​Imperial CEO: Oilsands still a world-class opportunity, but you have to be big to play in the sandbox

Imperial Oil CEO Rich Kruger. Image: Imperial Oil

Persistently low oil prices, CO2 worries and difficulty getting production to markets have many thinking growth in Alberta’s oilsands is over.

Imperial Oil president and chief executive officer Rich Kruger aimed to dispel that view during the company’s investor day in Toronto.

Kruger pointed out demand for oil is expected to continue to grow for decades to come and Canada is one of the few countries with significant resources like the oilsands open to private investment. But, he added, oilsands ownership will become increasingly concentrated in the hands of companies with the size and technical abilities to develop the resource efficiently.

How badly does the world need Canada’s bitumen?

Total global energy demand is expected to grow by 25 per cent by 2040, with oil expected to continue to be the main energy source, meeting more than 90 per cent of all transportation needs, according to ExxonMobil’s 2016 Outlook for Energy: A View to 2040. The world is expected to need 50 million bbls/d of new oil production to offset natural declines out to 2040, according to the International Energy Agency and ExxonMobil’s outlook.

And only 20 per cent of the world’s oil resource base is open to private investment—and roughly half of that 20 per cent is in the Canadian oilsands, Kruger said. The rest, he said, is in countries where private investment is restricted—such as Russia, China, Malaysia and OPEC member nations.

So only about 20 per cent of the world’s resource base is open to private investment “in a material way,” Kruger said. “Canada represents about half of the world’s resources that are open to private investment. And the vast majority of the resources in Canada are oilsands—97 per cent [more than 170 billion barrels].”

“From an investor standpoint, Canada has a lot to offer, not only the resource size,” the Imperial CEO continued.

He listed Canada’s other strengths as relative political stability, competitive fiscal terms that attract investment, responsible development and operating standards and a reasonably balanced regulatory regime, though he added the latter “is a bit more of a question in recent years.”

His bottom line: “Our belief is that the highest-quality oilsands resources can be competitive on a global basis.”

But Kruger said it is going to take large operators with deep pockets to develop that resource.

“Economies of scale make a difference. Size does matter,” said Kruger.

While big companies have always dominated mining, the Imperial CEO pointed to the concentration of production ownership in the in situ oilsands sector as well.

“Seven companies—including Imperial in both cases—represent nearly 70 per cent of the in situ production.... So a unique level of concentration relative to other types of operations,” Kruger said.

On the mining side, Kruger pointed out that five companies operate 100 per cent of the production: Suncor, Syncrude Canada, Royal Dutch Shell, Canadian Natural Resources and Imperial.

Speaking to analysts, Kruger said Imperial believes the “highest-quality in situ resources can be developed with oil prices as low as $45, $50, $55/bbl...whereas in the case of mining, our view is that’s taking something more like, or in excess of, $80/bbl to be commercial on a global scale.”

He said total industry bitumen production from oilsands mining doubled in the past 10 years while in situ oilsands production has essentially tripled.

Kruger said technology will continue to be key to developing all types of oil and natural gas resources and that the oilsands sector has unique technical and operational requirements.

As examples of Imperial’s technology leadership, he said the company had the first research department in the country, drilled Canada’s first horizontal well and got the first patents on cyclic steam stimulation and SAGD.

“Now we’re working on solvent-assisted technologies that will leapfrog SAGD,” he said.

Imperial, he said, has “an unparalleled commitment to, and a history of, research and innovation and demonstrated achievement. We invest some $150 million to $200 million a year at Imperial in technology and innovation.”

Also, Imperial can benefit from the nearly $1 billion a year ExxonMobil spends on research and development.

“To illustrate our commitment, we’re building a new oilsands research facility in Calgary that we will have in operation by the end of the year,” Kruger said. “This commitment is independent of the price of oil, but it’s fundamental to our belief of what it takes to compete, not only now but long term in the oil and gas industry.”

One of the technologies Imperial has piloted in recent years is solvent-assisted SAGD (SA-SAGD). The company has filed regulatory applications for two commercial-scale SA-SAGD projects—Aspen and the Cold Lake Expansion.

Kruger said the earliest Imperial could sanction the projects would be 2017 for Aspen and 2018 for the Cold Lake Expansion. In both cases, first oil wouldn’t be till next decade.

In the meantime, while the company would prefer to move its crude by pipe, it also likes the flexibility of rail.

“Our preference is pipeline. It’s the safest, most reliable, lowest cost,” Kruger said. He added that rail provides access to markets, particularly some East Coast and, increasingly, West Coast and California, refineries, some of which are not pipeline-connected.

“So rail allows us to now feed crude to 35-some refineries. And with a long-life asset...you want as many customers as you possibly can,” Kruger said.

He acknowledged Imperial’s new Edmonton rail terminal is underused.

“For an asset, that normally is a bad thing. In this case, it’s a good thing because it means we have higher-valued markets that we have access to, but that rail terminal also gives us that flexibility if the market were to turn around.”

When Imperial sanctioned the investment in its Edmonton railcar-loading terminal, WTI oil was at about US$100/bbl, and the industry feared severe transportation constraints would materialize as pipeline approvals and construction failed to keep pace with growth in bitumen production.

“We started along the rail path a few years ago when we saw...western Canada unfolding differently. We expected continuing production growth and market-access constraints much more severe than they’ve turned out to be right now,” Kruger said. “So we undertook rail as...a bridging agent to new pipe, or the worst case, an insurance policy if the pipe didn’t come there.”

He said Imperial is moving the vast majority of its equity crude today via pipeline, but he didn’t offer a specific percentage.

Asked about the cost of pipe versus rail, he said the company has in the past talked about roughly US$7–$8/bbl as the pipeline cost from Edmonton to the U.S. Gulf Coast and a rail cost of about $15–$17/bbl using efficient unit trains. Given the drop in demand for crude-by-rail since oil prices collapsed, Kruger said Imperial’s rail transportation cost is now lower, but didn’t offer a current figure.

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