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Canadian Oil & Gas Industry

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  1. Canadian Oil & Gas Industry Analysis & Recommendations Featuring : Suncor, Talisman & EnCana

  2. Presenters & Topics • Linda Holmes: Industry Overview • Eric Song: Suncor Energy • Daniel Lee: EnCana • Tolek Strukoff: Talisman Energy

  3. Industry Overview Agenda • Industry Synopsis • Economic summary • Crude Oil Highlights • Natural Gas Highlights • SWOT • Industry Forecasts

  4. Industry Synopsis… 2001: Canada's primary energy production : ~39% natural gas ~25% oil ~20% hydropower ~11% coal ~5% nuclear power • Sub-sector of Energy • Oil & Gas Industry encompasses • Petroleum exploration (upstream) • Refining (midstream) • Distribution & Sale to consumers (downstream) • Products / Benefits • Synthetics/ Pharmaceuticals/ Plastics • Transportation / Heat / Employment • Everyone uses energy • Demand virtually endless

  5. Industry Synopsis • Oil & Gas is the largest industry in the world • Tends to parallel boom & bust in economy • Recession: less products, less commuting…less energy use. • Demand: reasonably stable (except recession) • Supply: can experience shocks • OPEC meetings • Net exporter of energy • 2001: 31% of energy production exported

  6. Canada and the Upstream Oil & Gas Sector • 3rd largest producer of natural gas • 9th largest producer of crude oil • 6% of Canada’s GDP • Grown more than 250% since 1990 • Overhead: 6 years of stats

  7. Economic Highlights… • 2002: Canada’s real GDP grew ~3.3% • Compared to 1.5% in 2001 • Signals economic recovery • Canadian economy influenced by US economy • Largest trading partner • ~85% Cdn exports to US (2002)

  8. Economic Growth Forecast (Canada) • Lowered for 2003 • Continued weak US growth • Strengthening of Cdn dollar • SARS outbreak • Canadian beef export ban (Mad Cow) • Still growing but slower than last year’s forecasts

  9. Situational Analysis • Demand looks positive (CAPP) • Increasing with economic growth • OPEC estimates demand will grow • From ~75MM bbl/d to more than 100MM bbl/d by 2020 • Investment needed to support this demand • >$100 Billion in exploration & development • Overhead: • International Petroleum Supply & Demand • Base Case • Provided by Energy Information Association

  10. Situational Analysis … • OIL: world’s largest source of energy • NATURAL GAS: role increasing • US gas supply < US gas demand • Analysts estimate this will continue well into 2025 • World Market: • Demand forecasted to double by 2030 (~4.8TCM/yr) • Reserves increasingly remote from major markets

  11. Energy (Cdn) Production Trends 2001: Canada's primary energy production : ~39% natural gas ~25% oil ~20% hydropower ~11% coal ~5% nuclear power

  12. Crude Oil Highlights ~ Canada • Reserves: • 180 billion barrels (2003) • Alberta Oil sands (174.8) • Conventional (5.2) • Production 2002 • Average 2.9MM bbl/d • Consumption 2002 • Average 2.0MM bbl/d • Exports • 1.5MM bbl/d crude to US

  13. Crude Oil Highlights…cont’d • Alberta • Leading oil producing region • Conventional oil reserves are declining • Huge oil sands deposits • Trends • Projects shifting focus to eastern & northern provinces

  14. OIL: Production & Consumption

  15. Demand increasing Canada is the lead supplier to US Mackenzie Delta has potential for piping to south Resources are limited Shift in focus from WCSB to BC, Atlantic & Artic New Sources: liquefied natural gas & coalbed methane Natural Gas Outlook

  16. Natural Gas … • Issues: • Technology development (lower costs) • Gaining access to resources • Regulatory restrictions (timeliness) • New sources: • Coalbed & methane gas • Coalbed: potential industry for Canada

  17. Natural Gas Exploration Projects • Mackenzie Delta • Gauge potential reserves • Challenges • Temperature: down to –33 degrees • Cost: $30 MM/well • 60 times more than in AB • Politics: NWT & Federal gov’t • Potential: • Increased capacity

  18. Gas: Production & Consumption

  19. Reserves at Year End: 60.1 trillion cubic feet Production: 17.4 billion cubic feet per day Prices: $4.40 (US$/MM btu) Exports: 10.6 billion cubic feet per day Natural Gas in Canada (2001)

  20. Strengths • Size of the market • Size of the industry • Alberta Oil Sands • One of the largest sectors in Cdn economy • Increasing economies of the less industrial provinces • Huge undeveloped energy, including major natural gas deposits in offshore areas

  21. Weaknesses • Limited natural gas reserves (TCF)

  22. Natural Gas Productive Capacity

  23. Weaknesses Cont’d • Higher costs for major supply basins than others

  24. Opportunities • Developing world • US supply < US demand • Exploration & pipeline projects in Yukon & NWT • Oil sands (bitumen)

  25. Oil Production Forecast

  26. Power of Suppliers within Industry • Dominated by a few powerful companies • Large capital investment required • Discourages smaller investors • Proximity to largest energy market • Technological Developments • 3-D seismic & steam –assisted gravity drainage

  27. Threats • Capital investment more internationally mobile • Goal: projects that offer • Best potential ROI • Least geological, ecological, & political risk • High development costs • High natural gas prices • Growing environmental concerns • Kyoto requirements

  28. Threat of New Entrants into Industry • Barriers to Entry ~ HIGH • High fixed costs • Pumping trucks > $1MM • Specialized Skills • To operate equipment & determine drilling decisions • Cash on hand • Need ample $$ to compete • Scarcity of resources • Government restriction or legislation

  29. Regulatory Approval Timeline

  30. Reserve Comparison

  31. Availability of Substitutes • Alternative Fuels: • Coal, solar, wind, hydro, nuclear • Uses of Oil: • Plastics & other materials • Specialized Services • Seismic drilling or directional drilling can better withstand

  32. Competitive Rivalry • Slow Industry growth rates • Since 1990 Cdn oil production has climbed 42% & natural gas 76% • High costs for major supply basins • Capital tends toward projects with higher ROI & lower risk

  33. Price History: 10 Year Parallel Dips ~ 1998 CRUDE OIL (sweet) Opposite Moves ~ 2000 -2002 NATURAL GAS

  34. Price History: 5 Year MarketCrash

  35. Price History: Year-to-Date

  36. Canadian Oil & Gas Overview Source CAPP,April 2003 2001 2002 2003F Production Crude Oil (mmbl/d) 2.2 2.4 2.7 Natural Gas (tcf/yr) 6.4 6.4 6.4 Exports Crude Oil (mmbl/d) 1.4 1.4 1.7 Natural Gas (tcf/yr) 3.7 3.8 3.8 Wells Drilled (Canada) 18,300 15,000 17,000 Summary: Canadian Oil & Gas Stats…

  37. Company Background • Integrated energy company • Strategically focused on developing one of the world’s largest petroleum resource basins – Canada’s Athabasca oil sands • Ticker symbol: SU (both TSX and NYSE) • Stock price: $28.80 (TSX) • Market capitalization: US$9.95 Billion • 3400 employees

  38. Management Team • Rick George, President and Chief Executive Officer – 23 years of experience at Suncor, 13 years as CEO • Steve Williams, Executive Vice President, Oil Sands - over 20 years of international energy industry experience • Ken Alley, Senior Vice President and Chief Financial Officer - 19 years of experience at Suncor • Dave Byler, Executive Vice President, Natural Gas and Renewable Energy – 24 years of experience at Suncor • Tom Ryley, Executive Vice President, Energy Marketing and Refining – 20 years of experience at Suncor • Mike Ashar, Executive Vice President, Refining and Marketing U.S.A – 16 years of experience at Suncor, came from Petro-Canada

  39. Main Business Units • Oil Sands (core business segment) • Natural Gas and Renewable Energy • Energy Marketing and Refining – Canada (under the brand name “Sunoco”) • Energy Marketing and Refining – U.S.A. (acquired in 2003)

  40. Strategic Priorities of Value Creation • Reduce oil sands operating costs (by economies of scale with additional production) • Increase production from existing oil sands assets • Reduce the company’s net debt • Continue to build the foundation for the next stages of its growth strategy

  41. Locations of Operations

  42. Pipeline Network – Oil Sands Production

  43. Oil Sands • Mines and upgrades crude oil • Operations are located near Fort McMurray, Alberta • Oil sands production: 205,800 barrels per day • Vision: 550,000 barrels per day in 2010 ~ 2012 • Firebag In-situ Oil Sands Project: use horizontal wells to reach deep oil sands deposits, heat it and bring the bitumen to the surface for processing Advantages of in-situ technology: • recover large reserves that can’t be reached by traditional ways • suitable for staged growth • more environmental friendly • reduce costs of recovery

  44. Oil Sands

  45. Natural Gas and Renewable Energy • Explores for and produces natural gas • 3 locations in Western Canada • Internally to power its Oil Sands facilities and Sarnia Refinery • Externally to supply markets throughout North America

  46. Natural Gas

  47. Energy Marketing and Refining – Canada • Refines crude oil and markets finished petroleum products • Customers are located primarily in Ontario and Quebec • Retail customers in Ontario under the Sunoco brand (over 500 retail sites) • Sales agreements in Ontario • Refinery in Sarnia, Ontario

  48. Energy Marketing and Refining – U.S.A. • On July 31, 2003 Suncor acquired ConocoPhillips’ Denver, Colorado refinery, retail stations and associated storage, pipeline and distribution facilities • Flexibility to move crude and products to the Denver refinery or other customers • Provides increased control of its oil products from production straight through to the consumer

  49. Energy Marketing and Refining