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THE INSIGHT BEHIND ENERGY SUCCESS 3 Drivers for Investors in Oil Sands Long-term view for crude oil – fundamentals remain strong Resource optionality Increasing valuations and new players moving in (Total, Royal Dutch, Tech, China) Competitive landscape for new projects – too much all at once? Cost pressures have reduced or eliminated the benefit of higher prices Synthetic or bitumen – where is the best return? Growing differentiation of SCOTRANSCRIPT
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
CALGARY LONDON HOUSTON
THE INSIGHT BEHIND ENERGY SUCCESS
T RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
The Energy Round Table 2006
Investment Drivers for Oil SandsTom Ebbern
Executive Managing Director Institutional Research
2
THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Tristone Capital Inc.Full Service Global Energy Boutique
Globally Positioned For Success in Energy
Calgary
Houston
London
3 Countries 100 People
Tristone Capital has main offices in Calgary, Houston and London
Tristone Capital is a fully integrated investment dealer that actively combines three primary advisory services:
Capital MarketsInstitutional Research
Institutional Sales
Institutional Trading
Asset Management
Investment BankingMergers & Acquisitions
Strategic Advisory
Equity Underwriting
Fairness Opinions
Valuations
Property A&DNegotiated Sale
Mid-Value Negotiated
Land-Value Negotiated
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Drivers for Investors in Oil Sands
Long-term view for crude oil – fundamentals remain strong
Resource optionality
Increasing valuations and new players moving in (Total, Royal Dutch, Tech, China)
Competitive landscape for new projects – too much all at once?
Cost pressures have reduced or eliminated the benefit of higher prices
Synthetic or bitumen – where is the best return?
Growing differentiation of SCO
4
THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Source: Tristone Capital Inc., Bloomberg,
Investment Returns in Oil Sands
An index of oil sands (COS, OPC, SU, SYN, UTS, WTO) has increased 900% in the last 7 years (40% CAGR)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jan-0
0
May
-00
Sep-0
0
Jan-0
1
May
-01
Sep-0
1
Jan-0
2
May
-02
Sep-0
2
Jan-0
3
May
-03
Sep-0
3
Jan-0
4
May
-04
Sep-0
4
Jan-0
5
May
-05
Sep-0
5
Jan-0
6
May
-06
Sep-0
6
10.00
19.00
28.00
37.00
46.00
55.00
64.00
73.00
82.00
91.00
100.00
US$/
b
Oil Sands Index WTI Oil
5
THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Global Excess Capacity vs. Oil Prices
With virtually no surplus global production capacity, oil prices are expected to remain in the $60 range for many years
0
1
2
3
4
5
6
7
8
9
10
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
E20
07E
mm
b/d
0
6
12
18
24
30
36
42
48
54
60
US$/
b
World Oil Excess Capacity WTI Oil Price
Source: Tristone Capital Inc., Bloomberg,, EIA, IMF
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Global Refining Capacity
Excess global refining capacity has finally been used up – it means more capital is required to go from a resource in the ground to the end product
Source: EIA, IEA, Oil & Gas Journal, Tristone Capital
40
50
60
70
80
90
100
1970 1975 1980 1985 1990 1995 2000 2005 2010E
mmb/
d
World Refining Capacity World Crude Consumption
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
World Proved Oil Reserves
Investors are attracted to the enormous resource potential of the oil sands
Source: Oil & Gas Journal Jan 1/06
0
50
100
150
200
250
300
SaudiArabia
Canada Iran Iraq Kuwait UAE VenezuelaRussia Libya Nigeria UnitedStates
Billio
n Bar
rels
Total Oil Canada Conventional Oil Canada Oil Sands
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Alberta Oil Sands Land Sales – Very Little is Left
Note: As of Aug 23 land saleSource: GeoScout
Recently Posted Oil Sands Leases>$1000/acre$100-$1000/acre<$100/acreOil Sands Leases
Oil Sands Land Sale Prices
Peace River
Athabasca South
Wabasca/ Grosmont
Athabasca
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Alberta Oil Sands Acquisition Prices
Source: Company Reports
Purchaser Seller Date InterestValue $mm
3P Resource (mmb) $/ boe
Petro-Canada UTS Mar-05 60% 300 1740 0.17CNOOC MEG Apr-05 17% 150 250 0.60Sinopec Synenco May-05 40% 105 502 0.21Total Deer Creek Aug-05 84% 1350 1594 0.85Teck Cominco UTS/ Petro-Canada Sep-05 15% 375 420 0.89Shell BlackRock May-06 100% 2400 604 3.97
The value of undeveloped oil sands resources has increased significantly
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Proposed Mining Projects
0
500
1,000
1,500
2,000
2,500
3,000
2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016+
mb/
d
Voyageur Syncrude Muskeg River Horizon Kearl Northern Lights Fort Hills Joslyn Creek 2
Big growth plans – not likely to get done as currently planned
Source: Company Reports
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Forecast Labour Market in Western Canada
Source: Construction Owners Association of Alberta (COAA)
The system is already stressed at current levels of 15,000. How can we get to 30,000?
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Year over Year Forecast Labour Changes
Source: Construction Owners Association of Alberta (COAA)
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
Q1/
05Q
2/05
Q3/
05Q
4/05
Q1/
06Q
2/06
Q3/
06Q
4/06
Q1/
07Q
2/07
Q3/
07Q
4/07
Q1/
08Q
2/08
Q3/
08Q
4/08
Q1/
09Q
2/09
Q3/
09Q
4/09
Q1/
10Q
2/10
Q3/
10Q
4/10
Cons
tructi
on C
raft P
erso
nnel
The reality is that project timing will get pushed back – we are already seeing it happen
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Forecast Scorecard – 2002 to 2006
Source: Company Reports, Tristone Capital
The oil sand industry has a history of over-promising which will get worse as the landscape becomes busier.
0
500
1,000
1,500
2,000
2,500
2003
A
2004
A
2005
A
2006
E
2007
E
2008
E
2009
E
2010
E
2011
E
2012
E
mb/d
2006 Forecast 2002 Forecast(Suncor, Syncrude, AOSP, Petro-Canada, LongLake, Horizon)
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Proposed In-Situ Projects
Source: Company Reports
0
500
1,000
1,500
2,000
2,500
2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016+
mb/
dJackfish/ Cottonwood OrionLeismer/ ThornburySurmont SouthJackfish CreekSunriseN.Christina LakeGreat DivideTuckerSurmontJoslyn CreekLong Lake/ KinosisHangingstoneGreater McKay RiverFirebagFoster/ Christina etc.PrimroseCold Lake
Impressive growth planned for thermal – with only two commercial SAGD projects currently running – we may see some surprises
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Cumulative Steam Oil Ratio Comparison
Source: GeoScout
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75Months on Production
Stea
m:O
il Ra
tio
MacKay RiverChristina LakeLong LakeFirebagAverageFoster Creek (Full)Foster Creek (Pilot)SurmontHangingstone
Mixed results from thermal projects are starting to add concern to investors
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Oil Sands Historical and Forecast Additions Cost
Source: Company Reports
Syncrude Stage 3
Long Lake
Horizon
HorizonSyncrude Stage 3
AOSP
AOSP
MilleniumFirebag
Mackay RiverMackay RiverFoster Creek
Tucker
Fort Hills
Northern Lights
Great Divide
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
1999 2001 2003 2005 2007 2009 2011 2013
Addi
tions
Cos
t ($/
b/d)
-102030405060708090100110120
Crud
e (U
S$/b
)
Integrated Non-Integrated Historical WTI NYMEX Strip Integrated (Prelim. Cost Est)
Costs have risen as fast as crude prices. Smaller projects (thermal without upgrading) have seen less cost pressure
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Mining & Upgrading Project Returns: Cost vs. Oil Prices (US$/b)
Source: Tristone Capital
0%
5%
10%
15%
20%
25%
20 30 40 50 60 70 80 90 100 110Flowing Barrel Capital ($ k/ b/ d)
IRR
$30 $40 $50 $60 $70
Costs have risen as fast as crude prices. Smaller projects (thermal without upgrading) have seen less cost pressure
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
SAGD Project Returns: Costs vs. Oil Prices
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
10 12 14 16 18 20 22Flowing Barrel Capital ($k/ b/ d)
IRR
$40 $50 $60 $70
Costs have risen as fast as crude prices. Smaller projects (thermal without upgrading) have seen less cost pressure
Source: Tristone Capital
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Value Erosion
Long term crude forecast has increased 175% in five years, but rising costs – both capital and operating have eliminated the benefit to investors.
AOSP Muskeg River Jan 2002 Sept 2006WTI US$/ b 20.00 55.00
Canadian Fx Rate US$/ C$ 0.65 0.86
Capital Costs $m/ b/ d 32 110
Operating Costs $/ b 11.75 18.00
Project IRR 14% 12%
Source: Tristone Capital
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THE INSIGHT BEHIND ENERGY SUCCESST RI ST O NEC A P I T A LT RI ST O NEC A P I T A L
Synthetic Crude Differentials to Edmonton Light
Source: Company Reports, Tristone Capital
-18.00
-16.00
-14.00
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
Q1/ 03A Q2/ 03A Q3/ 03A Q4/ 03A Q1/ 04E Q2/ 04E Q3/ 04E Q4/ 04E 1Q05E 2Q05E 3Q05E 4Q05E 1Q06E 2Q06E
SU Syncrude Albian Differences in SCO quality (API, Cetane, Smoke Point, Sulphur etc) are becoming more important as
SCO volumes increase.