ESSO RESOURCES CANADA LIMITED PROPRIE TA INF ORMA TION COLD LAKE STRATEGIC BUSINESS REVIEW 10/1991 TABLE OF CONTENTS TABLE OF CONTENTS 1. INTRODUCTION 2. EXECUTIVE SUMMARY 3. COLD LAKE STRATEGIC BUSINESS REVIEW 4. APPENDIX A. - TECHNOLOGY DEVELOPMENT DETAILS 5. APPENDIX B. - RECENT AND NEAR TERM PROFITABILITY AND TACTICS 1. INTRODUCTION 1. INTRODUCTION This current strategic assessment of the Cold Lake business has been assembled by a small team from the divisions and sections that are key to the future of the business. It must emphasized, however, that the development of the Strategic Business Review could only be completed with the input and and experience of most if not all of the Research and Technology and Oil Sands Operations Divisions? sections that are associated with the Cold Lake Business. This summary is divided into 5 sections: 1. This introduction. 2. An Executive Summary for those only interested in an overview of the Cold Lake business and its potential futures. This section also includes the endorsement of our strategies by the Imperial Oil Management Committee. 3. The Strategic Business Review report which details our process and provides a more detailed business assessment 4. Appendix A, which details our current technology thrusts. 5. Appendix B, which addresses very recent and current pro?tability and tactics (given our immediate pro?tability crisis, we felt it necessary to address short term tactics as well as our strategies). If readers wish to further understand the Cold Lake business or have any questions with respect to this report, please call one of: Howard Dingle (237-3963) Kim Eastlick (639-5533) Bob Over?eld (237-3292) Mike Roberts (237-2070) Ron Shannon (237-3921) Ian Walker (237-3149) Don West (237-4057) 2. EXECUTIVE SUMMA RY wansluesslze?nmun - Production of bitumen from Clearwater formation at Cold Lake using cyclic steam stimulation (CSS). Natural gas is used to generate steam. . Sale of dilbit, or Cold Lake Blend (bitumen blended with condensate to permit transportation), to refiners for conversion to re?ned products. - Very large resource base (see Reserves - appendix A). - Product value is low relative to other crudes and transportation costs are high. - Oil Sands are currently the only significant liquid hydrocarbon resources available to replace Esso?s (and Canada?s) declining liquids production. - On a commercial scale, Cold Lake is the only successful domestic in situ oil sands production business. - Cold Lake?s current contribution to ERCL: - Net Proven Reserves: 44% 17%) - Net Probable and Static Reserves: 96% Athabasca Oil Sands, incl. 58%) - 1990 Net Liquids Volumes: 27% - 1990 Earnings: 32% Was - Hydrocarbons will continue to be a key energy source for the foreseeable future (well into the 2000's). Heavy oil can continue to be cleanly produced and utilized. 0 Cold Lake is critical to the future of Esso Resources. - The Imperial Oil flat price forecast is the basis of this review, although ramp sensitivities have been tested. - Domestic supply forecasts based on best assessment of Canadian heavy oil and bitumen in a flat price environment. - Heavy Oil demand forecasts based on joint assessment. - Forecasts average out as smooth curves, but extreme volatility will be periodically experienced. EnmmunLAnalms - Cold Lake Blend competes generally with all crude and specifically with heavy oils worldwide. Regional competitors include midcontinental U.S. heavy oil, Canadian conventional heavy oil and other Canadian bitumen. In the long run competition will be global, rather than domestic. - Major pipeline connected (Primary) market is PADD II (Northern U.S. Midwest). Current supply and demand are about 500 BID. - Total dilbit production (1990) 180k (Esso 120k Waterman: - See attached appendix A. - See attached appendix - See attached appendix - 1990 Corporate Plan - Our ability (or inability) to forecast Cold Lake Blend prices, which are determined by the light sweet crude price, modi?ed by: 1) Worldwide supply of heavy oil. The heavy portion of world crude runs increases gradually with time as average crudes are becoming heavier. 2) World demand for heavy fuel oil. 3) Impact of environmental legislation. 4) Industry conversion capacity for heavy oil. With heavier crude and decreasing fuel oil markets. conversion must grow gradually. The economics of each successive addition of conversion capacity will determine light/heavy spread, which is forecast to increase as severity of processing heavier average crudes increases and environmental constraints become more stringent. - Operating Costs - Unit operating costs from existing business will increase with time as oil/steam ratio declines and energy input to generate steam stays constant. If gas price increases relative to Cold Lake Blend price, this problem is exacerbated. - After development of CLPP 7-10. cost of supply for new CSS projects exceeds plateau price forecast. Supply cost for next development (compared to light sweet crude) is forecast at ($7.50 for bitumen; $5.50 for diluent and $7.00 for spread). . Technology Development Opportunities - Energy ef?ciency (CSS improvement) and cost-effectiveness (alternative fuel to natural gas). - Follow up recovery post. .rr ?8 (horizontal wells/displacement). Alternate recovery process (borehole mining). Product/market enhancement (partial upgrading, POWERBIT) - Markets (see also Competitor Analysis) - Winter demand is currently limited to re?ners with capacity to convert heavy oils to clean product. Summer demand improves due to asphalt market. mums: - Markets for Cold Lake Blend. - Continuing commitment to technology development - Environmental pressures Note - diluent supply no longer a current issue (not until late 1990?s) Wm - It is possible for Cold Lake to achieve: - a go?forward PV13 of - quadruple current booked reserves; and - operate a sustainable business; - If technology development for: - increased recovery from developed areas; - new reserves adds; and - product enhancement; - ls developed. - Continue to be low-cost producer and maximize supply/demand ?exibility within operational capability. . Develop the technology necessary to: - Increase recovery from existing developed areas All with no expectation of real growth in light - Add reserves through new developments crude price - Extend market and/or add value to bitumen - Maintain ?exiblity to switch to alternate strategies 1) ?Blow down" existing operation, without attempting to recover all currently booked reserves 2) Pro?tably recover all currently booked reserves, with CSS. maintaining technology development focus on optimization only. MW WW 1996 1997 1988 1999 1990 Cash Direct Unit Opex - inc. 0.5. 5.79 4.79 4.36 4.44 4.11 Blend Book Breakeven Price - Edm.) 9.63 3.91 9.03 9.44 9.39 Par Book Breakeven Price - Edm.) 14.10 13.21 14.45 15.23 17.49 Blend Cash Breakeven Price - Edm.) 7.02 6.86 7.44 7.59 0.00 Par Cash Breakeven Price - Edm.) 12.29 11.16 12.86 13.38 15.69 Blend Price - Edm.) 10.19 14.08 9.76 12.96 16.11 Spread - Edm.) 4.47 4.30 5.42 5.79 7.61 Earnings inc. IOL A86 (0M3141 Annual EVA Cash Flow (OMS) 85 188 113 142 199 means) 2% 17% 5% 9% 15% Bitumen Production Volumes (BID) 61.111 79.749 91.283 88,014 80,407 Oil/Steam Ratio 0.29 0.35 0.35 0.34 0.33 Cape: (inc. technology developmentCumulative Net Cash Flow (CMS) -139 -67 -178 -5 7 125 Prices - Edm.) l?umen Production Volumes (1000 1986 1987 1988 1989 1990 1986 1987 1988 1989 1990 Pilots CLPP 1-6 Blend Bock Price Blend Price Blend Cash Price Par Price Cash Direct Unit Opex - inc. 0.8. DIR (cs/B) mm 6.00 Cumulative Gross Production (MB) 191 Remaining Net Proved Reserves (MB) 767 550 Ultimate Static Reserves (MB) 3.400 Overall bitumen in place (MB) 41.800 5_oo Total (exc. megaproject) 1,100 4.50 Net Book Value 850 4. 0 Earnings (CMS) (1 6) 1 1 Volumes (1000 3/0) 01.100 1986 1987 1988 1989 1990 Opex(CM$) 43 Blend Price - Edm.) 10.45 Par Price Edm.) 20-50 Annual Earnings a. Cash Flow 200 20% Cumulative Net Cash Flow (0M5.100 Earnings inc. Annual EVA Cash Flow inc. A86 (OMS) -200 i I 3 aces (7.) 1975 1980 1985 1990 31515.; MAM 1221mm Par Price at Edmonton 2173 21.24 See sensitivities and note Cold Lake Blend/Edpar Spread 7.61 8.87 (1) below USS Exchange Rate 0.857 0.366 [Elam 122W 122131111013 - Volumes (k BID) 88.4 84.6 - Cash Expenses (M3) 133 131 - Unit Cash Expenses (SIB) 4.11 4.28 - Earnings (MS) 141 36 - Operating Cash Flow (MS) 200 91 - Capital - inc. Technology Development (MS) 18 31 - Oil/Steam Ratio 0.33 0.31 - Pil i Price 23 i Spread 32 i 1% Bitumen Production Volumes .7 i 5% Operating Expense 4,4 1- lc Exchange Rate 3.3 i Natural Gas Transfer Price 1.6 (1) Spread through February 1991 exceeded due to increased supply of heavy worldwide and loss of Kuwaiti conversion capacity. Forecast of expected average spread for 1991 ranges from See sensitivies for earnings impact. As a result of current high spreads, start up of CLPP 7&8 has been put on hold. (First production in Corporate Plan was scheduled for 91.04). WI) Earningleash Flow (1990 Volumes (R 8/0) 1 22? 110?, 200 ?3 EVA Cash Flow 100 CLPP1-6 Vol. MaintEarnings 20 1O Pilots Direct Unit Operating Exp. Capex (1990 MSNon Fuel lncr. Fuel Costs I Sust. Tech. Dev. Curr. Fuel Cost Calgary Costs Base Vol. Maint. [In] New Vols 9015.3: 1. in cross to maintain volumes from the current base business (CLPP1-6 and pilots), investments i new pads or a follow up process to 038 i ll be required between 1993 and 1995. 2. Beyond 1995, decreasing bitumen values and increasing fuel costs (due to gas price increases and decline in oil/steam ratios) are expected to significantly erode profitability unless technologies can be developed to mitigate these potential problems. The potential damage that a decline in bitumen values can do to the business is illustrated by the losses currently being experienced due to high light/heavy spreads. See reverse for management committee action. mm mm Imperial oil Limited I 8 0 I A 1 TOPIC - Cold Lake Strategic Business Unit Review - Esso Resources Canada Limited - Oil Sands Division 21x: - 4 hours or HIITIIG - April 17, 1991 IEIQBEAIIQI Esso Resources' Cold Lake division has completed a Strategic Review of its business and has develOped a Business Plan which will be reviewed at this meeting. The Executive Summary (attached) gives a brief synopsis of the presentation and positions the key issues around this business. Environment In the long term, the heavy portion of crude runs are increasing gradually with time. With heavier average crudes, decreasing fuel oil markets and light/heavy spread forecast to increase, conversion capacity will grow gradually. Unit operating cost from the existing business will increase with time. Following the development of CLPP 1-10, the supply cost for new projects exceeds plateau price forecast. This. in turn. makes it essential for Cold Lake to both improve its base business profitability and find the economic means to grow the business and recover the vast resource base?in place. There are several technological development opportunities for the Cold Lake operation: recovery post C58, alternate recovery process, energy efficiency, cost effectiveness. and product/market enhancements. It is through this means that Cold Lake will continue to chart its path to the future. new Business strategy will emphasize approaches to: l. Minimize unit operating and capital costs. 2. Where profitable, maintain pipeline connected market share and use export market to absorb winter production. 3. Effectively manage production during low blend price period. 4. Develop technology to increase current developed area, add reserves and extend markets. Wiggins Several alternate strategies that involve harvesting the business at Cold Lake will also be discussed in more depth during the presentation. The option to upgrade Cold Lake Bitumen is currently under study and will be reviewed in detail later this year. Agr. 24/91 - Copy sent to G.J. W111mon. a . CLL- Ream p0, mam-r comm APR 2 4 1991' IHPEIILL OIL LIHITED 041MLuaou1 My RECEEVED - 7 APRZ 41991 On April 17. 1991. the management committee reviewed end endorsed Reeourcee Cenede Linited'e recommended etretegy for the Cold Leke ee deteiled 1n the ettechmente end topic summery on the reverse side. RECEIVE-D APR 2 51991 _1 DINGLE 'cietuL- 3.3. Hejduki Secretary cc: R.B. Peteteon . Dingle) . Beldvin. 6.3. Uillmon. . Velker, D.V. Feet. Dingle. H.A. 3.3. Rodgers, . Ferguson. Hecleughlen) (Presenter: (Attendee-z runner-tun: 3. COLD LAKE STRATEGIC BUSINESS REVIEW CQLD LAKE 21g; BLJSINESS REVIEEZ BART 1. - Introduction A number of initiatives have recently been undertaken to improve our understanding of the Cold Lake business. as we changed our focus from one of growth. based on expectations of higher oil prices to one of optimization of the current business: - The "$12 Challenge" (1988/89) 0 The Cold Lake District organizational redesign (1988) The Cold Lake Development organizational redesign (1988/89) - The Cold Lake Strategic Framework (1989/90) - The Cold Lake Strategic Business Review (1990/91) These efforts have resulted in a process. based on the principles of "Interactive Planning", which provides a strategic business per- spective for all employees of the business they work in. This strategic business review documents the current position. Message Given our current understanding of the existing technology process - __C_vclic _S_team Stimulation (CSS) and assigning conservative esti- mates to several supplemental and alternate technologies under development. it is possible to: - achieve a go-forward PV13 of - quadruple current booked reserves. and - operate a sustainable business into the forseeable future; i we successfully develop the technology required to: - increase recovery from developed areas, - add new reserves, and - enhance our product; at ?at prices. This strategy has been recommended over the other alternatives which essentially involve harvesting the business, either as quickly as possible, or over the period necessary to recover proven reserves. The proposed strategy has been endorsed by Imperial Oil's Man- agement Committee. In order to allow the process to have an effective decision recording mechanism, it is necessary to record the key assumptions that will be monitored for changing trends that will affect strategic decisions. The following are the key assumptions that currently prevail: 1. The ?rst and most important planning assumption has been that hydrocarbons will continue as a key energy source for the ?foreseeable' future at least well into the 2000?s. We are aware of the growing pressures environmental and competitive on our product but have attempted to re?ect these as economic pressures. 2. It has been assumed that heavy oil can continue to be cleanly produced and utilized. Again. our planning is aware of the growing envirorunental pressures but assumes that our produc- tion processes and our customers' refuting processes will continue to satisfy product quality and environmental quality constraints. 3. Cold Lake is and will continue to be critical to the future of Esso Resources. 4.TheImperial Oil ?at averageprice forecasthas beenused, although we have tested our strategic options on the basis of a ramp price forecast. The ?atprice forecast includes areal growth forecast for natural gas signi?cant to the Cold Lake Operation 5. The domestic supply forecasts are based on the best assessment of Canadian heavy oil conventional heavy plus blended bitu- men - supply in a flat price environment. 6. The heavy oil demand forecasts are based on a jo int internal ERCL forecast specific to oil sands. 7. Whereas the forecasts average out as relatively constant values. it is assumed that extreme weekly and volatility in both price and spread will be experienced periodically. l. The first and most important business driver is clearly our ability to accurately forecast price and spread. - Investment decisions require price/sprerxl forecasts of 5 to 20 years out. - Steaming decisions require price/spread forecasts of at least 1 year out. - Pipeline-connected market decisions require price/spread fore- casts of 30 to 90 days out. - Marine-export decisions require price/spread forecasts of at least 6 weeks out Ourcurrent and proposed strategy to operate and to plan for low cost survival and ?at pricing provides only some measure of protection in this environment. 2. Operating costs will continue to be a key driver. The business has been successful inholding directcosts ?at for athird straightyear while maintaining volumes - and we are con?dent that we can be similarly successful in 1991. There is. however. limited leverage left with respect to controllable direct costs under CSS and the business is vulnerable to increasing fuel costs. (This is addressed later in this review.) 3. Technology will be a dominant theme throughout the review. The ultimate continued success and development of Cold Lake is directly tied to our successes in this area. 4. Customer relationships are a business imperative. Understand- ing the customer need and the impact of this particular feedstock on their operation is essential to effective marketing of the resource. [Salaam 1. Markets. which will be discussed at some length later in the review. 2. The corporation's long term commitment to. resourcing of and pace of research and technology development. which will also be discussed at length. 3. Diluent supply (at one time considered a significant issue) is no longer a current issue other than as a cost component of the business. We are not expecting supply problems before the late 1990?s. 4. There will be growing environmental pressures on our business. This review is not intended to debate the more global challenges the Corporation faces. but it is important to highlight several key pressures on the Cold Lake business and their directional impacts: - Fresh Water Supply - We anticipate an ample supply of water will be available for development of Cold Lake even if CSS is employed for future projects. - The Long Range Water Management Plart for the Cold Lake? Beaver River Basin. approved in 1985. called for the North Saskatchewan River water pipeline to be operational by 1991. however a much slower and less fresh water intensive pace of development has, irt Industry's view. mitigated the need for the line in the foreseeable future. -We expect that apipeline will berequired when about 35% of the local water supply is used by industry and forecast this to occur in 1998. The line would be constructed on behalf of industry with related tariffs impacting CLPP by per year of our operating budget). - Greenhouse Emissions - A Canadian cap on greenhouse emissions is expected to materialize and we recognize the Federal Government's com- mitment to stabilize emissions at 1990 levels. We believe this issue will impact the oil sands business principally on a product price or spread basis. - Based on discussions with corporate specialists working in areas we do not expect pu- nitive measures directed at only certain segments of the fossil fuel supply industry but rather broadly based (and scienti?cally sound) economic intervention that will affect fuels proportion- ally to their greenhouse contribution. We believe these costs will ultimately be reflected in the light/heavy spread. 0 Environmental Protection The greenhouse issue is only one of several related environmental initiatives that could impact the oil sands industry. Three of these are worth highlighting: - We expect acap on sulfur emissions. This may be implemented on a regional cap basis and may include econorrtic incentives such as the ability to buy and sell emissions credits versus full regulation of point sources. The primary impact would be to increase the pressure on reduction of sulfur in combustion fuels. This will tend to increase the spread to re?ect the additional processing bitumen based fuels will require for sulfur removal. The emissions cap would also impact the potential for using coal. bitumen or bitumen bottoms to fuel thermal recovery operations by mandating more capital inten- sive sulfur control (fuel treating or stack gas cleanup). The expected ?greening? of transportation fuel products will target aromatics - benzenes. toluenes. etc - content. Being a napthenic crude. bitumen refuting tends to produce a highly aromatic slate and will thus be further debited as a feedstock - de?nitely in price, perhaps in volume. Again. we have at- tempted to incorporate these ?nancial effects in our pricing forecasts. We expect tanker restrictions. both internal (risk avoidance practises) artd external. Will increasingly limit access to offshore markets. There is avery realrisk access to the secondary market via Vancouver will be curtailed. Indications are that any major ocean spill (anywhere. not just in the Vancouver area) could be enough to trigger public pressure and closure of Vancouver to crude exports. We believe our plan to target the pipeline connected North American market is consistent with the risk entailed in depending onoffshore exports. We further expect some level of seasonality in markets and prices (although this should be mitigated by conversion capacity additions through 1992) and continue to design our production tactics accord- ingly. In summary. we are dealing with a high carbon. high sulfur resource at Cold Lake. We expect that environmental protection will in- crease the cost of utilizing our product. hence anticipate a direc- tional increase in light - heavy spread. We are designing our planning basis to be consistent with this expectation and believe strategic development of Cold Lake remains a feasible opportunity for IOL. History. The Cold Lake business was one of Imperial Oil's major growth areas through the 1980's. following the cancellation of the ?megaproject? development irt 198 . Esso Resources startedpilo ting in-situ Oil Sands production at Cold Lake in 1964. It is necessary to fully understand the historical basis of our business in order to best analyze the current and future business.The follow- irtg is an outline of the historical development at Cold Lake. culminating in the construction of CLPP 7-10 (See Fig 1.): - Recovery of Cold Lake bitumen using CSS was demonsuated to be technically viable at the Ethel pilot which operated from 1964 through 1970. This pilot provided a basic physical understanding of the CSS process and justified further ex- perimentation. CS is the prirnary process used at Cold Lake by Esso. With this process. the ratio of bitumen produced to steam injected (oil:steam ratio or OSR) to stimulate the reservoir decreases as the wells are depleted irt developed areas. In addition, OSR and expected recoveries are lower in areas where reservoir quality is poorer - The May pilot. which had the purpose of testing the commercial potential of the CSS process. followed in 1972. May continues to operate today, investigating CSS for close spacing of wells and for low quality reservoir. - The Leming pilot started operating in 1975 with the objective of developing CSS as a commercial process in a high quality. clean sand. Because of the lower reservoir quality at May, the majority of CSS experiments to date have taken place at the Leming pilot. - In addition to proving CSS as a commercial process. the initial piloting at the Ethel. May and Leming facilities included the investigation of steam/hot water flooding. cold flow produc- tion. electrical heating. and horizontal wells. Natural gas injection. air injection. diluent injection were also investigated as a means to enhance performance. - The success of the piloting program between 1964 arid the late 1970's and expectations of signi?cant oil price increases led to plans to develop a commercial operation. This was initially envisaged as an integrated megaproject to produce upgraded light crude oil Plans for the megaproject were abandoned irt 1981. . Between 1981 and 1984. a number of factors formed the basis for phased development of bitumen poduction: - Alarge market opporturtity for diluted bitumen was identi?ed in the US PADD ll re?ning area (northern mid-west). - The Federal Government eased export restrictions on heavy crude exports - from quarterly permits. to annual permits. to biannual permits (currently). and, potentially. to evergreen permits. - The Federal and Provutcial Governments provided attractive ?scal terms. - The Federal and Provincial Governments provided assur- ances that production would not be prorated and that diluent would be allocatedon aprion'ty basis after chemicals feedstock needs were met. - As a result of a recession at the time, the the engineering and construction contracting environment was highly competi? tive. - Finally. there was an internal desire to increase liquids production and reserves. - These drives led to the start-up of the commercial operation of CLPP 1&2 in 1985. followed shortly thereafter by CLPP 3&4 and CLPP 5&6. In 1988. construction of the CLPP 7-10 plant and the majority of CLPP 7&8 ?eld facilities was completed. Start-up of the CLPP 7&8 wells and the CLPP 7-10 plant was deferred in late 1988 due to concerns about prices and markets. Current plans are to start these phases up in the spring of 1992. - A total ofabout 1 has been invested to date in the Cold Lake operation - excluding funds spent on preliminary engineering for the megaproject. Fig. 1 shows Cold Lake?s historical development. Current] the commercial operation and the pilots produce about 14000m Id of bitumen (about 25% of Esso Resources 1990 outlook for liquids volumes). GOLD LAKE BITUMEN PRODUCTION (k bpd) 140 ETHEI- PILOT LEMING PILOT (1954?1970) (1g75_ 120 7 - INTER-WELL COMMUNICATION . CASING FAILURES MAY PILOT . PRODUCED WATER 10? (1972- RECYCLE . MAROINAL RESERVOIR . CLOSE - GRAVITY DRAINAGE 30 - BASAL PLANE - BOREHOLE MINING 1 CLPP 1/6 60 (1955- I - OVERLAP STEAMING - RESERVOIR OUAerv ?0 - EMULSION FLOW HEGIMES - WATER . UNrr 00515 PLAN 1964 1966 1972 1976 1960 1984 1988 1992 1996 2000 Fig.1 Resent?enmrmance The following is a brief summary of recent performance: - Cumulative cash flow from Pilots and CLPP turned positive early in the 3rd quarter of 1990. (See Fig. 2) Bitumen volumes have shown a steady. sustained growth. A slight decline in productivity has begun since no new pads have been added since 1987 and approximately 20 of our CLPP wells are now in or entering cycle 6. In addi tion. we are now experienc- ing limitations in our ability to poduce all wells due to limits on water handling. (See Fig.3) 0 Cold Lake returns have corresponded directly with crude oil price and the light/heavy spread the Cold Lake blend price) (See Fig. 4) - Over the last 4 years. unit lifting costs have decreased (despite in?ation) as volumes have increased, the commercial operation has stabiliaed. the CSS process has been optimized as the focus has changed from growth to base business and. most recently ef?ciency and continuous improvement initiatives have borne positive results. (See Fig. 5 - The costs indicated here include Calgary overheads. but exclude IOL and ERCL Calgary overheads tend to improve the overall picture because of large reductions in our project management staff, effected from 1988. as we moved from a growth mode to a stronger focus on the base business.) Cumulatlve Cash Flow (MS) Bitumen Volumes (k BID) 200 100 125 88 . .200 1975 1980 1935 1990 Fig. 2 Fig. 3 Ital I l2: urn on Cap mp eyed and Blend Prlee Cash Direct Unit Opex (SIB as spent) US $16.44 . . B.m 15 $4.11 Price (as spent Edm) 4.Flg. 4 Flg. The major characteristics of the Cold Lake business are: - low profit margins. due to high production costs and low prices relative to other crudes - an energy intensive production process (steam is used to stimulate the very viscous bitumen) - an expected decline in OSR has the potential to erode pro?t margins signi?cantly over time (and totally if Cold Lake blend prices don't grow). This erosion could be accelerated if gas prices grow more quickly than Cold Lake blend prices. as would occur in the 1990 plateau price forecast; - a huge resource base; (and consequently large reserves). Because it is more dif?cult to re?ne and is of a lower quality. Cold Lake Blend sells at a discount to light. sweet crude. E550 uses the spread between light conventional crude and Cold Lake Blend as a method of tracking the price performance of Cold Lake Blend. Although heavy oils are not completely fungible, Cold Lake Blend competes on price with heavy oil produced in Mexico (Maya). Venezuela (Bachequero), and the Middle East (Arab Heavy). The Spread for Cold Lake Blend tracks the international light/heavy Spread. Fig. 6 shows yearly prices and spreads in 1990 dollars, from 1976 to 2000. The scale is chosen to suppress minor events ?only major ones remain. The top line is representative of world light crude (WTI). the middle line is representative of world heavy crude (Bachaquero in the first 5 years and then Maya). Par and CLB follow the world crude trends closely post-NEP. The light and heavy prices generally Hack, but not perfectly. as can be seen on the price differential or ?spread" line. Historically, spread shows two signi?cant peaks (1980 and 1991) and the future projection exhibits an overall gradual growth. The factors that determine spread are: . It is a function of re?nery econornics. particularly the conversion step, where surplus heavy molecules are converted to lighter gasoline and distillate molecules. - To make a given product slate. a re?ner can choose to run light crude in a low conversion re?nery. or heavy cmde in a high conversion re?nery. The re?ner is not willing to pay as much for heavy crude. because he must build and operate expensive high conversion facilities. - Considering the world re?nery system. the balance around re?n- ery conversion is rep-resented by the equation on the chart: Supply of bottoms from crude is equal to Fuel Oil Demand plus Conversion requirement The shape of the spread curve in Fig. 10 shows: - Over a long period of time there will be a gradual increase in 1 PRICES, SPREAD (1990 US $13) 75 . SPREAD ISA FUNCTIONOF REFINING CONVERSION BALANCE SUPPLY OF aorroms . FUEL OIL DEMAND CONVERSION 50 - MIDDLE EASTDISRUPTIONS 25 I. Ii hilly-um? "mu. 0 I 1 976 1 980 1984 1988 1 992 1996 2000 a Light Heavy Spread Fig. 5 spread. This is because: The average crude barrel is gradually becoming alittle heavier. with a gradual increase in heavy crude runs and there is a continuing loss of fuel oil market to competing fuels. with the result that re?nery conversion. the balancing step. must grow. The cost of that step increases in real terms with time because each incremental step is more dif?cult and higher quality specs for diesel and gasoline are emerging (greening). oThereason for the peakinspreadin l980was thatcrude prices rose rapidly as a result of Iranian revolution. fuel oil was priced out of market (nearly 1/3 of world fuel oil market was lost to gas. coal and nuclear) and conversion capacity couldn?t be increased im- mediately. so re?ners sought to run lighter crude rather than heavy. Gradually new conversion as built and spread retumed to normal - The second peak is the current one. The recent Middle East crisis changed the world conversion balance signi?cantly. The replace- ment of Kuwaiti and Iraqi crude with heavier Saudi and Venezue- lan crude has increased the supply of conversion feed. On the demand side. conversion capacity has been signi?cantly reduced because of the loss of the Kuwaiti re?neries. These factors both work towards high spread. We are currently in the range (Maya vs WTI) compared to a more normal yearly average of U536 to 7. - It will be at least a year or two until Iraq and Kuwait return to normal. so we can expect to see spreads remain wide. While world heavy oil prices are an important determinant in the price of CLB. the heavy oil supply demand balance in our Pipeline connected, or Primary. market (Chicago/Minneapolis/Samia) can also have aneffect. The Pipeline-Connected Market is alandlocked. high conversion re?ning system that is largely dependent on Canadian supplies of heavy oil. When unable to get enough Canadian heavy. the re?ner will cover the shortfall with imported heavy crude such as Maya. Our price competition is thus Maya or equivalent cmde delivered to Chicago (Chicago parity with Maya). Our analysis indicates that the Pipeline-Connected Market will be short ofheavy crude over this decade, even with the 7-10. thus Chicago parity with Maya is the basis for our forecast. We will nevertheless continue to see occasional oversupply. especially in the winter. but we will continue to move that supply increment to the arine-Export market (Far East) in order to avoid a negative impact on Pipeline-Connected market price. Fig. 7 shows our current assessment of the pipeline-connected market. HEAVY OIL PIPELINE-CONNECTED MARKET (k BPD) 800 700 Incremental U.S. Demand 600 . Domestic Supply :00 400 Base U.S. Demand .5. 300 200 . - ?llFlg. 7 EARNINGS vs CLB 40 I?ll Record Profit -l II ll (MS) i '10 Record Less -20 1990 1 991 - Blend Prlce Edm.) Flg. 3 . IE . Cold Lake is highly vulnerable to low crude oil prices and/or high light heavy spreads. It does. however, offer high upside opportunity in times of high prices. This is demonstrated by the performance experienced during 1990 and early 1991 when there were signi?- cant swings in both price and spremi. See. Fig. 8. (See also Appendix for a more complete review of near term tactics). William Consistent with the principles of "Interactive Planning". the process used by Cold Lake to strategically plan the business is to take the current assessment of the business and understand what will happen to the business if no intervention to change the future is undertaken. (Le. Let the future happen to us.) Having understood our position if the current status quo is maintained. we decide on the ideal desired future state. identify the gaps between the current and the ideal and the possible interventions that can be undertaken to "create the future." The ideal future is then de?ned. along with the strategic alternatives to this future (our "Strategic Options"). As earlier mentioned critical to the process is documenting our key assump- tions. so that if the world changes. we are in aposition to react. This permits us to maximize our ?exibility. Fig. 9 (based on our $12 challenge format) is a projection of the major unit components of our business (under a ?at price forecast). showing the factors that will pinch the pro?t from the existing business and the limited leverage we have as far as controllable operating costs are concerned. In addition to having such small leverage. it must be understood that signi?cant gains in operating cost reduction have been made already and although we expect to our continuous improvement initiatives to continue to bear results, we will reach a point of diminishing returns on what clearly was. at the outset a small leverage area. While we work on opportunities to minimize the unit of energy input into the reservoir per unit of output (the necessity indicated by the growth in fuel costs between 1990 and 2000 on the chart). we will also be investigating ways in which to increase revenues by determining whether we can manu- facture higher value products that have SWergies with the base business (the necessity shown by the growth in spread). Fig. 10 shows the values of the various products. signi?cant to the Cold Lake business, under the ?at price forecast which forms the basis of the projection in Fig. 9. In addition to indicating the increasing spread. this chart also indicates the relationship between bitumen and gas values which combine with declining oil steam ratios to cause the projected increase in fuel costs. I I I Fig. 11 shows an estimate of the potential reserve - the ?size of the prize? - for our Cold Lake resource. As the chart shows it is immense at over 4 bbl. Even this only represents 15 to 20% of the estimated total bitumm in place in the Clearwater reservoir at Cold Lake. The supply cost for Cold Lake's next new plant (post-CLPP 7-10) volume increment assuming process. is .00 (in 19905), making it uneconomic using the current planning basis. As a result, if we limit ourselves to using only our currently proven CSS technology we will only recoverawroximately 4% of the Clearwater bitumen in place 1.04 of reserves. This would be accom- plished by producing currently developed pads to their economic limit and then replacing them with new CSS pads from the currently approved CLPP 1-10 development area. Since all these reserves have been booked as proven there would be no additions to our proven reserve base. We would simply see a transfer of reserves from proven undeveloped to proven developed as new pads are drilled. Although Esso Resources has opportunities which are attractive using the flat price planning basis. these have limited reserves and, if renewal of the upstream business at its current scope is consid- ered, would require ?nding costs of new reserves to be added to their supply costs. The necessity for technology which will reduce supply costs so that future development of the Oil Sands can be undertaken is illustrated in Fig. 12. which indicates Esso Resources' supply costs for selected new opportunities along with their asso- ciated reserves. If the necessary technology is not developed and] or large new conventional oil reserves are not discovered, the upstream will face a signi?cant reduction in its liquids business. Considering Fig. 12. a few signi?cant observations can be made: - Adding pads to the existing Cold Lake plants will be an attractive investment oppommity with CSS technology even under the IOL ?at price forecast. This will enable us to fully cover our booked reserves of 1040 by capturing the 613 proven but currently undeveloped reserve. - Adding new plants with current technology will not be attractive for Cold Lake. It can be seen that due to deteriorating reservoir quality the cost of supply increases with each project. Without technology or real price growth we will not be able to add to our currently booked proven reserves for Cold Lake. 0 Technology makes it possible to add signi?cantly to booked reserves at a supply cost less than the IOL ?at price. However. even with new technology. the reality is that, given the nature of the resource. supply cost will continue to be high relative to some opportunities in conventional oil. This is coupled with increasing pressure on the existing business. making it imperative that we take the necessary action to ensure that we mitigate the impact of these factors. LEVERAGE AREAS 20 .. 5? INTERVENTIONS tn 3 seesaw? 10 .. LUENT 3 SQ seize gmgz?s o. 3333.3 Fig.9 Product Values (1990 5 i Ugh! Crude 4 a Bitumen ?umFlg. 10 COLD LAKE CLEARWATER RESERVES (AT FLAT PRICES) 4000 \va WW VV 433$ +Tecuvgiocv Con-pm Roeovory 3000 .. Mom?s Prue-cu. 5 2000 . sis'follmp an mnemonic 1000 .. ?ol 4. CSS Roplmmont Pads - PROVED Tow OBIP UNDEVELOPED CLPP 1-10 A Dunn - ?110'. IO DEVELOPED Fig. 11 ERCL PORTFOLIO OF OIL 8- BITUMEN DEVELOPMENT OPPORTUNITIES 25 - 1 A KAKWA A KI-IEWOSS - . A HAHKESISCSS 20 ?own-reason . CI CSSREPLACEHENT PADS - CLPP mo PAos ALTERNATE - CLPP anmv PADS 15 .. aouunAnv son -9 WILSON OK SUPPLY COST (1990 US $13 EDM) COLD LAKE EXISTING TECHNOLOGY 0 - PADS To EXISTING PLANTS A new PLANTS COLD LAKE TECHNOLOGY THRUSTS .- FOLLOW-UP messes i ALTERNATE PRIMARY mocessas COLD LAKE BOOKED RESERVES - 63 10 43 memos scam PROVED UNDEVELOPED: 013 an READY PROBABLE STATIC (UNRISKED): 3411 :?ao1oo 200 300 400 500 RISKED RESERVES (HE) Fig. 12 The areas that are analyzed to determine the ideal future are: - CLPP 1-10 Pm?tabiliry - Future Alternative Recovery Processes Market Development - Product Development - Breakthrough The process followed is to articulate the existing situation, the desired future and the gaps between the two in each area. with particular emphasis on the opportunities available to in?uence the key leverage areas. As discussed later in section 4. - Strategic Options. the opportuni- ties are then incorporated into one case in the economic analysis of our Strategic Options. Alternative cases are also developed to provide a view of the future if these Opportunities are not pursued. ?l l'l'l 131 At present, new piloting efforts at the May and Leming operations focus on the development of CSS follow-up processes and the development of alternate primary recovery processes. Existing Situation The current Cold Lake operation will be uneconomic by the late 1990's unless: - there is real price growth for bitumen; - we undertake a strategy to add new pads to replace low 05R pads; and/or - signi?cant technological advances are obtained which mitigate the expected energy ef?ciency decline of late cycle C88. The good quality reservoir that forms the basis of the CLPP 1-6 operation is currently at 8% depletion. This is approaching half of the expected CSS recovery. In the future. unit operating costs will increase as both the site average OSR and production volumes decline. If we are able to maintain our current success rate in ?nding ways to enhance CSS, we will. at best, be able to limit future declines to no more than 10 per year. CLPP 1-10 RECOVERY PROCESSES Improve the cost effectiveness of the steam based process in the developed areas of Cold Lake EXISTING IDEAL GAP Existing plants expected to be uneconomic Value of Cold Lake asset is Means to allow for more effective by mid 1990's without price growth. maximized through efficient heating of bitumen by steam to 08R declines with depletion. use of existing and new facilities maintain OSR with depletion. to exceed current recovery expectations We are hall way to achieving 20% Follow-up processes which will OBIP recovery expected with extend recovery in developed area in developed areas is deemed possible but is currently unproven. Gas price increases in real terms. Alternative fuel which isn't Alternative fuels we know are: increasing in price relative to lass environmentally our product. friendly than gas. More capital intensive tor grassroots and retro?ts. OPPORTUNITIES . Steaming/Production Strategy Optimization . Prove follow-up processes (Horizontal wells/Iniector only intills) . Price growth oriented pilots - deterred) Active Flg. 13 Iti??l?l??llQn follow-up processes may not be suf?cient to sustain viability - Ideally we would like to achieve economic performance through without tie-in of additional pads. Effective management of the selective technology application. in all qualities of reservoir at interfaces between the high and low pressure operation of new Cold Lake. pads. late cycle CSS and CSS follow-up processes will be - Ourdesire is to create abusiness where the value of our product critical if we are to maximize the overall performance. increases faster than the value of the energy input streams. . Alternate lower cost energy resources identi?ed to date are less These input streams include fuel. electricity and diluent. environmentally friendly than gas. Both coal and bitumen result - We would like to maximize our economic return by matching in higher sulfur. metals, ash and CO2 emissions than gas. production to high netback marketing opportunities as they . As indicated later in the discussion on tactics for price volatility occur during the year. (see Appendix B), with our water-to-oil production ratio in- creasing and our cycle reaching 2 years, or more. we Q3125 have an extremely limited capability to vary our production in We need to bridge several critical gaps which exist: response to upside market opportunities. such as those brought 0 CSS is not economic in all reservoir types. To extend it from on by seasonal demand variations. clean reservoir into clast-prone (and even dirtier) reservoir, further understanding of our reservoir-recovery process interac- tions is required. We need to understand the performance of To be successful in developing Cold Lake as both a sustainable and CSS in all types of Cold Lake reservoir. as well as understand strategic part of our business, we will need to how to apply follow-up processes to that same resource. - Expand our recovery base through developing a better under- - Most of our late cycle CSS performance experience has been at standing of the reservoir quality-C88 recovery process interac- Leming in thick clean sands. In many ways CLPP 1-6. where lions. average clean sand thickness is less and where complexities are - Continue to optimize steaming and production strategies greater, has become our new late cycle CSS pilot. Thus we no - By using the key learnings we ?nd in sustaining the existing longer have a road map by which we can predict our future with business, we will also be able to enhance the performance of our a high degree of con?dence. CSS follow-up processes, alternative technologies and develop- - The ?rst areas to require CSS follow-up processes are expected ment strategies by ensuring that the processes are customized to to be the ?problem' pads where either large clast-containing the requirements of the reservoir. intervals, chlorite zones, or top gas/water have limited the effectiveness of CSS. These pads represent the largest risk for the successful implementation of our existing CSS follow-up Existing Situation processes. The supply cost for developing the next six phases past 9&10 with - OSR and productivity performance of late cycle CSS and CSS FUTURE ALTERNATIVE RECOVERY PROCESSES Maximize the value of the Cold Lake undeveloped resource by reducing the supply cost by developing alternative processes EXISTING IDEAL GAPS Developer supply cost Developer supply cost less A reservoir recovery process Increasing from $21 than ?at prlce 01520.30 will reduce cost In reservolr to $31 USIB for next USIB (par 1990:) Increaslng In complexlty developments OPPORTUNITIES - Borehole . Basal Plane Heatlng (on hold) Marita- thow Kaltwa West East 3. ll. Illrb lay Ilahlh- Flg. 14 Cyclic Steam Stimulation and Dilbit climbs a staircase from 21 to 31 The reason is the pmgressively deteriorating reservoir quality. which leads to both (harnessed oil rates and oil/steam ratio. Shales. clays, and lower bitumen saturation are all responsible. but we really don't fully understand CSS in this environment. IQ??Situa?gn We would like a supply cost which is well under the flat price forecast. so we can continue to develop Cold Lake with attracrive investments. All of the components which make up our supply cost are fair game. Gaps We need a reservoir recovery process which will reduce lifting cost in reservoir increasing in complexity. . . Bore Hole Mining is attractive to us because it has the potential to decouple us from rising gas costs. and perhaps can operate in poorer quality sands. Existing Situag'gn We occasionally debate whether we are in the bitumen business or blend business. An either/or choice may not be necessary. Clearly we produce bitumen because that is the resource in the ground. There is no market for bitumen. so we blend it with condensate and move it to Edmonton in order to enter the marketplace. At the 12 SU S/bbl blend price implied in our current price forecast. we are able to carry out that operation at a pro?t. But selling blend is not the only marketing possibility. In theory. at least. we could enter any or all of the steps that bring the ultimate customer the product that he or she uses. In practical terms. upgrading to a better quality crude is probably the only step we need to address. This step is illustrated by the second line. In the past. our studies have indicated that we could raise the price of our bitumen by upgrading it to a higher quality crude. but supply cost (including areasonableretum) rises faster than price. Thus. we stay in the blend business. We expect spread to rise with time. and upgrading may be attractive by the end of the century. We are currently re-examining upgrading and if an attrative investment opportunity is indicated. we will develop a proposal. We need to recognize that most re?ners in the market could also invest to do the quality addition that takes place in an upgrader. so competition will set limits on the attractiveness of upgrading. gamma; Perhaps we can ?nd an edge in upgrading that is unique to the bitumen producer. gas The gap between the existing situation and what is desired is represented by the line. If we could synergistically combine production with quality irnprovement. we might find an alternative to stand alone upgrading or continued blend sales. game: Examples being considered at this time include: - In situ upgrading - Using the bottom of the bitumen barrel on site for steam generation - Perhaps also using the bottom of the bitumen barrel on site for co-generation These would have the added bene?t of expanding our number of customers, and the market demand for our product 15 IO SUPPLY 005T re 15 MARKET PRICE (SUB/bin!) MARKET DEVELOPMENT BLEND or UPGRADE - Pnooucnorr Fig. 15 Thus, while our research will be focused primarily on production, we will also look for ways to add quality as part of the production process. Existing Situation Today we sell a single product from Cold Lake, which is bitumen blended with natural gas condensate. msg'red Situation Ideally. we would like multiple products that are tailored to our customer's needs. G_ap_s Customer needs are now changing. with emerging clean~air legis- lation targeted at transportation fuel composition. The high density and viscosity of bitumen also create a transportation hurdle, which is overcome by condensate. Heavy oil blending creates about 70% of the demand for conden- sate in Alberta. With ?atter heavy oil production pro ?les. we don't expect a shortfall in condensate until the end of the decade. Of course the last thing we want is to have diluent limit our production. especially when prices are good. An alternate diluent or transpor- tation option is needed. We think we can move MTBE by pipeline into Padd II, where new mogas legislation is creating a substantial oxygenate demand, by using it as the diluent for heavy oil. The incremental cost of the transportation of MTBE is the fractionation and treating. which is $3 or 4/8 cheaper than transportation by the Cochin pipeline. The heavy oil business bene?ts by having an alternate diluent. thus relieving the supply/demand stress on condensate. The economics of upgrading depend on spread. with a spread of required for grass roots construction. Even in the face of soft high sulfur fuel oil prices, we don't see these levels being reached before the end of the decade. Spread, like par, is a highly volatile parameter. The ideal of a high return. low risk investment in upgrading seems elusive. Re?neries have an intrinsic advantage, for they can add conversion capacity through a retro?t more cheaply than we can by grass-roots construction. Phased upgrading is a development strategy to use both proven and emerging partial upgrading processes to broaden our markets. For example. we can separate the bitumen into a lighter. deasphalted oil which is suitable for medium conversion re?neries and use the bottoms for fuel to raise steam at Cold Lake. The reduced conden- sate demand and alternate fuel in the face of rising natural gas prices create a synergy with our production operations. Our preliminary economics indicate that such a project could be started as early as {mmrtunities 1996. for an investment of 250 yielding a return of about 20% POWERBIT is a good example of synergy between business lines. DCFR under the IOL flat scenario. PRODUCT DEVELOPMENT Develop new products to improve our operating re venues for spread and diluent while enhancing markets by meeting customer needs EXISTING IDEAL GAPS bitumen Multiple products Foreseeing and meeting changing natural gas condensate customer needs; Transportation Condensate supply Oil Sands development not Alternate diluent! transportation balances heavy oil diluent limited by diluent demand Full scale upgrading Low risk upgrading Making grass-roots not economic upgrading competitive with re?nery OPPORTUNITIES . POWEHBIT . Phased Upgrading Fig. 16 Hummus) Renewal is essential to any industry that exploits a depleting resource base. In conventional oil and gas. renewal is accomplished by the Exploration process. which exists to add reserves. In Oil Sands. we lmow where the oil is. and the challenge is to produce it economically. Our renewal process depends on Technology. The processes which are followed in these two endeavors are similar. Both are characterized by screening a wide number of prospects. which begin at the idea stage. In Exploration. these ideas are developed and a play is mapped. The analogy in is to do a small scale proof of concept. usually in the laboratory. The acid test comes when a wildcat well is sunk. or a technology ?eld pilot is launched. Each of these activities is inherent risky. because it involves going into unlmown territory. The ?nal step in Technol- ogy is like delineating a ?eld. when the technology is scaled up and proved for commerciality. This is a ?Demonstration" that the technology will work as expected in commercial application. like the Lerning pilot was for Cold Lake. Both processes are also characterized by the fact that costs climb exponentially at each stage in the advancement of a prospect. This forces some hard choices. so the number of prospects must neces- sarily funnel down as they are advanced. ?Innovation? in parlance means going all the way through this process, from an idea to a commercial application. To be effective at innovation. we must be making active progress in each stage in the process (Fig. 17) Existin 'tuatio Cold Lake is a good example of the adage that success sows the seeds of failure. Cyclic Steam Stimulation. or CSS. has been very successful since it was proven 20 years ago. We say we want breakthroughs. but the hard reality is that while we believed in ramping oil prices, we lacked a driving force for change. As long as oil was expected to ramp we could afford the rising supply cost for Cold Lake and we believed we would produce a mountain of oil. Over that time. technology became a discretionary expense to lower costs. We have been prioritizing our technology pilots budget . which is analogous to Exploration's wildcat wells. with all other developments. By deferring or prorating these downwards year after year. we have sent a clear message to the organization that we can afford to wait for new technology. Now. when we look for the technology that can allow for steady reserve addition when CSS falls short. we have few or no options. We have developed an optimization mindset. and have optimized CSS to a state of matu- n?ty. We are the proud owners of a world class research facility. and we have built a stong research and technology advancement capability. We want a steady flow of innovations. climbing the technology learning curves to find their value. Innovation is taking an idea through the process of lab testing. ?eld testing. demonstation and final commercialization. Our slow pace on technology pilots has created a bottle-neck in that process. There is strong expertise in bitumen upgrading in other parts of the corporation. In response to continuous demands to reduce expense budgets. however. we scaled back the affiliate funding of in bitumen upgrading and were no longer effectively tapping this expertise. Desired Situation The crisis in the pro?tability in Cold Lake Operations beyond this decade clearly presents an opportunity for breakthrough. To accomplish it we have to reduce the cycle time for new technologies. and to signifcantly increase resources for technology development. PROCESS 1 EXPLORATION 3&0 GENERATE AND GENERATE AND UPGRADE IDEA UPGRADE IDEA DEVELOP AND LABORATORV MAP PLAV EVALUATION DRILL WILDCAT FIELD PILOT RESOURCE . DEMONSTRATE CLAIM RESERVES - AND SCALE-UP DEVELOP I'm APPLY AND OPTIMIZE Flg. 17 Technology as Exploration EXISTING - Few Inventions commercialized -15 years since 088 proved IDEAL - Technology as a discretionary expense to lower costs - Technology pilot capex budget prorated with all development -Worid class research facility with strong program In reservoir description and recovery BREAKTHROUGH Find ways to unlock the potential of the Oil Sands resource, by seeing Break-throughs Technology which allows steady reserve addition Steady flow of innovation from idea to implementation OPPORTUNITIES - Crisis in the profitability In the current operation GAPS Lack driving force for change Optimization mindset Siow pace of new technology pilots lacks expertise in bitumen upgrading Retain/attract innovators Fig. 18 . When the future of Cold Lake is considered there are many possibilities from which we can choose. If our objective is to maximize the value of the Cold Lake resource the best alternative will be a function of the assumptions we make regarding the future business environment. Traditionally we make some key assump- tions and develop a single detailed plan as an accurate representa- tion of the future only to discover that the weakest part of the plan was the assumptions we made. This has, at times. resulted in complete changes in direction. Given fuun'e uncertainties, it is prudent to acknowledge that we cannot forecast all things with certainty and that a variety of potential futures exist. Chances of ultimate success will be higher if we are able to understand. at a strategic level, the implications of a variety of futures. This section of the report will describe three alternatives for Cold Lake which we believe encompass the range of possible futures. These alternatives were developed as part of a scenario based development plaming process which will be built on in the future. The degree to which each of the alternatives will become a reality will be a function of several factors. Apart from oil and gas prices. a key factor in dictating Cold Lake development will be the pace and success of technology development. The three alternatives examined are as follows (Fig.20): - Technology case. Assumes 100% success in technology devel- A I opment. - Replacement pads case. Development using only lutown CSS technology. - Blowdown case. Deplete only currently developed reserves. The technology case shows the impacts of technology on future Cold Lake development, assuming that 100% success is achieved on several technology development fronts. These include CSS followup processes. alternate primary processes (modelled as Borehole Mining), andpartial upgrading (Deasphalted Oil or DAO) with bottoms burning for steam generation or bottoms sales. The replacement pads case assumes no success in new technology. Based on the flat price assumption we are limited to adding CSS replacement pads to the existing plants to achieve a DCFR greater then 13%. Finally the blowdown case examines an option of minimizing future costs by depleting only the currently developed reserves. Market aspects. other than as re?ected in the corporate price forecasts. are not considered in this analysis. The following section provides a more detailed description of the cases. This case models future Cold Lake operation using only existing facilities. Phases 7 and 8 starts up in 1991 but operates only with the 12 pads which are already drilled. No further pad additions occur. Overhead and sustaining capital costs are reduced to a minimum. There is 5 MS sustaining investment in 1991 after which it is a function of steam volumes. Total cumulative capex of50 (1991 S) is required which includes abandonment 8r. reclamation costs. Further technology and development initiatives are not pursued in any form. All Calgary staff are disbanded including Resource Development and Research Technology. The operation contin- ues until it becomes uneconomic in about the year 2000. This case models CLPP 1-10 and the Pilots under CSS. No further technology initiatives are pursued. Development occurs by adding replacement CSS pads to existing commercial plants to fully utilize steam and process capacity. The case is run tmti] the current booking of proven reserves is recovered (approximately 1000 ultimate gross) . This represents the limit of remaining reservoir which can be economically exploited with CSS technol- ogy at the flat prices. In this case 103 pads are added including 28 CLPP 7-10 primary pads. We assumed that CLPP 7&8 starts up in 1991 with 8 more pads being drilled by 1993. CLPP 98:10 is assumed to startup in 1995 with a total of 20 pads being added by 1998. We assumed that a replacement pad could be added at a capital cost of 4 M5 by utilizing equipment from abandoned pads. The primary pads for CLPP 7 to 10 were assumed to cost 6M3 per pad. The sustaining capital was assumed to be 10 $lyr. The total capex required over the life of the project including abandonment reclamation costs was 1 . I . To bridge the ?gap' between the ?mess? and the ?desired future? or vision requires specific interventions. These will encompass some actions and technologies that are already known and some that have yet to be identified. In order to develop a case that could be economicially evaluated. an analysis of interventions that are currently identified was undertaken. From this analysis. the most appropiate interventions were selected. Given the circumstances surrounding the Cold Lake business. it transpired that these were primarily new technologies. (Hence the title - "Technology Case"). The details of the new technologies are outlined in Appendix A - Technology Details) There are obvious. lcnown and 'guaranteed' interventions that we are immediately capable of making new CSS pads in the remaining quality sands in the CLPP 1?10 area). We have a suite of interventions which are reasonably certain and a larger suite of interventions which still require significant scoping but aredependent on known technologies. In both cases the key will be to implement the interventions and to obtain the minimum necessary results to be economic. The major portion of the 'gap' will have to be bridged by interven- tions which we largely do not understand at this time or. worse yet, do not yet lmow of. We expect more interventions to be identified although we don't know precisely what or when they might be. Fig.19 sununarizes our key thrusts and interventions identi?ed to date. along with their supply cost (or impact on current supply cost) and our assessment of the probability of success. ti CLPP 1- 10 and the Pilot sites are produced under C88. The starrup assumptions for CLPP 7 to 10 are the same as the replacement pads case. Replacement pads are added as required to maintain steam INTERVENTIONS SUPPLY RESERVES . DEVELOPMENT OPPORTUNITY COST ADDED PROBABILITY COST (5 yrs) WINDOW PAR) (NB) OF SUCCESS (MS) BASE BUSINESS -OPEX MINIMIZATION 1991+ 2110.20) 0 0 - SUSTAIN 21% RECOVERY 1991+ 19 0 5 POST-CSS PROCESSES - HORIZONTAL WELLS 1994-1997 19 200 5 1994-1997 19 200 5 COMBUSTION 20002010 21 200 20 -ALTERNATE FUELS 1994-1997 11(030) 0 5 ALTERNATE PROCESSES 43an HOLE MINING 1997+ 19 400 50-100 - BASAL PLANE HEATING 1997+ 21 150+ 12 - COGENERATION 1995+ 1010.10) 0 7 PRODUCT I MARKET - POWERBIT 1992-1995 010.50) 0 1 PHASED PARTIAL UPGRADING 1995-2000 1110.10) 0 25 Flg. 19 oumur at capacity. A follow up process to C88 is applied to all CLPP 1-10 pads. including replacement pads after 1995 when the technology is assumed to be available. The CSS pads are switched to a follow up process at of 0.2. The application of followup processes provides an ultimate recovery which is 2/3 higher than that of CSS alone. The cost for followup process implementation was assumed to be 3 slpad. Pad abandonmentcosts of 300 KS/pad were assumed. Surface piping was abandoned at the end of the project life. CLPP 11+ is developed using an alternate primary process (mod- elled as Borehole Mining). Partial upgrading (DAO) with bottoms burning or bottoms sales is adopted at all commercial sites. Plants are brought on stream every 2 years starting in 1997. Each plant is assumed to produce 4000 m3/d for 24 years. To capture most of static reserves 14 plants are included, with ?nal production in 2046. Deasphalted oil and bottoms bunting are applied to all of CLPP 1- 10. starting in 1997. Seventy four percent(74%) of the bitumen is converted to DAO and blended with diluent at a 9% blend ratio. We assumed that the DA0 would initially sell for 81% par decreasing to 75% by 2010 with the price holding at 75% after 2010. Bottoms burning replaces allproprietary and purchased gas l- 0. At the BHM projects it is assumed that the bottoms will be sold. A bottoms price sensitivity of 25 to 50% of 1995 gas price. on an energy equivalent basis, is evaluated. We estimate that this case would require a capital expenditure of 10 to 35 MS per yeartcum 180 MS 19913) to develop the technology at the required pace. Assuming all technology initiatives we as- sumed are successful. the total future capital required for the technology case is 11.000 MS (19905). However. the risk of this investment would be managed over time by using the pads case as a fall back alternative to sustaining the business until we feel it is prudent to spend capital on applying a new technology. I I. I. 20] The Blowdown case shows that under current ?at price forecast. operation could continue until early in the next decade with no further interventions. if significant cost reductions are achieved. The currently booked proven developed reserves would be cap- tured. but proven undeveloped reserves would not. The addition of replacementCS pads facilitates the capture of total proven reserves. but adds little in present value over the blowdown scenario. The economic performance of incremental pads added declines with time as blend value decreases under flat par prices. even though replacement pad production is identical. A more rigorous scenario would have pads added in the near term perform- ing better than those which are brought on in later years to model a decline inreservoir quality. The result would be improved near term performance. and hence a greater present value spread between the Pads and Blowdown case. In any case. the trend of decreasing economic performance with time would remain (or worsen), and would not change the conclusion that replacement CSS pads alone will not provide high returns inde?nitely in a ?at price environ- ment. STRATEGIC OPTIONS TECHNOLOGY GO FORWARD GO FORWARD DEVELOPMENT PV13 PV13 RESERVES CAPEX ABANDONMENT CASE (FLAT - us) (RAMP - MS) (FLAT - MB) (1990 3) DATE BLOWDOWN 580 900 500 0 ?2000 PADS 610 1800 1000 0 TECHNOLOGY 950?1300 6500?8000 4000 180 2040+ (10?35 arm) Fig. 20 Figures 21 to 23 show some sensitivities to the base cases. Shown are the PV13 impact to each case resulting from changes in key parameters within reasonable ranges of variation. All base cases are run under the IOL flat forecast. It can be seen that while downside risk is reduced in the blowdown case, so too is upside potential as compared to the other cases. As would be expected. those factors impacting production perform- ance or product price are those to which cases are most sensitive. For the technology case the price sensitivity is based on deasphalted oil(DAO) since that is the product we assumed that we are selling. The ?gures also show that in the technology case fuel gas price sensitivity is small. since we are burning bottoms. However. sensitivity to changes in non fuel operating costs increases as we move to technologies such as BHM. Cases have beenrun whichrepresent alternate futures forCold Lake dependent on the strategic path we choose. the business environ- ment which transpires and the success of our technology develop- ment initiatives. The cases are intended to be illustrative only as much of the technology included is at a conceptual stage at this time. The technology alternative will require a commitment for resources to prove the concepts at a pace which enables them to be imple- mented by the mid the 1990?s. -500 400 -300 200 -100 Production DAO Price US Exchange Non Fuel Op Costs Bottoms Value Overheads Flat Spread Gas Price Sensitivities - Technology Case Sensitivity (MS) 0 100 200 300 4-00 500 Fig. 21 Sensitivities - Pads Case Sonslivly (M8) 400 410 -200 -100 Exchange Fin Ga Non Fuel q? Cuts Pad Coot Gil Overheads Fig. 22 Sensitivities - lowdown Case Sensi'rvitv (MS) -500 400 -300 -200 400 59"? so so Hat-nu :lnu Production Non FuolOpcm Flat?u EE 1351. 3 15? mm 110% was Flg. 23 Within the assumptions of these cases: Given signi?cant cost artd overhead reductions. and discontinua- tion of technology development initiatives, operation of Cold Lake could continue under IOL flat prices until the year 2000 using existing wells andplants. The degree to which these costreductions could be achieved constitutes the critical assumption in this case. Such a strategy would not capture undeveloped proven reserves. Sensitivity runs show that while this strategy obviously affords some downside protection. upside potential is also limited in comparison to other cases. This case represents a "Shut-'l'he-Door" strategy which is difficult to reverse. However it does provide higher degree of certainty of outcome as can be seen in the sensitivities. Further development of Cold Lake with existing plants and replace- ment CSS pads allows the capture of current proven reserves by the years 2010 to 2015. present value results are found to be only better than the Blowdown case however as decreasing blend value under ?at prices make the business more marginal with R4- NLI Irrespective of the speci?c strategy to intervene. bridging the ?gap' between the current business and our recommended strategic 0p- tion also will require the adoption of a clearer policy with respect to technology development for the whole oil sands business. and the concurrent dedication of resources - staff and dollars - in support. Our strategy is built on a commitment to the development of new technologies which will obtain a breakthrough or several for Cold Lake. This commitment must be undertaken without compro- mising the principles of operating the base business to be the lowest cost producer and without compromising the well-established initiatives for continuous improvement of the base business. Execution along term technology development strategy has its own Speci?c requirements: 0 There is an ongoing need to attract, nurture and retain innovators. This is not inconsistent with our current need to rightsize in fact. the foci on essential work. prudent risk-taking and lateral career development are all fully supportive of this type of organization. - Accepting the fact that CSS technology is maturing. we will focus a signi?cant amount of our into pursuit of breakthrough in alternate recovery processes. - We will maintain a coherent and substantial program - largely undertaken by affiliates - into synergistic product and market developments will be the key to real economic develop- ment of Cold Lake. - We must and will plan for a significant increase in the pace of technology development. We do not have the luxury to take 20 years - as we did with CSS to bring new technologies forward to commercialization. -We will maximize technology development and interchange through external parties such as AOSTRA and OSLO New time. The availability and proximity of suitable replacement pads is the key factor in this scenario. Adding replacement pads to the existing plants offers a good bridging strategy to the technology case to the technology case to sustain the business until technolo- gies are proven for implementation. Since this case applies only existing technology there is a reasonable certainty of outcome. The technology case makes it possible to signi?cantly add to Essa Resources proven reserves. This is accomplished through imple- mentation of CSS followup processes increasing recovery from developed areas and building new plants through the application of alternate primary recovery processes. The economic application of these recovery process technologies may be limited in duration under ?at par prices given ever increasing spreads. Developments in product enhancement with alternate fuels represent a signi?cant opportunity for long term success under ?at prices. Mitigation of declinirtg blend value and increasing fuel costs fundamentally changes the nature of the Cold Lake operation. This case provides the possibility of a sustainable business well into the future. however. because it is very much technology based the potential outcome is much more uncertain. RE MMENDATI Ventures - and minimize arti?cial barriers around intellectual property management. In the longer term. our competition is not domestic but global. - Lastly. if oil sands are our energy future. we will pursue reserves additions for this segment of the business with the same vigor with which we strive to add reserves of conventional oil arid gas. Technology development and piloting truly are to oil sands what exploration is to the conventional upstream. (Elm The two divisions responsible for Cold Lake - Research and Technology and Oil Sands Operations have estimated the re- sources needed to accomplish the critical new technology devel- opmentobjectives. The data for 1990 shows the resources currently being deployed. and these curves give an indication of the levels required over the next decade. mum Personpower directly associated with will require a slight increase from current levels. We need to maintain steady effort on follow-up processes in order to see those through to commercial implementation. Likewise, a steady effort on increasing the energy ef?ciency of our steam processes is required. A substantial increase in effort is needed to climb the learning curve for alternate proc- esses. We need to recommit to the kind of effort that was required to launch CSS but at a much accelerated pace. Product and market development activities also need bolstering. but we recommend that these centers of expertise in other parts of the corporation be tapped. Although the resourcing charts pertain to Research Technology. we will also require commitment to the resources required by the base business Oil Sands Operations and business development planning Resource Development. Between them, these two divisions must sustain the pro?tability of the existing commercial assets and implement the new technologies as they become avail- able. As our efforts focus on cost effective alternates to the energy intense CSS technology. it is this technology that must provide the cash ?ow and operational bridge to new developments. We have shown that signi?cant CSS improvements have and will allow us to continue to meet our recovery expectations in the face of reservoir more complicated than originally imagined. We have ample evidence that our efforts to optimize CSS and understand the reservoir must continue in support of a viable enterprise and to position the business for optimal implementation of better recovery technology. This is not intended to justify the status quo. The base business is .:ommitted to ri ghtsizin steps that will reduce persortpower levels by at least 20%. We do. however, need the ?exibility to acquire. develop and [e_ta?m the skills - particularly oil sands reservoir engineering and production geoscience - critical to supporting the business as it develops. With respect to the development and retention of the critical skills base. the best - only? -altemative to incremental staf?ng is to adopt a policy of retaining technical expertise for longer periods decades, perhaps careers. This ?exibility must not only be adequate for the existing or new facilities. but also for the business development, operational evalu- ation and ultimate implementation of technologies as they emerge for commercial application. These resources will continue to be directly proportional to the scope of business at a given point in time. him A signi?cant increase in our expense budget is also needed. primarily to fund the af?liate We have ratcheted down our budgets to the point where person-power is over 70% of our cost. The wedge for product development needs bolstering to fund affiliate research. Cams Field piloting is capital intensive. but is absoluteiy mandatory to advance technology. If we continue to prorate this with our other developmental work we are wasting our time on technology ad- vancement. Several good sized chunks of capital, and the related engineering and design expense (which will be contracted out) are going to be required. We believe that efforts to optimize and understand CSS will require Capex of $3 million per year in the near term 5 years ?declining late in the decade as CSS is superseded by other technologies. This investment will not only sustain the pro?tability of CSS but also will develop understanding of the reservoir for future applications. The funding would be directed at work to understand how we are depleting various types of reservoir and is not now speci?cally budgeted. Fig. 24 shows the total build-up. and makes one more important TECHNOLOGY DEVELOPMENT TOTAL COST REQUIREMENT I FIELD EXPENSE CAPEX REQUIRED LEVEL CURRENT LEVEL TOTAL cosr (A. Spent PERSON EXPENSE 1992 1990 1994 YEAR 1996 1998 2000 Flg. 24 point. It costs money in the ?eld to run pilots. This is currently coming out of the $130 M5 operating budget for the entire District operation. In so doing. we have disguised the true costof develop- ing technology. Even worse. we force prioritizations between daily operations and technology goals. We need to explicitly budget and manage for these expenses. I. In summary: The staff in Esso Resources who are dedicated to oil sands devel- opment and. speci?cally to Cold Lake, are committed to continue to be melow cost domestic producer of bitumen and bitumen blend. . We intend to ?nance our own future through our base business - plus provide a signi?cant contribution to Esso Resources. Impe- rial and Exxon. - We will continue to develop capabilities to maximize our ?exibil- ity to respond to supply/demand changes and seasonality. and thus enable us to manage the business within shorter lag times. - We recommend that we maintain the current scope-of-business in the pipeline-connected market and plan. where appropriate, to increase that market (eg, BiProvincial Upgrader, Conoco at Bill- ings). - We are vulnerable to a permanent loss of primary market if we are unable to meet our customers' expectations. One consequence is a recognition of the need to continue marine-exports, when economic. in order to maintain our productive capacity. - We recommend the continuation of the current strategy for the acceleration of well?researched. well-designed and innovative programs focussed on early commercialization of technolo- gies for Cold Lake. These include both technologies with direct application to the base production business. and technologies which. through synergy. will also bene?t our customers as well as ourselves. In support of the strategy we need several commitments by ERCU IOUEHON: Con?rmation and endorsement of the strategic importance of Oil Sands and Cold Lake. Endorsement of a long term commitment of resources to aimed at early commercialization of technologies for Cold Lake. Endorsement of and support for the inter-company pursuit of opportunities which provide business synergy to Cold Lake and its partners. Finally, endorsement of the acquisition and development of af?li? ate support for sustained into oil sands technologies. 4. APPENDIX A - TECHNOLOGY DEVELOPMENT FOR COLD LAKE W111i LAKE The CSS. or Cyclic Steam Stimulation. process is the basis for the commercial project at Cold Lake. In this process steam is injected into the unconsolidated Clearwater oil sands formation from 20 well. directionally drilled ?satellite" pads. The steam heats the bitumen and reduces it's viscosity. It also provides the drive energy to produce the bitumen. After a month of steaming and a brief soaking period, a well is brought onto production. A water in oil emulsion is produced. Over the course of about a year the fraction of oil in the production fluids and the temperature gradually decrease. The cycle is then started again. In the central plant, the free water is separated and the bitumen is blended with diluent. which is a natural condensate. The rest of the water is removed in an electostatic heater treater. The oil is then further blended to 27% total diluent to meet pipeline viscosity and density speci?cations. and is sent to market. The water produced with the bitumen is deoiled. Divalent cations are removed by the hot lime softening process with ion exchange ?nishing. This water is then recycled by using it to make injection swam. Natural gas ?red boilers operate at 80% steam quality to ensure ion transport. The overall process is by and large self-contained. with a small amount of fresh water importation and brine disposal. Gas produced in the CSS process is compressed at the satellites and burned in the steam generators. The by-product lime sludge is dewatered and land ?lled. and the bitumen slops are mixed with sand and used for local road oiling. Esso has made numerous technological innovations as we climbed the learning curve for CSS. Several of these have been signi?cant on an industry-wide scale, and are worth summarizing here. We were the clear leader in the development of horizontal wells to tap the oil sands. This steam assisted gravity drainage process was proven in two early pilots. The potential of the process has continued to increase with time as good communication developed. and we now see horizontal wells as avery efficient. high OSR option for CSS follow-up. AOSTRA has also been very successful in developing our concepts into a primary production process in their Underground Test Facility. We now have lab and ?eld data to support a new theory that the injected steam forms a water-inoil emulsion with bitumen. and that this emulsion flows as a single phase. Theoretically. this ?xes an anomaly which required hysteresis in oil/water relative permeabilities to explain how CSS works. Application to better control CSS has led to a rough estimate of 15 MS in added revenues for Cold Lake in 1990. We are also using the theory to improve our predictions and control of late-cycle CSS. We were ?rst in recycling produced water to generate steam. Our competitors (Shell, BP) still haven't learned to do this. By limiting our requirement for fresh water we have gained a positive image with the local community and have deferred the need for the North Saskatchewan pipeline, which would have cost 4.4 MS per year. Applications of our research expertise to problem solving has supported continuous improvement. Significant savings have resulted from an improved "Quench and Temper" alloy for steam lines. new polymeric stuf?ng box materials and super?hard ceramic coatings to help control sand erosion. We have also made signi?cant reduction in chemicals use. including demuls i?ers. scale control chemicals. and lime and acid for hardness removal. The table shown below is a ten-year retrospective on Esso's costs and bene?ts for Cold Lake technology development: QQSICMEI BENEEII him um 110 Capex for May 330 Oil Produced 8: Lemlng 145 - Research 80 Know-how to produce CLPP - control Inter-well communicatlon - all volumes 100 - Research 20 Reduced Operating cost - BREAKTHROUGH TECHNOLOGY 0 - Capex 20 Oil Production 30 - expense 25 Options for Follow-up Process Posltlon for breakthrough 475 Total 335 Total A long view must be taken when evaluating an exploratory process like By nature this is a risked venture. and future performance may not be as good as past. However, when we consider the size of the prize that our future efforts are directed at, we believe that further is a good investment. The following table illustrates the programs in our current effort. The goal of the CSS Optimization program is to achieve our booked reserves of 1 GB, by sustaining the 21% recovery of bitumen in place in our developed and proven undeveloped resource. The goal of our Processes program is to ?nd signi?cantly improved processes to operate our steam-based recovery business more ef?ciently. It is targeted at evolutionary changes which will allow us to reduce our fuel and lifting costs. The goal of our Alternate Process development effort is to achieve a revolutionary step change reduction in our costs. by changing the primary recovery process that we use. The goal of our Product Development effort is to add value to our product as a way of increasing our revenues and broadening our markets. ERQQRAM ERQJEQI (MS) CSS OPTIMIZATION Sustain 21% Recovery 30 POST-CSS PROCESSES Injector Only In?lls 30 OR Horizontal Wells In-sltu Combustion 0 Alternate Fuels (Bitumen Bottoms Burning) 40 ALTERNATE PROCESSES Bore-Hole Mining 75 Basal Plane Heating 6 Cogeneratlon 50? PRODUCT DEVELOPMENT POWERBIT 300 Phased Partial Upgrading 85 The projects which are identified in this table are in the latter stages of the process, so we are able to estimate the commercial economics if success is achieved. The net present value in the IOL Plateau scenario is shown. Each program also has earlier stage research projects which are feeding the innov ation process. It is much more difficult to value the future contributions that those programs will make. but we expect a continued stream of opportunities which improve on those identi?ed here. Figure A1 shows the commercial production forecast which the ?rst three programs are targetted at. These are the volumes which are in our 1990 Corporate Plan. Each of the projects will be described in more detail. An expected future value for technology, and the requirements for future success, will then be presented. 25000 20000 Follow-up Processes 93 lar:kthrough 15000 10000 . Phase 7-8 Phase 9-10 5000 . CLPP by Cyclic Steam Stimulation (CSS) Pilot: 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 . 1 Fig. A1 In order to sustain 21% recovery and to achieve our booked reserves of ICE. a continuing effort is needed on optimizing CSS and understanding the interplay between the recovery process and the reservoir geology. The MARSTHERM simulator is a tool to help optimize the process. but is limited in its applicability. The fundamental physics and chemistry of the process are not well understood. so the simulator is tuned by history matches. The limitations become evident when one considers that it predicts more than 60% recovery in areas where 20-30% is more the expectation. The influence of the geology on the CSS process performance is also poorly understood. In clast-prone areas of CLPP the effective recovery is zero. With CSS the Oil-Steam Ratio. which is a measure of energy efficiency. declines with recovery. The thermodynamic breakeven is an OSR of 0.07. CSS achieves 0.35 in early cycles. and then declines. At the economic breakeven of 0.15. an average of only 21% recovery is achieved. A follow-up process to CSS is needed to improve the recovery at high ef?ciency. Realm We now have two options which are close to commercial readiness. This is illustrated in Fig. A2 RECOVERY PROCESS FOR CSS FOLLOW-UP IOI DISPLACEMENT PROCESS - - a steam based process to Improve decllning CSS performance . Current Status - (dlaplacement) pilot running elnce 1080 - Horlzontel Wetle Pllot In 1990 - Future Effort - and evaluate process optlons - complete development for commercial applicatlon In 1 904 - Bene?ts OBIP) Horizontal Well. 3.0 0.30 14 I Injector-Only-In?lle 2.5 0.27 16 Varleblo 0.2 0.2) 5 Dleplaoernent Flg. A2 101 is a steam-drive "displacement? pocess which uses Injector-Only-In?ll wells. The 101 pilot has been operational for two years and is looking promising. VPD, or Variable Patter-n Displacement. is a very similar process which foregoes the injectors. and operates on the original CSS spacing. The second option is to drill horizontal wells below a row of ?ve CSS wells. The CSS wells would then be converted to injectors and the horizontal well used as a producer. This concept builds on our learnings from the ?rst two horizontal wells, and a pilot has recently been drilled and is now being started up. We have a dedicated effort to prove out the best option and to advance it to commercial application. We expect a steady, stepwise implemention. as CSS pads in the Phases 1-6 area are depleted. The challenge will be made especially dif?cult by the fact that pads with complex geology, including high shale clasts, will be the ?rst to require a follow-up process. The total capital requirement for CSS Follow- up will be about 200 MS. with appropriation starting in 1993. The bene?ts. along with the trade-offs possible with the different technologies. are illustrated in the table in Figure A2. These projections are based on limited ?eld data and simulations, and we will be improving our con?dence in their accuracy. An investment in Follow-up recovery is projected to be economical in the IOL Flat scenario, with an internal rate of remm of 13 to 18%. In-situ Combustion (ISC - Fig. A3) was in our plans as a ?nal Follow-up process, after a displacement process like 101 had created steam channels between producers. In this process. oxygen is injected to burn a portion of the residual bitumen in the Steam-swept sands. The heat of combustion mobilizes the bitumen in adjacent. reservoir. and drives it along With the residual bitumen to the producer. IN-SITU COMBUSTION . Description - Injected oxygen feeds combustion In hot. depleted mam couaus'nou steam chambers to and drive adjacent bitumen Stu-m 3'09! Zone Centurion Supt Zone - Current Status - Fleld pilot deferred: commercial process not economic at plateau prices - Future Effort - 3-D lab tests to test new configurations - base for ln?sltu upgrading breakthrough Producer Injector . PLAN VIEW . Benefits - Improve recovery by 10+% Fig. A3 The economics of commercial application of were evaluated based on the lab data we had obtained. and related results from BP's ?eld pilot. We made some upside projections that increased the oil production by 40% above what was expected. We also decreased the direct operating cost by 50% to allow for synergies of cogeneration of steam and electicity to run enriched air compressors with the low-Btu produced gas. Even with these upsides. ISC was barely economic in the IOL Plateau price forecast We therefore terminated our plans to proceed with AOSTRA on an ISC pilot in May pad. The Research Department had just commissioned a three dimensional lab unit to test ISC late last year when that decision was taken. They are now using it to test new con?gurations for ISC which may improve the oil recovery. One con?guration which looks promising is to use horizontal wells to produce the oil. and to produce the gas up the vertical wells which were previously steam injectors. The ISC knowledge we have gained is also being used as a base to explore the possibility of a real breakthrough. If the heat of combustion could be combined with upgrading reactions in-siru. we could conceivably produce a higher quality oil and use the refractory part of the bitumen to fuel the process. This is already happening to a small degree in ISC. and the challenge is to magnify and control the effect. So we are ?going back to the drawing board". If we ?nd an ISC based process which looks economic at flat oil price. we will reinitiate a ?eld pilot. With the anticipated rise in value ofnatural gas. we have been searching for an alternate fuel for raising steam at Cold Lake. Environmental acceptability is a fundamental design criteria in our process development. A highly leveraged pilot plant (Esso Share 11.6%) using new. low technology. was started in 1990. Several problems have been encountered with the lagging component of the burner. and we are working through them. We have always recognized that coal conversion would not be economic in a low. ?at oil price scenario. The coal pilot will be completed to ful?ll our obligations to our partners and to create a future option in the event that gas price or a technological breakthrough supports coal utilitization. With our current focus squarely on pro?tability at flatprices. wehave identified an opportunity to both upgrade the bitumen and to burn the bottoms. The burning of bitumen bottoms is illustrated in Figure A4. This use of bitumen bottoms would direct the hard-to-convert bottom end of the barrel to its best use, which is fuel. at minimum capital investment. In the pilot we are now planning. the bottoms will be emulsi?ed for easy storage and transportation. and to improve the burn- out. We have been supporting an effort on ammonia addition to the ?ue gas for sulfur dioxide and nitrogen oxide control, and plan to apply this process in our pilot. The spent lime which we already have at Cold Lake could be the ultimate trap for the sulfur. regenerating the ammonia. Bottoms burning has the potential advantage of making our operation immune to external price influences on our fuel bill. Of course it has the hurdle of learning to burn the bottoms. which have 6% sulfur and heavy metals. cleanly. We are learning a lot from progress others have made in this area. ALTERNATE FUELS FOR STEAM GENERATION - Description - find an alternate fuel which is both economical and environmentally acceptable for raising steam MMW at Cold Lake . Current Status - low coal pllot operational - coal not economic In plateau forecast - planning Bitumen Bottoms Burning Pliot Future Effort Steam Generator - 1992 Pilot on emulsified bottoms - demonstration pilot in 1993 Bottom. - 1996 commercialization (NH 5?0. NH . Benefits - fuel self-suf?ciency Spent Ilme Regen - enhance marketability of bitumen by sharing technology Gypsum easo? 2?le Fig. A4 We can produce bitumen for $1.90 a gigajoule. including both capital and operating cost. We plan to develop a strong technological capability in clean burning to help us develop a potential market for bitumen as thermal fuel. The bottoms would be emulsi?ed with water for ease of transportation. and would resemble the "0rimulsion" which the Venezualans are successfully introducing. We have already had some encouragement from a cement manufacturer. Costs for other fuels are shown here. illustrating the potential attractiveness of bitumen bottoms, if the clean burning challenge can be met. Weiss-5.10.255 The supply cost for developing the next six phases past 9 8t 10 with Cyclic Steam Stimulation and Dilbit climbs a staircase from 21 to 31 The reason is the progressively deteriorating reservoir quality. which leads to both decreased oil rates and oillsteam ratio. Shales. clays. and lower bitumen saturation are all responsible. but we really don?t fully understand CSS in this environment. The goal of this program is to leap-frog those hurdles with by developing a different recovery process. Bore Hole Mining (BHM) is a non-thermal recovery process which we are now developing on a fast-track. In this process. which is illustrated in Figure A5. high pressure water is jetted into the unconsolidated oil sand formation. The bitumen and sand is produced as a slurry. The bitumen is ?oated in a froth on the surface. and the sand is returned to a previously-mined cavern. Our discovery that gravity will cause it to collapse on its own is key to enlarging the cavity to the required size (10 radius). While, there has been some previous research on Bore-Hole Mining. our experience with high bitumen production in shutting off a cold- flowing abandoned well in the C7 pad convinced us of the potential merit of this method. We recently completed a single well ?eld test to verify the concept. In short duration mining runs. we achieved 40% of our target rates of 1100 m3lD. High erosive materials wear and cold weather slowed us down a little. but we feel that these problems are solvable. We are ?nalizing an agreement to share the costs with AOSTRA. in exchange for the licensing rights. BORE HOLE MINING RECOVERY PROCESS . Description - an alternative process to CSS to enable economic future developments BITUMEN . Current Status - exhibited with CT shutoff - field test successful - cost shared 50% by AOSTRA (4M5) . Future Effort - continuous process (1992) - demonstration scale pilot (1994) - commercialize in Mahkesls (1997) . Benefits - recovery Increased to 40% - anticipate 34x efficiency improvement over CSS 4? high pressure let produces slurry - operating cost reduced from reservoir stoughss. enlarging cavity 333 to 325 (13/3 blend 4- bitumen separated and sand replaced t. Fig. A5 We are still early on the learning curve, and foresee several pilot phases and signi?cant capital (50 to 100 M3) and expense requirements to resolve the technical hurdles. In the next phase we will test the ultimate cavity size and a continuous mininglre?ll Operation. A subsequent phase will address surface stability management and Operate the technology on a commercial scale. We are working towards commercialization of this technology in the Mahkesis area. successful, we will have reduced the development time by a factor of three relative to C88. A signi?cant bene?t of this process is that a recovery of 40% should be possible in just 5 years. The process should be inherently energy efficient. since heat is not required to separate the bitumen from the sand. As a result. the operating cost is projected to be reduced by a third relative to C58. The comparison of supply cost for a blend barrel which is shown here demonstrates the potential advantage for Bore- Hole Mining. Mahkesis Development Basis CSS BHM blend) Capital 2.75 251 Operating 3.80 2.48 Other variable (incl. tax, royalty, tariff) 1.77 1.64 Spread 7.00 7.00 5&1 Elli Total 21.92 18.67 Basal Plane Heating is a steam based recovery process which is an alternative to C88. It requires virgin reservoir to operate. Fig. A6 shows how it works. The stress state of the reservoir is ?rst modified with injection of steam, similar to the ?rst cycle A hydraulic fracture is then made. Because of the stress state, horizontal fractures are favored, and a pancake fracture results. Finally, the pattern is steam-?ooded from the central well. To prevent steam from channelling straight through to the producers during production, the pattern is operated with pressure cycles. Basal Plane Heating displayed a very promising ?rst pressure cycle in the uncon?ned May pilot. but the second cycle was disappointing. It was characterized by high water return. and low oil rates. Observation wells have been drilled and are now being analyzed. The results will lead us to abandon the process or reinstate the con?ned pilot. The commercial potential of Basal Plane Heating was evaluated based on ?rst cycle performance. Basal Plane Heating is comparable to C58 plus Variable Pattern Displacement. Since neither are economical for Mahkesis development in the IOL flat price forecast. the con?ned pattern. commercial prototype pilot of Basal Plane Heating was deferred. The real advantage we now see for Basal Plane Heating over CSS is that the ultimate recovery is doubled. This projection is supported by Shell's record in Peace River. where thin bottom water creates a natural basal plane. As a consequence. a two-phase Basal Plane Heating plant needs only half the area of CSS. With limited clean sand reservoir remaining. this could be a real bene?t. Co-generation of steam and electricity could be a way to reduce future capital and operating costs, particularly for bitumen bottoms burning. We are talking with Alberta Power utility to understand the merits of this approach. BASAL PLANE HEATING . Description - A steam based alternative to CSS which Improves ultimate recovery Current Status Heat Producers and - Unconflned pilot at May had poor second cycle Modify Stress - Observation wells to be In 1091 - Contined pilot deferred; commercial implementation not profitable with plateau prices . Future Effort - Interpret May perionnanee - lie-evaluate economic potential - Benefits - Comparison for Mehkesls development Cl'OatO Pancak. - 250 ms Cape: from Central Well Area Recovery 03R NPV (acres) (96 OBIP) (33 1600 Steamilood from Central Well - Our Product DevelOpment strategy is aimed at improving pro?tability in CLPP 1-10 and at allowing economic future development at ?at oil prices. In the face of widening spreads. we have been searching for alternatives to diluent blending for transporting and adding value to our bitumen. One thrust is to improve the diluent. and another is to find low cost conversion options or ways to convert the bitumen to make it suitable for other pro-i Ms POWERBIT (Fig. A7)is a blend of high value diluent, that's the POWER. with bitumen. which is the BIT. The project initially started from a desire to ?nd alternative diluents which would be more valuable to our Cold Lake Blend customers. The US Clean Air Act has profoundly changed the mogas demands of our customers. with lower RVP and oxygenates being required in 1992. The demand induced premium for MTBE. which is predicted by EUSA. and industry studies. has given it the economic advantage over other options we have studied, including aromatics via CYCLAR technology. alkylate. and natural gas conversion. We have been collaborating with Planning in EPC. and foresee a natural transfer of sponsorship for this project with the way the business opportunity has developed. POWERBIT Fuel Gas - Description ALBERTA - a blend of high value diluent and bitumen Current Status Methanol 555552 - MTBE best diluent - US Clean Air Act demands oxygenates; Butane 200 MTBE shortfall In 1992 Bitumen . Future Effort - EPC Sponsorship for MTBE - demonstrate POWEHBIT with US Oil - define customers for MTBE-POWEHBIT . Benefits us MARKET - Synergies NPV (M3) butane upgrade to MTBE 140 MTBE low cost MTBE transportation 70 heavy oil diluent substitution 60- .199 Total Project 310 Bitumen Flg. A7 One of our current Cold Lake customers. US Oil in Tacoma. has favorably received our POWERBIT proposal. We intend to work through the technical concerns of pipeline contamination and segregated re?nery processing. If we can secure MTBE from PetroCan and arrive at a satisfactory price for we can begin delivering 8 RED blend (2500 BID to US Oil in 1992. This will also be a demonstration of the technical feasibility. which will permit larger scale development. POWERBIT customers must need both MTBE and bitumen. A requirement for dedicated fractionation facilities may be discouraging our customers who are major integrated re?neries in Paddl] from participating in POWERBIT. We are also confronting a transportation hurdle going east. The need to avoid contaminating other crudes with MTBE would require an expensive upgrade of IPL's heavy crude line. lfit is proven feasible. POWERBIT could bene?t several business lines. An investment of 400 MS like Neste 0y and PetroCan have made in Edmonton yields a present value of 140 M3 for upgrading butane to MTBE. With POWERBIT, the heavy crude becomes the carrier for the diluent MTBE. A further credit of between 60 and 100 MS is derived for Cold Lake Operations because the supply/demand stress on natural gas condensate is relieved. Esso Chemicals could also supply low cost methanol by conversion of their idle ammonia plant at Redwater. By improving the value of bitumen as are?nery feedstock we can access more re?neries in the primary market. thus increasing our customer base. The key is doing this in a way which is cost competitive with re?nery retro-fits and stand-alone upgraders. ?By ?nding synergy with our production operations. such as heat-integration and elimination of diluent, we believe that we can develop a high quality investment option that also leverages our ability to continue development of new production. Phased partial upgrading is a concept to add value to our bitumen by directing its components to their best use. Fig. A8 shows the value of deasphalted oil (DAO) to a medium conversion re?nery. and the corresponding value for the separated bottoms, Which would be an attractive fuel. We are exploring several process options to achieve partial upgrading in a way which will allow the investment to be phased in as the market demands. PHASED PARTIAL UPGRADING BMmun . Description mo - separate bitumen Into DAO for medium conversion refineries and a low cost fuel cm - Current Status - deasphaitlng FLEXICOKING proven and economic FLEXIOOKER - developing new technology options (shaded) which can be phased In to Improve econoqu Fuel for unmieogen - Future Effort at?? - test options and define business plan an". - affiliate research to prove new technology options arm (1 "5 In 1991) Blocking - develop for 1997 startup .. . Benefits emu cm. - value added to bitumen at competitive cost 4 - w? - Increase customer base A0 9? . Bitumen 1900 WG-1 1 .. Bottoms to Fuel 0 1005 2000 2005 2010 2015 2020 YEAR Fig. A8 Deasphalting is a high yield separation process which has been demonstrated by Sarnia research to work very well for Cold Lake crude. FLEXICOKING is a proven route for converting low grade bottoms to fuel gas. Other emerging technology options are shown as shaded boxes. The Catalytic Hydro-Visheaking (CHVB) process being developed in can increase the yield and quality of DAO. There is a strong connection between partial upgrading and our Alternate Fuels program to burn the bottoms. We are also looking for other bottoms disposition options. such as emulsion coking. Researchers at and the University of Calgary have shown that emulsifying the feed improves the liquid yield of ?uid coking. In the coming year we will be developing these options and a business plan for partial upgrading. We are supporting af?liate research in EPC and to prove out one or more of these new options as a way to improve the economics of an upgrading investment. We want to be prepared to meet the need for partial upgrading by having a commercial project appropriation ready by 1994. The future value of our program can be determined by weighting the value of each program by it's probability of success. The determination of the latter is subjective. and is based on the judgement of experts in the innovation process. based on the solidity of the science foundation. the magnitude of the technical hurdles which remain. and the track record we have had in similar endeavors. If we were to atiueve 100% success in ail our endeavors, the overall effort would yield a PV of about 550 M3 more than productivity maintenance pads would. However. the probability of success is less than 100%. The following estimates are built up from the individual project economics shown above. Some like Bore-Hole Mining and Phased Partical Upgrading were applied to several new developments. This is also the basis of the "Technology" case discussed in Part 5. EYELMSI WW Post CSS Processes 0. 75 Alternate Processes 400. 0.5 Product Development 170. 0.5 The methodology for combining this data 15 to use the ?decision tree" shown in Fig. A9. The nodes are future events when the technology is either successful or not. Each branch leading from the node has a probability of occurring which is given by the number in italics. The value at the node 1s the cost to pursue the program. EXPECTED VALUE OF NEW TECHNOLOGY FOR COLD LAKE Probsbm PV 0.5 P'd' .03 [y 47 - Italics are Probabilities Pad 0 . Bold Numbers are 0-25 Pads arm .03 '23 0.5 oubtt 75 0.25 0 '2 WP .09 -17 Q75 Follow-up Process -25 3? FUP .09 58 New Technology 75 Optlons '20 DAO Pads .09 123 0.5 Pads 0 as 015 0.5 05+ Pads aHu 523 0.75 "MuFollow?up Process 0 -2s .28 553 3001.10 1- FUP 400 Fig. A9 The branches of the tree lead to each possible outcome. and the value of that outcome is its net present value times the probability of getting there. The sum of the probabilities for all of the branches is 1.0. The weighted sum of the Net Present Values of all the branches is the ?risked" value of the overall program. which is 260 MS. The decision tree method also gives an indication of the worst possible outcome. Based on our best assessment, the likelihood of a negative outcome is less than 15%. and the maximum exposure, which is the cost of all the currently identi?ed pilots, is 47 MS. In order to accomplish the program goals. we need the resources proposed in Section V. The level of spending on technology development for Cold Lake will have to be increased from about 20 to 35 M$lyr. Equally as important, there are several policies that we will ensure exist These are: POLICY REQUIREMENTS - Break the optimization mindset - Change the definition of success to economic at ?at price - Manage risk in proportion to the prize - Stick to a long-term Technology Development strategy - Refocus recovery on breakthrough processes - Build a coherent, substantial program in Product Development - Prioritize strategically, not as part of base business - Value innovators - Facilitate and recognize accomplishments - Hire for excellence! value diversity - Enhance strength of the informal organization - Allow 15% discretionary time for inventors - Promote role and responsibilities of technical leaders - Encourage multidisciplinary teams: geosciences/engineering Stewardship milestones are a neccessary discipline to track our progress. The related milestones we will be responsible for are: STEWARDSHIP MILESTONES - Continuous Improvement In technology delivery - Shorten technology development life cycle - Accelerate progression of prospects through stages - Developand Implement plan for transition from 088 to follow up for CLPP 1'-6 BY 1092 - Meet critical technology delivery targets -A follow up with 0.25 minimum OSR ready for appropriation by 1993 - A phased partial upgrading process and new markets developed by 1994 -An approprlatlon tor Mahkesls (next new volume increment) development based on borehole mining by 1996 - Quantity potential of poor quality reservoir by 1092 With a clear commitment to Oil Sands as our energy future, and an enthusiasm which sees Research and Technology as the Exploration arm of that business, we are confident that these goals will be met. 5. APPENDIX NEAR TERM BUSINESS ANALYSIS AND TACTICS Fig. B1 compares recent netbacks from our Pipeline Connected market with two expense indicators. Book and Full Cash. The difference is primarily Depreciation and Corporate Overhead. (Not shown is the incremental cash expense line. which would be about 28/3 lower than the Cash Expense line). With the low crude prices and wide spreads that we experienced during early 1991. we were in a loss position. April was near book break even but still negative. The balance of the year assumes that light crude will return to Plan levels (about 22$ US Par). and spreads will stay wide (about Q4). We are likely to see volatility. and we may see loss months again. but on average we expect to be positive. and continuing to operate is the the apporxiate strategy Notwithstanding our expectations for positive earnings. it is well to consider contingency actions for lower prices. Since this is a pipeline market with limited supply alternatives and our arrangements with customers are term, we are limited in the actions we can take. If we believe the period of low prices is short. say 2 or 3 months. we will negotiate for lower volumes and higher prices. but basically we will continue to supply; because we don't want to harm long term customer relationships. there are limits to Cold Lake plant turn down that relate to our water balance, and we want to keep cash costs covered to the extent possible. If we expect the period of low prices to be long years instead of months). plant shutdown is a consideration. This is addressed later in the appendix. Cold Lake Blend - Pipeline Connected Market 1o junta-m LL: 3318 01 11111111 =l I I I "11-11 I 5 0 ?mz