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Canadian Oil and Gas

Canadian Oil and Gas. Presented by: Haosen Liang Sandy Sanjoto Alice Liang Yu Tai Ben Yee. Presentation Overview. Industry Analysis Imperial Oil Suncor Energy Encana Corporation. Agenda. Canada’s Place in the World Underlying Product Industry Components

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Canadian Oil and Gas

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  1. Canadian Oil and Gas Presented by: Haosen Liang Sandy Sanjoto Alice Liang Yu Tai Ben Yee

  2. Presentation Overview • Industry Analysis • Imperial Oil • Suncor Energy • Encana Corporation

  3. Agenda • Canada’s Place in the World • Underlying Product • Industry Components • Importance of Technology • SWOT Analysis • Recommendation

  4. Top Ten World Natural Gas Producers in 2004

  5. Top 10 World Crude Oil Producers in 2004

  6. Oil and Gas Re-investment Cycle($ Cdn for 2003-2005)

  7. What is the underlying product? • Fossil sediments • trapped in in the pores of rocks • Hydrocarbons • CH4 (methane), C3H8 (propane), C4H10 (butane) • C7H16 through C11H24 (gasoline and diesel) • Lubricating and Heavy gas oils

  8. Types and Uses • Crude Oil and Natural Gas • Uses: • Mobility, heat and cool our homes and provide electricity • Products: • plastics, life-saving medications, clothing, cosmetics, and many other items you may use daily • Barrel – a unit of measure for oil and petroleum products that is equivalent to 42 U.S. gallons ~ 159 Litres

  9. Proven Natural Gas Reserves

  10. Western Canadian Natural Gas Resources

  11. Canadian Oil Production Outlook

  12. Big Players’ Production

  13. Conventional Oil vs. Oil Sands Conventional Oil • Petroleum found in liquid form, flowing naturally or capable of being pumped without further processing or dilution • Light crude oil • Cheaper to produce Oil Sands  Synthetic Crude Oil • Oil Sands is a thick mixture of sands, bitumen, mineral rich clays and water • Synthetic crude oil is extracted from oil sands and it is often sold at a premium because of its high quality • More costly to produce

  14. Types of Crude Oil Produced in Canada • Condensates: hydrocarbons recovered from a natural gas reservoir. • Light crude oil: liquid petroleum with a gravity of 28°API or higher • Heavy crude oil: liquid petroleum with a gravity below 28°API • Bitumen: petroleum in semi-solid or solid form that is found in bituminous sands. It is so heavy (gravity below 12°API) and viscous that it will not flow unless heated or diluted. • Synthetic crude oil: a product similar to a high-quality light crude oil. It is made by refining or upgrading heavy oil or bitumen. From 31-33°API • Pentanes: hydrocarbons containing molecules of 5 carbon atoms and 12 hydrogen atoms.

  15. Industry Components • Upstream • Exploration and Production • Seismic Survey • Midstream • Pipeline, Transportation and Storage • Downstream • Refining, Marketing and Retailing

  16. Extraction 1.Natural Gas • Wells are drilled and gas flows under its own pressure ~ 90% methane • Needs processing to remove impurities 2. Drilling: • Conventional crude oil that is near the surface can pumped up using traditional techniques

  17. Oil Sands Composition

  18. Synthetic Crude Production Process Ore Preparation • Strip-Mining • The pick and shovel method used to recover oil sands that are near surface • 600,000 barrels per day  1.2m barrels per day in 2010 • In Situ • Includes various methods used to recover deeply buried bitumen deposits, including steam injection, solvent injection and firefloods • 380,000 barrels per day  700,000 barrels per day in 2010 • More than 80% of the Oil Sands reserve require this method Extraction • Separates Bitumen from other molecules Upgrading • Processes Bitumen into Synthetic Crude Oil and Vacuum Gas Oil

  19. SAGD: Steam Assisted Gravity Drainage Because of the rising prices of natural gas, crude producers are moving towards using bitumen or high sulphur fuels to generate steam 80% of bitumen extraction relies on this method In-situ Production

  20. Harvesting Bitumen

  21. Oil Refining 1. Fractional Distillation ~ boil and cool 2. Conversion ~ chemicals 3. Treatment ~ impurities 4. Recombination ~ octane ratings

  22. Importance of Technology

  23. Correlation between Oil and Natural Gas Prices

  24. Oil Sands Production TechnologiesAlternates to Natural Gas

  25. Toe-to-Heel Air Injection

  26. Oil Sands Supply Costs by Recovery Type

  27. Heavy Oil Economics (US$ per barrel)

  28. Strengths • Canada is the world leader of • Enhanced recovery techniques for mature reservoirs • Cold climate and offshore production • Gas processing, sulphur extraction and heavy oil upgrading • Oil Sands reserve • Development of Oil Sand projects • Integrated with the world’s largest market for energy consumption, making it less costly to bring the products to market. • Strong interest from China, the largest market for energy consumption in the future. • Attractive crown royalty rate for oil sand projects

  29. Weakness - Regulatory Approval

  30. Weaknesses • Limited natural gas reserves • Capacity for natural gas is forecasted to decrease • Canada is one of the high-cost places in the world to find and produce oil and gas • Deep gas, natural gas from coal and developments offshore, in the oil sands and the North are large, complex and expensive and have long lead times before they turn a profit • Challenges in meeting North America’s energy needs

  31. Opportunities • Exporting to the US • Oils Sands • Exploration of Northern and Eastern Canada • World population is currently around 6 billion people, but is expected to grow to approximately 7.6 billion by 2020. - a huge increase in the demand for transportation fuels, electricity, and many other consumer products made from oil and natural gas.

  32. Opportunities - Markets • Expanding markets in U.S. and Asia

  33. Threats • Tighter environmental and security regulations • Kyoto Protocol • Limited proven natural gas reserve • Long run viability of oil sands project • It is estimated that crude price has to be above $30 a barrel for oil sand projects to be profitable because of the high production costs • Increasing Supply costs

  34. Important Trends • Higher oil sands production/declining conventional oil production • Share of gas production increasingly coming from sour and unconventional gas (e.g., coalbed methane) • Average drilling density increasing and competition for the land base escalating • Average finding and development costs spiraling upwards • Greater North American market interdependence

  35. Selection Criteria for Long Term Investment Larger companies with strong financial resources Companies that have good access to resources and (potential) markets Companies that already demonstrate superior cost structure and lower production costs Recommended Strategy

  36. Imperial Oil Limited

  37. Agenda • Company Background • Management & Business Strategy • Business Segments • Risks and Challenges • Financial Information by Segments

  38. Agenda (Cont) • Financial Statements • Valuation Ratios • Stock Prices and Charts • Discounted Cash Flow Model • Conclusion & Recommendation

  39. Company Background • Incorporated in 1880 with HQ in Calgary, Alberta • Largest integrated oil company in Canada • Stock Exchanges: AMEX (IMO-A), TSE (IMO-T) • Market Cap: 37.187 Billion (As of March 10, 2006) • Share Price: $111.80 CAD (As of March 10, 2006)

  40. Company Background (Cont) • Proposed three-for-one stock split on Feb 2, 2006 • Relationship with Exxon Mobil Corporation • Exxon Mobil owns 69.6% of the company • Abundant access to technologies, leverage, and research globally • Imperial Oil and Exxon Mobil have agreed to operate their Western Canada production together as of April 1, 2005

  41. Management & Business Strategy • T.J. (Tim) Hearn: Chairman, president and CEO • R.L. (Randy) Broiles: Senior VP, resources division • P.A. (Paul) Smith: Controller and senior VP, finance and administration • Enhances shareholder value through the Consistent Management Approach

  42. Sustained emphasis on 4 corporate priorities: Operational excellence Growing profitable sales volume Achieving and maintaining a best-in-class cost structure Improving the productivity of the asset mix Management & Business Strategy

  43. Business Segments • Three business segments: • Natural Resources (Upstream) • Petroleum Products (Downstream) • Chemicals

  44. Natural Resources • Conventional Oil and Gas • Norman Wells in Northwest Territories • West Pembina in Alberta • Wizard Lake • Oil Sands - Cold Lake in Alberta • Tar Sands - Syncrude in Alberta • Exploration and Development • Mackenzie Delta

  45. Major Oil Sands Deposits

  46. Oil Sands – Cold Lake Operations • Imperial Oil owns 78,000 hectares of oil sands • Cold Lake is the second largest thermal heavy-oil operations in the world • Development drilling program and research • Increasing royalties to be paid to government

  47. Oil Sands – Cold Lake Operations

  48. Oil Sands – Cold Lake Operations

  49. Tar Sands – Syncrude Operations

  50. Tar Sands – Syncrude Operations • Located near Fort McMurray, Alberta • The single largest crude oil producer in Canada • Three main activities: recover shallow deposits of tar sands using open-pit mining methods, extraction of crude bitumen, and production of synthetic crude oil • Recent investment in expansions (Aurora)

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