Canadian Oil Sands: Opportunities and Challenges

November 3, 2010

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OVERVIEW

• Oil Sands Introduction• Recovery Techniques

– Mining– In Situ

• Oil Sands Projects and Spending• Economic Fundamentals• Oil Sands Challenges• Legal

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ALBERTA’S OIL SANDS

• What are Oil Sands?

– A mixture of sand and other rock material containing deposits of bitumen (a heavy crude oil; API gravity typically <10)

– At room temperature, bitumen is near solid state and must be converted to upgraded crude (typically API gravity of between 30 to 40)

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Alberta’s Oil Sands Deposits

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Crude Bitumen In-Place Volumes and Reserves

Mineable In Situ

Initial Volume In-Place1,629 Billion Barrels

Initial Established Reserves178 Billion Barrels

113 Mineable 35 Mineable

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RECOVERABLE OIL RESERVES

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CANADIAN PRODUCTION GROWTH

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US IMPORTS

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RECOVERY TECHNIQUES

Two main types of recovery methods:

• In situ (meaning “in place”)

• Surface mining & extraction

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BITUMEN PRODUCTION TECHNOLOGY CURVE

Knowledge

Time

SAGD

NEW

MINING

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MCMURRAY FORMATION OUTCROP

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STEAM ASSISTED GRAVITY DRAINAGE

From EnCana Website

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SURFACE MINING & EXTRACTION

• Overlying muskeg must be drained before oil sands can be mined; often carried out in winter

• Trucks & Shovels used to expose top of oil sands and prepare site for mining

• Oil sands formations are typically 40 to 60 meters thick and sit on top of limestone beds

• Over time, different techniques have been developed to mine oil sands

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OPPORTUNITIES

• Oil sands account for about half of global oil reserves for private investment (CAPP)

• Oil sands production in 2008 was 1.3 million barrels per day. Expected to grow to 3.3 million barrels per day by 2025 (CAPP)

• Oil sands development is expected to contribute over $1.7 trillion to North America’s economy over the next 25 years (Canadian Energy Research Institute)

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ATTRACTIVE ECONOMIC FUNDAMENTALS

Factors making oil sands investments appealing:• Mining projects are characterized by:

– massive resources (measured in Billions of bbls rather than millions of bbls)

– essentially “no” exploration risk;– non-declining production profiles; and– extremely long reserve life (typically 40 to 50 years).

• In-Situ projects are characterized by:– massive resources (measured in Billions of bbls rather than millions of

bbls);– low exploration risk (increased production risk relative to mining); and– extremely long reserve life (typically 40 to 50 years).

• Both Mining and In-Situ have an attractive royalty regime.

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PROJECT ECONOMICS

“A new mine requires a crude price of roughly $80 (US) a barrel . . . SAGD needs $65.”

Peter OgdenNational Bank FinancialThe Globe and MailSeptember 21, 2010

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OIL SANDS ROYALTIES

• Oil sands projects are subject to a royalty payable on gross revenues ranging from 1% to 9% (depending on the price of oil)

• After project payout, the oil sands royalty becomes the greater of the gross revenue royalty described above and a net revenue royalty ranging from 25% to 40%

• Both oil sands royalty rates hit their maximum at oil prices of $120/bbl

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CANADIAN CORPORATE TAX RATES

20102011 2012

Federal 18% 17% 15%

Alberta 10% 10% 10%

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OIL SANDS CHALLENGES

Challenges:• Use of land• Use of water• Use of natural gas• Infrastructure requirements• Workforce availability• Access to markets• Costs• Greenhouse gas emissionsResearch and development is aimed at:• Sustainable resource development in an environmentally

responsible manner• Reducing costs

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LEGAL MATTERS

• Corporate acquisitions by foreign companies require approval from Canada’s Minister of Industry, under the Investment Canada Act, based on whether transaction is of “net benefit” to Canada

• The purchase terms are negotiated between the buyer and seller with the Government of Canada very rarely offering incentives for the purchaser

• Government to government linkages are not common practice

• Recent trend for foreign companies to invest in Canadian companies through equity investments or joint ventures as opposed to outright acquisitions

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QUESTIONS ?