Canadian Upstream Oil & Natural Gas Industry Overview

● CAPP Overview

● Global Context

● Competitiveness

Crude Oil Market Outlook

Natural Gas Market Outlook

● Social License

● Summary

Presentation Overview

Represents large and small producer member companies

Members explore for, develop and produce natural gas, natural gas liquids, crude oil, and oil sands throughout Canada

Produce about 90 per cent of Canada’s natural gas and crude oil

Part of a national industry with revenues of about $100 billion per year

Associate members provide a wide range of services that support the upstream crude oil and natural gas industry

Canadian Association of Petroleum Producers

CAPP’s Strategic Framework

CAPP’s Key

Interfaces

Governments

Regulators

Aboriginals

Local

Communities

Public

Media

Stakeholders

Other

Industries

Other

Associations

Key Influencers

- Academia

- Think Tanks

- NGOs

“3

E’s

”

- E

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erfo

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- E

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- E

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gy

Sec

uri

ty &

Rel

iab

ilit

y

Key Focus

Areas

Education

Policy &

Regulatory

Advocacy

Industry

Performance

Improvement

Scope

Upstream Oil & Gas Sector

Canada (Primary), U.S. (Secondary), International (Some)

Environmental &

Social

Economic/Fiscal

Markets

Health & Safety

Del

iver

ing

Res

ult

s

Competitiveness

Fiscal

Environmental Policy

& Regulation

Market Access &

Growth

Pipeline Tolls

Aboriginal

Consultation

Workforce

Safety

Canadian Energy

Framework

Social License to Develop

& Operate

Performance

Communications &

Outreach

Strategic

Priorities

Communications

& Outreach

Global Primary Energy Demand IEA New Policies Scenario

• Significant energy demand growth:

Population

Standards of living

• Need all forms of energy:

Increasing role for renewables

Continuing reliance on hydrocarbons

Increasing role for unconventional crude oil & natural gas

• Environmental challenges.

• Technology is a key lever for sustainable

growth. 0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2010 2015 2020 2025 2030 2035

million tonnes oil equivalent

Other RenewablesBioenergyHydroNuclearNatural GasOilCoal

Source: International Energy Agency World Energy Outlook 2012

Fossil fuels share of energy consumption: 2010: - 81% 2035: - 75%

● Invested ~$60 billion in Canada in 2012

● $21 billion to governments in 2011 (Royalties and Taxes)

● 20% of the value on Toronto Stock Exchange

● Approx. 18% of Canada’s exports

● Employs more than 550,000 in Canada

The Oil and Natural Gas Industry A Key Driving Force in the Canadian Economy

Upstream Oil & Gas

Auto Manufacturing

Forestry & Logging

Wheat & Barley

Uranium

Upstream O&G Sector – Opportunities & Challenges

Opportunities

Resource base.

Production growth potential.

Market demand.

Established infrastructure.

Human resources – skills /

experience.

Technology and innovation capability.

Performance track record.

Political stability.

Access to capital.

Broad public support.

Challenges

Market access.

Industry reputation:

Landowner / community;

Heightened conflict w/ ENGOs.

Relationships w/ FNs.

Human resources – capacity.

Cost escalation.

Expectations of public markets.

Media profile.

Industry collaboration.

Source: Cenovus

Crude Oil

Global Crude Oil Reserves by Country

26 25 21

3037

48

8092

102

141155

173

265

298

0

50

100

150

200

250

300

Vene

zuela

Saud

i Ara

bia

Cana

daIran

Iraq

Kuwait

Abu Dha

bi

Russ

ia

Liby

a

Niger

ia

Kazh

akhs

tan

China

Qatar

Unite

d St

ates

bill

ion b

arr

els

Source: Oil & Gas Journal Dec. 2012

Restricted

(81%)

Open to

Private

Sector

Oil Sands

56%

Other

44%

World Oil Reserves Open to

Private Sector

Western Canadian Oil Production – 2012 Forecast

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

Jan

-200

5

Jul-

2005

Jan

-200

6

Jul-

2006

Jan

-200

7

Jul-

2007

Jan

-200

8

Jul-

2008

Jan

-200

9

Jul-

2009

Jan

-201

0

Jul-

2010

Jan

-201

1

Jul-

2011

Jan

-201

2

Thousand b/d

Eagle Ford(Texas)N. Dakota

SK Light

AB Light

Light/Tight Oil Production

+ 750,000 b/d in 2 years

2011 Canada and U.S. Demand for Crude Oil by Source Thousand Barrels per Day

0

2

4

6

8

10

12

14

UnitedStates

China Japan Korea India EuropeanUnion

mm

b/d

Net oil imports in the New Policies Scenario

2005

2011

2020

2035

Changing Global Oil Import Needs

Source: IEA World Energy Outlook 2012, EIA

CURRENT MARKET

FUTURE MARKETS?

Access to Markets – Pipeline Expansions in Development

Global Versus U.S. Crude Pricing

-40

-20

0

20

40

60

80

100

120

140

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Jan-1

3

Differential WTI Brent

• Brent benchmark price used to price 65% of world’s oil.

• WTI lighter than Brent - historically traded at a premium.

• Growing disconnect between landlocked N.A. crude and globally traded crude such as Brent.

• Throughout 2011 and 2012, WTI has traded at a discount to Brent.

• Discount remains in $20US/bbl range.

• Expected to be alleviated as new p/l capacity comes on-stream from Cushing to U.S. Gulf Coast.

US$/bbl Daily

U.S. Versus Canadian Crude Oil Pricing

0

20

40

60

80

100

120

Jan-09

May-09

Sep-0

9

Jan-10

May-10

Sep-1

0

Jan-11

May-11

Sep-1

1

Jan-12

May-12

Sep-1

2

Jan-13

WTI @ Cushing

Edm Par

US$/bbl

-40

-20

0

20

40

60

80

100

120

Jan-0

9

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

Cdn Light/Heavy Diff

WCS @ Hardisty

MSW @ Edm

Cdn$/bbl

• Current differential ~ Edmonton to Cushing transport cost – near term p/l constraints mitigated by rail & other options.

• Light oil differential expected to widen as p/l constraints become more problematic.

• Light / heavy differential problematic until new heavy oil p/l capacity available.

WCSB P/L Takeaway Capacity Versus Supply Forecast

Western Canada Crude Oil Rail Exports

• Crude oil movement by rail increased significantly over short-term. • Q3/2012 - 70,000 b/d • Q1/2013 - 120,000 b/d • Q4/2013 - 200,000 b/d

• ~4% of WCSB production

• Positives

Potentially improved margins relative to pipe

Flexibility to different markets (e.g., East)

Less diluent Use rail in both

directions

• Negatives: Higher transportation

costs

Natural Gas

North American Natural Gas – Supply Outlook

• Shale gas supply a game-changer …100+ years supply

• Technology success (horizontal drilling, fracturing, completions)

• Implications:

New producing regions

Shifting S / D dynamics

Changes in p/ l flows

Emerging stakeholder challenges (env. & social)

Canadian Natural Gas Exports, 2012 Impact of Shale Gas on N.A Gas Flows

West

2.5

bcf / d

Mid-West

4.8 bcf / d

Northeast

1.1 bcf / d

LNG

Marcellus

Haynesville, Fayetteville, etc.

Horn River, Montney

U.S. Rockies

New Supply Areas

Increased Flow

2012 Canadian Exports

8.4 bcf / d

• Existing infrastructure serves N.A. markets.

• Changing S/D dynamics necessitate market growth:

• N.A. (transportation, power)

• Exports (LNG for price & takeaway)

Projected Net Natural Gas Imports (Bcf/d)

0

5

10

15

20

25

30

35

2008 2015 2025 2035

China

India

South Korea

Japan

Source: EIA 2011 International Energy Outlook

● Kitimat LNG (Chevron, Apache)

1.4 Bcf/d

Permits received; awaiting investment decision

● BC LNG Export Co-operative

0.125 Bcf/d

Permits received

● LNG Canada (Shell, KOGAS, Mitsubishi, PetroChina)

1.8 Bcf/d

Feasibility stage; applied for some permits

● Pacific Northwest LNG (Progress/Petronas)

2.0 Bcf/d (Merger approval granted)

Completed feasibility, progressing to pre-FEED

● Nexen/Inpex

Conducting feasibility

● BG Group/Spectra Energy Corp.

4.2 Bcf/d

Advancing feasibility and engagement

● AltaGas/Idemitsu Kosan

0.27 Bcf/d

Conducting feasibility

Canadian LNG Export Projects in Development

23

Total potential new demand ~ 9.0 Bcf/d Interest expressed by Woodside Petroleum, Imperial Oil /ExxonMobil and Korea SK E&S. Details not available.

Asian Markets Represent an Attractive Export Option

$/M

Mb

tu

2012 Japanese LNG Price

Global Competition…… Active and Emerging LNG Exporting Countries

Canada needs to develop its LNG export potential expediently to compete globally.

Canadian Production – Market Constrained Case and New Market Opportunity Case

26

Eastern Canada

CBM

Western Canada

Unconventional

Western Canada

Conventional

Market

Constrained

Case

New Market

Opportunity

Case

CAPP’s Social License Framework

Social License = Performance + Communication

● Performance:

Continuous environmental & social performance improvement (across the value chain)…..including monitoring, timely & transparent reporting.

“What’s in it for me?”……line of sight to jobs and economic benefits.

Robust regulatory system.

Solutions-oriented advocacy for balanced policy and regulation.

● Communications & Outreach:

Sustained communications grounded in performance improvement:

• Fact-based & emotive messaging……not apologetic or defensive.

• Delivered via diversity of mediums, approaches, spokespersons.

Strong focus on outreach & engagement - local / regional (must include Aboriginals) and national / international.

● New challenges for industry – requires leadership & collaboration

Public Perceptions – Shale Gas Development

• “Frac fluids contain dangerous chemicals that aren’t disclosed to public”

Disclosure

• “Fracking can have adverse effects on drinking water”

Water Quality

• “Fracking uses enormous amounts of water”

Water Quantity

• “Fracking & associated waste-water disposal cause earthquakes”

Seismicity

CAPP Hydraulic Fracturing Principles & Operating Practices

Improving Environmental Performance

● Accelerating environmental technology & innovation in the oil sands: Canadian Oil Sands Innovation Alliance (COSIA)

Focus on water, tailings, land, GHGs

● Alternatives to reduce the need for both water and energy (steam): Cogeneration – steam and electric power

Solvent / steam injection

Alternative well configurations for SAGD

Reduce water temperature 80 to 35 degrees Celsius

Electro-thermal technology

Carbon Capture & Storage

● Reducing water use, increasing water recycle: Use of saline (non-fresh) water for steam

Faster waste water recycle

Water technology development centre

Ceramic membranes for water treatment

Full-cycle GHG Emissions Oil Sands & U.S. Refined Crudes

0 100 200 300 400 500 600

Avg US Barrel Refined in theU.S. (2005)

Most Recent Oil Sands Mining

Most Recent Oil Sands In Situ

kgCO2e per barrel of refined product

Well-to-tank

Refined productCombustion

Source: IHSCERA Oil Sands Dialogue Getting the Numbers Right 2012

+5%

U.S. Barrel Refined in the U.S. (2005)

+2%

In Context….N.A. GHG Emissions (2011) - Coal-fired Power Plants & Oil Sands

0-15 mtonnes

16-50 mtonnes

51-100+ mtonnes

Legend

U.S. Coal fired power

generating plants

Canadian coal-fired power

generating plants

Canadian oil sands

Sources: U.S. DOE/EIA & Environment Canada

GA

TX

NC

MI

AL

MO KY

IN OH

NE

NM

ND

CO

SC

KS

IA

TN

WY

VA

MN

UT

OK

WI

AZ

AR

AK

LA

IL

NV

OR

MT

SD

NJ

NY

NH

MS

WV

FL

2013+ Strategic Direction – Communications & Outreach

2013 Strategic Direction

Communications remains a strategic priority for 2013 – key determinant in maintaining broad public / public policy support.

Build on success of current “Air Campaign”.

Implement a targeted “Ground Campaign” in key jurisdictions in support of market access.

Integrate across the value chain.

33

Reputation/ Social License

Performance Communication = +

Public Opinion Polling – Natural Gas & Oil Sands

34

“For each of the following types of energy, please indicate if your overall feelings are very negative, negative, neutral, positive, or very positive.”

CAPP Advertisement - Prevost

CAPP Advertisement – Water Monitoring

CAPP Advertisement – Natural Gas Exports

The Way Forward

● Opportunities

Market demand.

Competitive supply.

Build on strong foundation.

● Key Challenges

Market access / infrastructure dvm’t.

Social license.

● Industry Social License

Performance + Communication.

Must be earned (every day!).

Key levers:

• Technology & innovation.

• Collaboration (within sector, along value chain, w/ aligned interests).

● “A Marathon, Not a Sprint”

Appendix Slides

Project Type Project Size (bbl/d)

Capital Cost Range $MM

Estimated Supply Costs $US WTI/bbl

In Situ SAGD 30,000 $750 – 1,500 $50 - $78

Standalone mine

100,000 $5,500 – 7,500 $70 - $91

Oil Sands Supply Costs

41

Source: ERCB ST98 - 2012

Connecting to World Market Cushing, OK to US Gulf Coast – Capacity and Timing

● Canada’s natural gas production less constrained by resource base more constrained by market

● Growing US gas production means more competition for traditional markets (less US Exports & Greater US Imports)

● Canadian gas production projected under two scenarios

● Scenario 1: Market Constrained

No LNG Export Development

Little New Gas-Fired Power Generation added in Ontario post 2012

Limited Growth in NGV market

● Scenario 2: New Market Opportunities

LNG Exports – 1 train of 5 mtpa in 2018, 5 such trains by 2023

Natural Gas replaces some Nuclear Power Refurbishment in Ontario Power Generation

Higher Growth in NGV Market

Canadian Natural Gas Outlook 2013 to 2030

43

44

“General Public”

Policy-makers

Key Influencers Current focus:

Air Campaign

Added focus: Ground Campaign Opinion Leaders

Key Elements Of The Plan – Expanding Our Audiences

Current focus: Upstream Social License

Added focus: Market Access Social License