Alberta’s Oil Sands

Role of Government, Value-added Processing, Ways of Participating in Projects

Duke Duke du Plessisdu Plessis, Senior Advisor, Senior AdvisorAlberta Energy Research Institute andAlberta Energy Research Institute and

Alberta Economic DevelopmentAlberta Economic DevelopmentOctober 18, 2004October 18, 2004

2

Role of the Alberta Government in the Role of the Alberta Government in the Development of Alberta’s ResourcesDevelopment of Alberta’s Resources

Government owns the ResourceGovernment owns the Resource•• Provides permits and leases to industry to Provides permits and leases to industry to

develop specific resources: Alberta Department of develop specific resources: Alberta Department of Energy (ADOE)Energy (ADOE)

•• Reviews and Approves applications by industry Reviews and Approves applications by industry for commercial development of the property:for commercial development of the property:-- Energy Utilities Board (EUB)Energy Utilities Board (EUB)-- Department of the Environment (AE)Department of the Environment (AE)-- Department of Sustainable Resource Department of Sustainable Resource

Development: Surface RightsDevelopment: Surface Rights

•• Sets & receives royalties for commercial Sets & receives royalties for commercial operationsoperations

3

Role of Industry in the Development of Role of Industry in the Development of Alberta’s ResourcesAlberta’s Resources

Acquires permit (up to 5 years) for specific properties Acquires permit (up to 5 years) for specific properties (Tenure Agreement)(Tenure Agreement)

•• Evaluates resource and the technical & economic Evaluates resource and the technical & economic feasibility of commercial operation feasibility of commercial operation

•• Prepares and submits application for commercial Prepares and submits application for commercial development to EUBdevelopment to EUB

•• Before 5 years converts permit to a primary lease (up to Before 5 years converts permit to a primary lease (up to 15 years)15 years)

•• Lease (Tenure) can be extended to commercial life of Lease (Tenure) can be extended to commercial life of projectproject

4

Fees Paid by IndustryFees Paid by Industry•• Permit & Lease (Tenure) Costs: Permit & Lease (Tenure) Costs:

•• One time permit fee: $500 plusOne time permit fee: $500 plus•• $3.50/ha/year for duration of lease$3.50/ha/year for duration of lease

•• Pays Royalty to Government when Pays Royalty to Government when the plant is in productionthe plant is in production•• 1% of gross revenue until capital cost 1% of gross revenue until capital cost

has been recoveredhas been recovered•• PostPost--Payout: 1% of gross revenue or Payout: 1% of gross revenue or

25%of net revenue (whichever is larger25%of net revenue (whichever is larger

5

Project Development StepsProject Development StepsProject Development Steps

Typical Project Appropriation

Typical Project Announcement

PublicDisclosure

EUBApplication

PublicHearing

EUBApproval

OpportunityIdentification Concept Screening

& Selection Front EndEngineering

(FEED)Detailed

Eng.

Fabrication & Construction

Start Up &

Operate

ProjectClose

IDENTIFY SELECT DEFINE EXECUTE OPERATE

Procurement

ProjectAnnouncement

Source: Petrocanada

6

Cumulative Revenue and Cost

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year

mill

ions

Cost Revenue

Phase 1(Pre-production)

Phase 2(Cost Recovery)

Phase 3(Profit)

PAYOUT

Typical Cumulative Revenue and Cost

7

Cumulative Royalty

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year

mill

ions

Phase 1 Phase 3

(Royalty: greater of 1% annual gross

revenue or 25% of annual net revenue)

Phase 2

(Royalty: 1% of annual gross

revenue)

Typical Cumulative Royalty

8

Bitumen Supply CostBitumen Supply CostTypical Typical AthabascaAthabasca SAGD ProjectSAGD Project

0

2

4

6

8

10

12

14

Bitu

men

Sup

ply

Cos

t (U

S$/b

@ P

lant

G

ate

Fuel

Royalties

Income Tax

Fixed Capital

Other OperatingCostsReturn onInvestment

Source: CERI

9

Refined Products and Petrochemicals Refined Products and Petrochemicals Increase Value and Market Options for Increase Value and Market Options for Rapidly Growing Oil Sands ProductionRapidly Growing Oil Sands Production

2.7

6.9

8.2

8.3

8.6

9.4

9.7

10.9

11.1

16.6

19.7

26.8

0 5 10 15 20 25 30

Bitumen

SCO

Diesel

Natural Gas

Jet Fuel

Propane

Gasoline

Ethylene

Xylene

Propylene

Ethylene

Styrene

U.S. Cents per Pound. Constant 2003 Dollars

Increasing Value and market options

Adapted from Purvin & Gertz, March 30,2004

10

Propylene is a component Propylene is a component of existing process streamsof existing process streams

0

20

40

60

80

100

120

140

Suncor

Syncru

de

NOVA

DowPC R

efinery

Imperi

al Ref

KTA

Extracted & produced by WilliamsEnergy

11

Propylene PotentialPropylene Potential

KilotonnesKilotonnes/year/year

RefineriesRefineries 320320Existing Existing UpgradersUpgraders 230230Petrochemical PlantsPetrochemical Plants 110110TotalTotal 660660Other sourcesOther sources–– Existing Existing upgrader upgrader expansionsexpansions–– BA Energy BA Energy UpgraderUpgrader–– Opti Opti

12

Oil Sands-Petrochemical Integration

MinedOil Sands Extraction

Synthetic Crude Oil(SCO)

In situExtraction Bitumen

Diluent

MarketsPipeline

Water

Distillation,Coking,Upgrading

Off Gases73,000bpd

Integrated Cluster for new world scale production of refined

products and petrochemicals

Bitumen

VacuumGas Oil

37,000bpd

Bitumen120,000 bpdSteam

13

Future CoFuture Co--production of clean fuels production of clean fuels and Petrochemicals is technically and and Petrochemicals is technically and

economically feasible (IRR= 15%)economically feasible (IRR= 15%)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Petrochemicals

Ethyleneand

DerivativePlants

Petro-chemicals

Fuels

GasolineDieselNaphtha

EthylenePropyleneBenzeneP-Xylene

KTA

ExistingProduction

New

14

Petrochemical Capacity: Petrochemical Capacity: Existing/NewExisting/New

ExistingExisting New PotentialNew PotentialEthylene Ethylene KTAKTADow LHCDow LHC--11 1,1351,135Nova ENova E--1 1 715715Nova ENova E--2 2 820820NovaNova--Union Union CarbCarb EE--33 1,270 1,270 Current Capacity 3,940Current Capacity 3,940Potential ExpansionsPotential ExpansionsExisting crackersExisting crackers 360360Fifth crackerFifth cracker 820 820

KTAKTAEthylene Ethylene 1,200 1,200 Propylene Propylene 1,400 1,400 BenzeneBenzene 500 500 PP--XyleneXylene 700700

EthyleneEthylene DerivativesDerivatives KTAKTADow Dow --PEPE (EG,VCM)(EG,VCM) 545545Union CarbideUnion Carbide PE PE 500500Nova Nova –– PE PE 350350Shell Shell ––(EG,SM)(EG,SM) 400400BP/Amoco BP/Amoco ––LAO 350LAO 350

Refined productsRefined products bpdbpdAlkylateAlkylate/Gasoline/Gasoline 25,000 25,000 Jet/Diesel FuelsJet/Diesel Fuels 45,000 45,000 Naphtha’s Naphtha’s 25,00025,000

15

Market Study Shows that Refining and Market Study Shows that Refining and Petrochemicals in Alberta Improve IRRPetrochemicals in Alberta Improve IRR

10

11

12

13

14

15

16

% IRR

SCO Base Case

Refining Refining +Petrochem

U.S. MidwestCalifornia

16

Getting the Oil to MarketsGetting the Oil to MarketsTransportation ConsiderationsTransportation Considerations

17

North America PetroleumNorth America PetroleumSupply & DemandSupply & Demand

02468

1012141618202224262830323436

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Mill

ion

Bar

rels

Per

Day

DemandOil Sands SupplyConventional Supply Market

Potential~15 million

bpd

Source: EIA, ADOESource: EIA, ADOE

18

Alberta Supply vs. Take Away Alberta Supply vs. Take Away CapacityCapacity

0

500

1000

1500

2000

2500

3000

3500

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Thou

sand

bar

rels

per

day

SCO Bitumen Conventional HeavyConventional Light Pipelines Expansion

Existing Pipeline Capacity

Expansion

Source: ADOESource: ADOE

19

Accessing New Markets for Accessing New Markets for Alberta ProductsAlberta Products

20

CANADIAN PIPELINES

EDMONTON

MONTREAL

SARNIA

CHICAGO

CUSHING

REGINA

ST. JAMES

LOUISIANAOFFSHOREOIL PORT

HOUSTON

POPLAR

BILLINGS PORTLAND

VANCOUVER

FERNDALE/ANACORTES

BAKER

GUERNSEY

1234

ENBRIDGE/LAKEHEADTERASEN TMPLE.S.E.P.RANGELAND

5

6

BOW RIVER/MILK RIVERW ASCANA

7 Enbridge LINE 9

1,70028017

100110

45240

CRUDE CAPACITY(000 B/D)

1

2 3

4 5

6

7

A

B

G

L

I

M

K

R

H

C

D

F

E

Major Canadian and U.S. Crude Oil Pipelines

MIDLAND

8 EXPRESS 172

8 U.S. PIPELINES

ABCDEFG

J

HI

KLM

CONOCOSANTA RITATEXACOBUTTEPLATTEAMOCOARCOCUSHING-CHICAGOLOOPLOCAPCAPLINECHICAPPORTLAND

94456094

150245120300

1,4001,3001,078500200

CAPACITY(000 B/D)

N WOODPAT 315

NSALT LAKE

CITY

CASPER

O

P

Q

O AMOCO/CONOCO 50P FRONTIER 40Q AMOCO 32

S

W OODRIVER

ST. PAUL

CLEARBROOK

T

UV

PATOKA

CORSICANA

TOLEDO

W

RS

SEAWAYMOBIL

270150

T KOCH 105U MINNESOTA 270V PORTAL 100W SUN/MID-VALLEY 400

HARDISTY

J

SUPERIOR

X

ENBRIDGE SouthernX 250

FT MCMURRAY

ENBRIDGE Gateway 4009

9

TERASEN Corridor10 22011 TERASEN TMX 400

10

11

21

SyncrudeSyncrude Sweet Blend can access most Sweet Blend can access most major North American marketsmajor North American markets

New OrleansNew OrleansHoustonHouston

CushingCushing

VancouverVancouverPortlandPortland CalgaryCalgary

Fort McMurrayFort McMurray

ChicagoChicago

SarniaSarnia

AOSPLAOSPLTrans MountainTrans Mountain

DetroitDetroit

InterprovincialInterprovincial

EdmontonEdmonton

LakeheadLakehead

MidlandMidland

MontrealMontreal

WascanaWascanaArcoArcoCaplineCapline

PortlandPortland

22

1

Cushing

Woodriver

Fort McMurray

Montreal

Toronto

Gretna

Regina

Hardisty

Kerrobert

Cromer

Patoka

Wood River

Catlettsburg

Casper

Mandan

ClearbrookSuperior

Salt Lake CitySinclair

Cheyenne

DenverMcPherson

Ponca City Tulsa

El DoradoCoffeyville

ArdmoreMemphis

Billings

Great Falls

ToledoCanton

DetroitChicago

Robinson

Edmonton

Corpus Christi

HoustonPort Arthur

New Orleans

Lake CharlesTexas CityFreeport

Puget Sound

San Francisco

Bakersfield

Los Angeles

Borger/SunrayArtesia

El Paso Big Spring

5(2009)

St. Paul

Lima

Buffalo

1 (2005)

4 (2007) 3

(2007)

2(2005)

Refineries

Canadian SuppliedNot Canadian Supplied

Enbridge New Market Access Plan

Far EastMarkets

5a

CaliforniaMarkets

5b

1-5 are NewMarkets

Gateway Project1200 km, 30 in dia lineCapacity 400,000 bpd

23

Sea transport from Prince Rupertis the same distance to Asia

as the Middle East

Asia

24

Costs Costs –– Edmonton to Far EastEdmonton to Far EastEstimated Delivery Costs (US$/bbl)

Gateway Toll (Edm. to Cdn. West Coast) $1.75

Tanker Rate (approx. 5000 N Miles) $1.25*

Total Delivered Cost/bbl $3.00

(*Analysis based on historic 2002 posted rates for 250,000 DWT VLCCs)

25

(US$/bbl)(US$/bbl)Arab HeavyArab Heavy Cold Lake Cold Lake

BlendBlendSCO/Bitumen SCO/Bitumen

BlendBlend

Supply PriceSupply Price::@ @ Ras Ras

TanuraTanura $26.9$26.9@ Edmonton@ Edmonton

Transport to Asia:Transport to Asia: $1.25$1.25$22.11$22.11

$3.00$3.00$22.76$22.76

$3.00$3.00

Landed Price @ Landed Price @ China:China:

$27.15$27.15 $25.11$25.11 $25.76$25.76

Landed Supply Cost Comparison

Source: Enbridge

26

TerasenTerasen-- Staged Capacity Expansion for Staged Capacity Expansion for Heavy Heavy crudes crudes and refined productsand refined products

300km by 200975,000-100,000 bpdIncremental capacity

27

Incremental Product DemandIncremental Product DemandNorth America, Europe, Asia North America, Europe, Asia

20002000--20202020

0

50

100

150

200

250

300

350M

illio

n to

nnes

NorthAmerica

Europe Asia

NaphthaGasolineJet/KeroseneDiesel/Gas OilFuel Oil

Source: Nexant Chem Systems

28

Ways of Participating in Oil Ways of Participating in Oil Sands developmentsSands developments

Market studies to match oil sands product quality with Japan’s Market studies to match oil sands product quality with Japan’s refinery needs refinery needs Research and Technology DevelopmentResearch and Technology Development–– Industry R&D ConsortiaIndustry R&D Consortia–– Industry field pilot consortiaIndustry field pilot consortia

Buy into existing projectBuy into existing projectPartner into developing projectPartner into developing project–– Construction capital being raisedConstruction capital being raised–– Regulatory approvals obtainedRegulatory approvals obtained–– Construction underwayConstruction underway

Partner into proposed project Partner into proposed project Acquire an oil sands lease Acquire an oil sands lease Increase value and market optionsIncrease value and market options-- upgrade to bitumen to SCO, upgrade to bitumen to SCO, refined products and petrochemicalsrefined products and petrochemicals

SummarySummary

29

Market OutlookMarket OutlookAlberta’s oil sands Alberta’s oil sands strategic source of oilstrategic source of oil

Global oil demand forecast to rise significantlyGlobal oil demand forecast to rise significantly

Increase suppliesIncrease supplies

Increase market access: North American and Increase market access: North American and AsiaAsia

Increase value.diversify products and marketsIncrease value.diversify products and markets

Alberta’s oil sands industry is respondingAlberta’s oil sands industry is responding

Opportunity for foreign companies to participate Opportunity for foreign companies to participate 30

31

Vision for the Future

2000 2010 2020 2030

million barrels per day

6

5

4

3

2

1

3rd OIL SANDS WAVE

conventional light and heavy crude

green fuelspetrochemicals

energy/power/H2bitumen

synthetic crude

Adapted from Oil Sands Technology Roadmap, Alberta Chamber of Resources, Jan 30, 2004

Oil sands: a sustainable

competitive sourceof synthetic crude

oil, refined products,petrochemicals

and clean energy

32

Offshore Exports

United States Exports

Rest of Canada Exports

Upgrading & Refining

Petrochemical Development

Alberta’s Oil Sands in 2020Alberta’s Oil Sands in 2020World Scale Hub for Energy and Refined ProductsWorld Scale Hub for Energy and Refined Products

Alberta Bitumen ProductionAlberta Bitumen Production

3 Million Barrels Per Day3 Million Barrels Per Day

Electricity Generation

Exports of Crude Oil and Exports of Crude Oil and Refined Petroleum ProductsRefined Petroleum Products

33

Sustainable Natural EnvironmentSustainable Natural Environment

34

Alberta: A Good Place to do Business