are two leases (oil sands leases 87 and 6), on which Imperial holds 100 percent of the surface mining rights; and on the left, Lease 36, a lease with mining potential that is 100-percent held by ExxonMobil, Imperial's major shareholder.
Several years ago ExxonMobil Canada initiated extensive work on development of a mining and upgrading project on Lease 36.
Imperial and ExxonMobil Canada are now progressing work on a potential joint mining development on these three leases, with Imperial serving as operator for the joint venture.
Our design basis involves a phased development approach - with an initial development of 100,000 barrels a day, and later expansions to over 200,000 barrels a day.
We concluded phase one of a core-hole delineation drilling program last winter to further define the resource potential on the 100-percent Imperial lease areas. We plan further core-hole drilling this winter. The red triangles indicate the extent of this program.
We've also initiated baseline environmental work, launched a public consultation program and begun conceptual engineering.
We are evaluating a range of upgrading options, from partial upgrading on-site to potential integration with North American refineries owned by Imperial (Strathcona Refinery at Edmonton) and ExxonMobil (Joliet Refinery at Joliet, Illinois).
Our preliminary cost estimates suggest this development would involve capital spending in the range of $5-8 billion (CDN), with the final estimate being highly dependent on the upgrading option selected.
An important additional unknown at this time is the impact of Kyoto compliance. Clearly, this, along with many other technical and commercial factors, must be fully understood prior to making a development decision.
Now I'd like to turn to Imperial's large gas resources in Canada's Far North.
CHART #10 -- Mackenzie Gas Project
As many of you know, development of the gas resources in the Mackenzie Delta has been the subject of much discussion since the early 1970s, when the largest onshore gas reserves were discovered.
From the outset, we have maintained that Aboriginal support is essential to development.
This chart summarizes the concept being advanced by the project co-venturers -- Imperial, ConocoPhillips, Shell Canada, ExxonMobil Canada and the Aboriginal Pipeline Group. Imperial is the project lead and operator for the gas-gathering system and the Mackenzie Valley Pipeline.
The concept includes:
- Development of Canadian onshore gas, with three anchor fields.
- These anchor fields contain about 6 TCF of gas, with potential for production of 830 million cubic feet per day
- Imperial's 100-percent owned Taglu field contains approximately 3 TCF or 50 percent of the onshore discovered resources.
- The pipeline will be along the east side of the Mackenzie River.
- Use proven technology, and buried, so it
- Minimizes the environmental footprint.
- Recognizing that additional natural gas has been, and will be, discovered, this concept is accessible to others and expandable.
Looking at the map on the right, gas produced will be transported through gathering lines to a common facility located near Inuvik, which would be just south of Taglu.
From the north end near Inuvik, the gas will be dehydrated and compressed before being sent south in a buried pipeline (shown in red) through Imperial's operations at Norman Wells and ultimately connect with existing gas pipeline systems in Alberta. Natural gas liquids will be transported in a separate, buried NGL line (shown in green), to Norman Wells and connect with the existing oil pipeline (shown in grey).
My next chart illustrates the flexible approach we are pursuing in terms of proposed pipeline capacity.
CHART #11 -- Mackenzie Valley Pipeline Flexibility
This chart illustrates the range of capacity possible with the design we are advancing as the filing basis.
In 2002, the Mackenzie Gas Project group issued an open season call for non-binding shipping nominations from all companies. We were pleased with the response -- we received responses representing 20 companies.
Based on the results of this process, we decided to base our engineering and impact assessment work on a pipeline sized to initially handle 1.2 billion cubic feet per day (BCFD) -- or about 50 percent greater than the 830 million MCFD required for the three anchor fields. This is illustrated in the centre portion of the chart.
Our current design basis, based on this capacity, would see a 30-inch gas line and a 10-inch NGL line.
As you can see from the expanded case shown on the right, capacity in the gas line could be increased up to 1.9 BCFD with the addition of compression.
As we move toward the filing of regulatory applications later this summer, we have been progressively seeking firmer shipping commitments.
CHART #12 -- Mackenzie Gas Project - Recent Highlights-Activity
So, with that basic understanding, let me say a few words about where we are today and what lies ahead.
Let me start with our safety performance. Through more than two years of project development and field work, comprising more than 1.3 million work hours, we have not had a single recordable injury.
Additional geotechnical work was completed this past winter in the Gwich'in region and the K'hasho Got'ine district in the Sahtu region.
As I stated earlier, we believe one of the critical strengths of our initiative is that we continue to work diligently to build and maintain significant Aboriginal direct involvement with the Mackenzie Gas Project. Toward that end, our public consultation and information-sharing programs have expanded significantly, with over 600 meetings held by year-end 2003 with a wide variety of interested parties.
The last and most recent highlight occurred on June 3rd, when the draft Environmental Impact Statement terms of reference were issued by regulators, with comments from stakeholders due back by mid-July. We expect to have the final terms of reference by the end of July.
Under the category of other Ongoing Activity:
- We continue negotiating benefits and access agreements with Northern communities.
- Working through our three regional offices in the North, we are actively recruiting Northerners for pipeline operations training and apprenticeship programs.
- We continue to progress commercial agreements for pipeline access with explorers.
- We are working with Northern elders in a number of communities, gathering traditional knowledge data to supplement the technical environmental data we've already acquired in preparation for project applications.
- All of this work is positioning the project to file regulatory applications late this summer. The specific timing will be dependent on the support and cooperation of all parties -- regulatory authorities, landowners and governments -- in addition to support by the co-venturers.
I want to turn now to another part of the country, and talk briefly about one of Imperial's most recently acquired opportunities off Canada's East Coast.
CHART #13 -- East Coast - Offshore Newfoundland
This map illustrates a new area of exploration for Imperial -- the Orphan Basin.
In a December 2003 licence offering, Imperial (25%) along with ExxonMobil Canada (25%) and Chevron Canada Resources (50%) were successful in acquiring exploration rights for eight deepwater parcels in the Orphan Basin offshore Newfoundland. These eight blocks are shown on this map in yellow.
For reference, also shown (in light green, just below the Orphan Basin) are the locations of the currently held exploration and producing acreage of our competitors surrounding the Hibernia, Terra Nova and Whiterose fields.
Imperial and its co-venturers were awarded exploration licenses for the eight Orphan Basin parcels in December 2003, after proposing exploration spending of $673 million (Cdn.). Imperial's 25 percent share would be $168 million (License terms are such that Imperial's minimum commitment is 25 percent of its share, or $42 million.).
This is a large, unexplored frontier basin, and these parcels are a significant addition to our unexplored offshore acreage.
Although this basin is considered high-risk, existing two-dimensional seismic data does suggest the presence of very large structures on these leases, with multi-billion barrel resource potential. To gain a better sense of the prospectivity of these leases, the acquisition of
3-D seismic will be necessary, and could begin as early as this summer.
The Orphan Basin is also in a very challenging and high-cost environment -- with deep water (1,500 - 2,500 metres), ice-bergs and a short weather "window." These are the types of challenges Imperial and its co-venturers are prepared to address, pending exploration success.
My next chart illustrates an oil-equivalent production outlook for Imperial.
CHART #14 -- Production Outlook
The graph on the left illustrates Imperial's near-term growth 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 2012. 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 East Coast deepwater plays, 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 nearly doubling over the next 10 years.
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.
CHART #15 -- Strongly Positioned for the Future
I want to close by re-stating a few of the points I've shared with you.
First, Imperial's resource base in Canada is second to none, and we are well-positioned in each of Canada's future upstream growth areas.
Due to my limited time, I haven't addressed the downstream side of our business, but I do want to mention that this is an area in which Imperial continues to make significant investments to maintain our leading positions in the marketplace. Several examples are listed on this chart.
In addition, a supplemental chart at the very back of your package lists some highlights of our market positions in the downstream.
Moving down the chart, Imperial operates from a solid base of technology with a high commitment to research and technology development for all business lines.
And, listed last on the chart, our financial position is rock-solid at a "AAA" rating.
Not listed on the chart, but the essential element for converting all of these attributes to shareholder value, is our talented, engaged and innovative workforce that delivered superior results in 2003, and is continuing to do so in 2004.
Thanks for listening, that concludes my prepared remarks.
CHART #16 --Disclaimer
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