| Notes for remarks by Eddie L. Lui, Vice-President, Oil Sands Development and Research, Imperial Oil Limited, to TD Newcrest Oil Sands Forum 2004
| | Calgary, AB | July 7, 2004
| CHART #1 -- Title Page
Good morning. It’s an honor for me to be addressing this conference, and I want to thank TD Newcrest for once again giving Imperial this opportunity.
I'd like to take a few minutes today to discuss some of the challenges and opportunities associated with development of Canada's oil sands, and offer some of Imperial's perspectives based on our experience with our in-situ development at Cold Lake and our interest in Syncrude Canada.
I will also touch on Imperial's other oil-sands opportunities, in particular the Kearl oil-sands mining opportunity.
Chart #2 -- Disclaimer
This presentation contains some forward-looking information & I'm sure you understand that actual results may differ materially due to a number of factors.
CHART #3 -- A Leader in Canada's Oil Sands
Imperial's oil sands assets are a significant portion of our asset base, and offer strategic long-term growth opportunities.
Our Cold Lake project is one of the largest in-situ oil sands operations in the world. This asset is wholly owned and operated by Imperial. Cold Lake produces over five percent of Canada's crude oil -- with production of over 47 million barrels in 2003 (or about 130 kbd).
Imperial also holds a 25 percent working interest in the Syncrude Project. The Syncrude Project is the largest producer of synthetic crude oil from Canada's oil sands -- accounting for about 9% percent of Canada's crude oil production -- with production in excess of 77 million barrels in 2003.
And while production from these two operations in Alberta's oil sands are the cornerstones of our current oil sands business, and account for more than 50 percent of our total upstream production, Imperial also has extensive oil sands interests outside of these projects.
On the bottom on this chart, it outlines our latest initiative, the Kearl oil sands mining opportunity. Imperial and ExxonMobil Canada are progressing work on a joint mining development on three leases north of Fort McMurray, with Imperial serving as operator for the joint venture.
Imperial has been involved in oil sands development for some 40 years. Over those four decades, we have maintained a strong focus on oil sands research and development to meet some of the challenges associated with oil-sands development.
Let me start this discussion with a look at our Cold Lake in-situ development.
CHART #4 -- Cold Lake Overview
Imperial's 100-percent owned and operated Cold Lake development is a premier oil-sands asset and the largest in-situ recovery operation in North America.
We have been 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 was started up at the end of 2002, shown in the two photos on this chart.
We have maintained an active research program, continuing our efforts in developing facilities and bitumen recovery technologies to further enhance our Cold Lake Operation.
CHART #5 -- Cyclic Steam Simulation
Let me take a moment to explain the recovery technology we use in Cold Lake.
The technology is cyclic steam-stimulation -- or CSS -- which you see illustrated in this schematic drawing. This is technology that Imperial developed at Cold Lake, for Cold Lake, and which we continue to use today.
Steam -- up to 600,000 barrels a day is transported to wells through insulated, above-ground pipelines. As illustrated on the left, this steam is injected down the wellbores into the Clearwater formation at temperatures of about 300 degrees Celsius and pressures at about 1600 psi.
To mobilize the bitumen and provide drive energy, cyclic steam-stimulation uses periods of steam injection, followed by periods of “soaking”, as you see illustrated in the centre.
Finally, the same wells are used to produce the bitumen and water mixture. The nature of the process provides for multiple drive mechanisms - compaction drive, solution gas drive, and gravity drainage - which in turn deliver higher early production rates than other thermal processes.
As the drive energy from the injected steam and production rates decline, a new cycle of steam injection begins. Cycle lengths range from a few months to three years as reservoir areas more distant from the wells are accessed.
CHART #6 -- Technology Development Led To Commercialization
As I mentioned earlier, technology development has been the key to our success at Cold Lake. Across the centre of this chart, I have listed some of the major technology advancement that has helped make commercialization at Cold Lake possible. I won't list them all, but let me mention a couple of highlights.
In 1966 - Imperial was granted a patent for cyclic steam-stimulation recovery technology, which has remained the most attractive recovery process for Cold Lake over the past 30 years.
In 1978 - Imperial refined its produced water treatment and steam generation process to permit once-through steam generation from produced water. This significantly reduced fresh water requirements and reduced energy costs by allowing the reuse of hot, produced water to generate steam. It also significantly reduces environmental impact to the air and water resources in the Cold Lake area.
In 1982 - Imperial was granted a patent for the steam-assisted gravity drainage, a process that is now being used by many companies in a number of new in-situ projects in the Athabasca basin.
The graph on the bottom right illustrates the increase in forecast recovery from bitumen in place as a result of our continued efforts in research. Advances in technology have increased current expected recovery rates to 25 percent, from 13 percent in 1977.
For over 10 years, we have piloted follow-up recovery processes to access cold, unswept portions of the oil sands reservoir. It is our assessment that follow-up processes could increase bitumen recovery at Cold Lake from 25 percent today to 30-35 percent.
I should note that when we talk about recovery at Cold Lake, we are referring to the recovery of percentage of the total original bitumen in place. This approach tends to yield lower calculated recoveries than you might hear for other projects, which may refer to recoveries in only the contacted areas.
CHART #7 -- Cold Lake Production - CSS Results in Variations
This chart illustrates the cyclic nature of the CSS production process on bitumen production over time.
The graph shows Cold Lake bitumen production over the past 10 years, with a projection for the expected variability in the near-term future.
You can see that the average annual growth over the past decade has been about five percent per year (illustrated by the dashed grey line). Within that overall growth, however, there is significant bitumen production variation. In fact, it's not uncommon to experience changes in production of as much as 20,000 barrels a day from one quarter to another.
The bottom line is that, despite the cyclic production, Cold Lake provides long-term, continuous production growth.
CHART #8 -- Cold Lake Development Plans
This map shows the locations of our current operations, as well as those of some potential future expansions.
Phases 11-13 (shown by the green symbol) started up in late 2002, on-schedule and on-budget. The expansion includes three new phases of bitumen production, developing 250 million barrels of reserves and a 170-megawatt cogeneration plant that will meet all of the electrical power needs for the entire Cold Lake operation for the foreseeable future.
We have an active development drilling program underway in 2004 within our approved development area (outlined in red), using up to three rigs, including a new rig specifically designed for drilling at Cold Lake. It is specially designed and built for Cold Lake pad drilling, and 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 option to further increase Cold Lake production.
And finally, in March of this year, we received regulatory approval for two future expansion areas, shown by the green hatching. These expansions would involve the addition of three more phases of commercial development, as well as an extension to our approved development area.
While this approval is a significant positive step for the continuing development of the Cold Lake project, further engineering assessments, analysis of markets and business conditions will need to be performed prior to our decision to fund these expansions.
CHART #9 -- Syncrude Development Plans
I know that Canadian Oil Sands Trust is presenting at this conference later as well, so I won't go into great detail on Syncrude, but I do want to briefly address Syncrude's stage 3 expansion and base business performance.
In 2001,Syncrude owners approved the Aurora 2 mine and Upgrader expansion.
The Aurora 2 mine is now operating, and was completed on budget and on-schedule, and has demonstrated the design capacity of 8000 tonnes per hour.
As you are likely aware, earlier this year Syncrude owners received a revised cost and schedule estimate for the upgrader expansion project indicating significant cost increase and schedule slippage.
Since that time, resources from Syncrude and the owners have been added to the project management team to take intervention steps and ensure the remaining project proceeds to a successful completion . Numerous initiatives are in place to manage cost pressures and effectively execute the remaining work.
The owners have been meeting with the project management team monthly. Based on my personal observations, I believe the team is doing a great job and making excellent progress.
The upgrader expansion is over 50% complete and is expected to be started up in 2006.
CHART #10 -- 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 2 bars on the right of each graph illustrate performance in 2003 and 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. Over the last three years -- the result of a combination of reliability issues with base operations, higher energy costs and start-up costs associated with the new Aurora mine -- Syncrude has experienced a unit-cost increase that is clearly not acceptable, and is being actively addressed.
You can see from the blue bar illustrating performance in the first quarter of 2004 that efforts to address this situation are paying off, and unit costs are coming down. Cash unit operating cost for the first quarter was just below $17 a barrel, despite a significant increase in energy expenses due to high natural gas prices. Syncrude management is taking steps to sustain that performance.
Let me now turn our discussion to the Kearl project - a new oil-sands mining opportunity for Imperial.
CHART #11 -- 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 the projects we are working on - Kearl Mining Project located northeast of Fort McMurray. Shown in yellow are: two leases (oil sands leases 87 and 6), which Imperial holds 100 percent of the mining rights; as well as Lease 36, 100-percent held by ExxonMobil.
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 joint mining development on these three leases, with Imperial serving as operator.
Our design basis involves a phased development approach - with an initial development of 100,000 barrels a day, and later expansion to 200,000 barrels a day.
We completed phase one of a delineation drilling program last winter to further define the resource potential on the 100-percent Imperial lease areas. And we plan further core-hole drilling this winter. The red triangles indicate the location of the drilling locations.
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.
My next chart illustrates an oil-equivalent production outlook for Imperial.
CHART #12 -- Production Outlook
This chart illustrates the present and projected future contributions to Imperial's business from the oil sands.
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.
Conventional volumes (lower red portion) are expected to decline toward the end of the decade. However, this decline is expected to be more than offset by growth from the oil sands, Mackenzie Gas and Imperial's other opportunities.
The significant growth we project for the oil-sands segment of the business, shown in green, - will, by 2012, more than double the volume we realized from this segment in 2003.
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.
CHART #13 -- Strongly Positioned for Future Oil Sands Development
Let me close by re-stating a couple of points.
First, Canada's oil sands represent a truly enormous opportunity with the potential to provide significant benefits for Canada.
But it's not a resource without some unique and significant challenges. The oil sands sector has done a remarkable job of meeting those challenges - creating an industry that's world-class in size, technology and cost-competitiveness.
To continue our success, we must continue to excel in the areas of technology development, project management and operating performance efficiency.
Imperial is excited about the growth potential of our oil sands assets.
We will continue our efforts in research and technology development to exploit this enormous resource.
That concludes my formal remarks.
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