JPM - Canadian Oils Sands Primer

North America Equity Research
20 November 2006
Canadian Oil Sands

Digging Deep for Value: A Primer
In this report, we discuss the outlook for the Canadian oil sands industry. We explain the resource itself, comparing it to other major hydrocarbon resource plays and discussing some of the properties that differentiate it from conventional hydrocarbons. We also discuss the production process, reviewing technologies, methods, and challenges. In addition, we discuss the economics of the Canadian oil sands. Finally, we highlight major development projectsboth those currently producing and those slated to commence production in the next several yearsand major players. Canadian oil sands have garnered significant attention in recent years as one of the more prominent and promising resource plays. As market conditions have changed and technology has advanced, the Canadian oil sands have become a more attractive opportunity. Moreover, the stability of the government and the fiscal regime in Canada relative to other regions of the world with large resource bases is nearly unparalleled, heightening the appeal of the oil sands play for multinational oil companies. Production set to triple by 2015. Oil sands production in Alberta has grown at a healthy rate of 9% over the 1996-2005 time frame to 1 MMbpd. Based on announced projects, oil sands production is expected to continue at a similar growth rate through 2015, reaching 3 MMbpd. Oil sands production poses unique challenges and benefits. While some of the technological and economic challenges are by no means unique to oil sands, the developments do consume vast amounts of energy and face relatively stringent environmental regulations. On the other hand, low geological risk and a friendly fiscal regime add to the appeal of the play. Economics support bitumen production outpacing upgrading capacity. Our economic analysis indicates that the greatest challenge to oil sands project economics is the cost of upgrading. We believe that at current capital cost assumptions, stand-alone mining and in-situ development projects will generate double digit returns even on a $35/bbl long term crude price, but that integrated upgrading projects require a crude price of $40-45 to generate at least a 10% return. We believe this will result in a shortage of upgrading capacity and additional downstream partnerships as producers seek an outlet for bitumen.
Source: EUB.
Integrated Oils and Independent Refiners Jennifer Rowland, CFAAC

(1-212) 622-6702 jennifer.c.rowland@jpmorgan.com
Katherine Lucas, CFA

(1-212) 622-6451 katherine.a.lucas@jpmorgan.com
Daniel Vetter, CFA

(1-212) 622-6628 daniel.g.vetter@jpmorgan.com
Albertas Oil Sands Areas
Oil Sands Heavy Hauler
Source: Canadian Natural Resources Limited, Horizon Oil Sands Project.
J.P. Morgan Securities Inc.
See page 50 for analyst certification and important disclosures, including investment banking relationships.
JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com
North America Equity Research 20 November 2006
Table of Contents
Overview ...................................................................................3
Worlds second-largest resource base..........................................................................3 Physical properties .......................................................................................................4 Origin and current position ..........................................................................................4 Development history has been influenced primarily by the crude price ......................5
Production Outlook ..................................................................6 Marketing Oil Sands .................................................................9

Synthetic crude or bitumen? ........................................................................................9 Available refining capacity for crude off-take ...........................................................11 Recent deals highlight growing integration between US refiners and Canadian oil sands producers..........................................................................................................12 Pipeline transportation another bottleneck in the supply chain..................................13
Challenges Facing the Industry ............................................15

Exploration risk..........................................................................................................16 Energy usage..............................................................................................................16 Environmental constraints .........................................................................................17 Recoverability............................................................................................................18 Fiscal regime..............................................................................................................18 Cost inflation..............................................................................................................19 Crude quality: lower than conventional crude ...........................................................20
Economic Analysis: Value Creators or Big Digs? ...............20

Mining........................................................................................................................20 In-situ development ...................................................................................................23
Production Techniques..........................................................24
Mining: scratching the surface...................................................................................24 In-situ: going deeper to access more resource ...........................................................31 Upgrading: extracting more value from the barrel.....................................................36
Appendices
Appendix I: Glossary of key terms........................................39 Appendix II: Oil Sands Projects ............................................41 Appendix III: Mining Economic Model ..................................45 Appendix IV: In-Situ Economic Model ..................................46
Overview
The stability of the government and the fiscal regime in Canada relative to other regions of the world heightens the appeal of the oil sands resource play for multinational oil companies.
Though the Canadian oil sands have been under commercial development since the 1960s, they had until the late 1990s largely been the territory of Canadian companies. Low crude oil prices and the technical and financial challenges of extracting the bitumen and rendering it refinery-ready made the play less attractive than some of the more conventional oil and gas plays around the world. As market conditions have changed and technology has advanced, the Canadian oil sands have become a more attractive opportunity. Moreover, the stability of the government and the fiscal regime in Canada relative to other regions of the world with large resource bases is nearly unparalleled, heightening the appeal of the oil sands play for multinational oil companies. Recent announcements from major multinational companies, namely ConocoPhillipss integrated joint venture with EnCana and Royal Dutch Shells tender offer for the remaining outstanding shares of Shell Canada, emphasize the importance of the Canadian oil sands as a vast play creeping to the top of the list of global resource opportunities.
Worlds second-largest resource base

Due to its large oil sands resource base, Canada ranks second only to Saudi Arabia in terms of total crude reserves.
Second only to Saudi Arabia in terms of total reserves. With total crude oil reserves of nearly 180 billion barrels (of which 174 billion barrels are oil sands), Canada holds one of the largest concentrations of hydrocarbons in the world, second only to Saudi Arabia (see Figure 1 below). The only other known deposit of heavy oil of significant size is in the Orinoco Belt in Venezuela. However, the resources in the Orinoco Belt are typically considered extra heavy oil rather than oil sands, though the distinction is largely academic. Large and under-exploited. Not only are the oil sands reserves one of the largest concentrations of hydrocarbons, they are also one of the most under-exploited. According to the Alberta Energy and Utilities Board, as of 2006, less than 3% of the initial established crude bitumen reserves have been produced since commercial production began in the late 1960s.
Figure 1: Canadas oil sands are one of the largest deposits of crude in the world
crude oil reserves ranked by country, billion barrels as of year-end 2005
300 250 200 150 100 50 0 Saudi CanadaVenezuela Iran Arabia Iraq Kuw ait UAE Russia Liby a Nigeria United States
Conv entional Oil
Oil Sands / Heav y Oil
Source: Oil and Gas Journal, Alberta Energy and Utilities Board, Canadian National Energy Board, JPMorgan.
Physical properties
At normal temperatures, bitumen is in a semi-solid state with a consistency similar to that of tar or molasses and is resistant to flow in its natural state.
Oil or molasses? Oil sands are a non-conventional source of hydrocarbons comprised of a mixture of sand, water, and crude bitumen - a thick, heavy oil with a high carbon/hydrogen ratio. At normal temperatures, bitumen is in a semi-solid state with a consistency similar to that of tar or molasses. Bitumen has a very high density and is extremely viscous, resistant to flow in its natural state. As such, bitumen must be diluted or upgraded before it can be moved through a pipeline. Bitumen also has high sulfur content and high metals content. Compared with other world crude oil grades, it is a very heavy, very sour crude oil (see Table 1 below).
Table 1: Bitumen is very heavy and very sour compared with other crude grades, but the end product of oil sands upgrading is a high-quality crude
Properties of various crude grades Crude grade WTI Brent Crude West Texas Sour Maya Cold Lake bitumen Athabasca bitumen Syncrude Sweet Blend Gravity (API) 39.6 38.3 33.0 22.0 8.7 7.9 31.0 Specific Gravity (15C / 60F) 0.827 0.833 0.860 0.922 1.009 1.015 0.871 Sulfur (% wt) 0.24 0.37 1.60 3.30 4.25 4.66 0.15
Source: EIA, Pemex, CERI, Syncrude, JPMorgan.
Bitumen comes in various qualities. Bitumen may comprise up to 18% of the overall mixture, and concentrations of more than 10% bitumen are considered to be high-quality rich deposits. By contrast, deposits with less than 6% bitumen are considered not only poor or lean, but also economically unfeasible to mine. On average, two tons of oil sands are required to produce one barrel of crude oil.
Origin and current position

The exact origin of the oil sands is under dispute among geologists, but the most widely accepted theory is that the hydrocarbons originated in shale in the Alberta Sedimentary Basin and soaked into the silt sediments, the two mixing under pressure. The result was a deposit of hydrocarbon-laden silt sitting near the surface. In their current state, the oil sands are resting under a layer of overburden, a deposit that does not contain hydrocarbons and that, in the case of mineable deposits, must be removed before extraction can begin. The overburden, in turn, sits under a layer of muskeg, a swampy layer of decaying vegetation 3 to 10 feet (1 to 3 m) thick.
The majority of oil sands development activity is occurring in the Athabasca area, where over 80% of the resources are located.
Over 80% of Canadas oil sands are in the Athabasca area. Canadas oil sands deposits are located in northern Alberta, and are classified in three designated oil sands areas (OSAs): Athabasca, Cold Lake, and Peace River (see Figure 2). There are 15 major oil sands deposits located throughout the OSAs. The Athabasca area contains the largest of these deposits, the Wabiskaw-McMurray deposit, which is currently under active development. Since the resources in the Athabasca deposit are close enough to the surface to be mineable, most of todays active development is in this region. Other significant deposits are Cold Lake Clearwater and the Peace River Bluesky-Gething (see Table 2 below).
Figure 2: Albertas Oil Sands are located in the northern part of the province in three OSAs
Source: Alberta Energy and Utilities Board
Table 2: The Athabasca OSA holds the majority of Alberta's bitumen resources
initial in place volumes of crude bitumen Area Athabasca Cold Lake Peace River Total
Source: Alberta Energy and Utilities Board, JPMorgan.
Size (sq km) 102,760 26,270 17,250 146,280
Resources (MMbbls) 1,369,478 195,072 129,058 1,693,608
% of resources 81% 12% 8% 100%
Development history has been influenced primarily by the crude price

After initial studies in the 1910s and 1920s proved that the bitumen could successfully be extracted from the oil sands, the first proposed use of the resource was as a paving material. Though technically a successful effort, bitumen was deemed uneconomic when compared with asphalt. In the 1930s, the Abasand Oils company began producing diesel fuel from crude bitumen. Interest in this effort peaked during World War II, but waned thereafter. In the 1950s, the government made efforts to encourage further development of the oil sands, indicating that despite the up-front capital costs, the oil sands could be commercially viable. In the early 1960s, the Albertan government put forth a plan for the orderly development of the oil sands, and later that decade, the pioneering oil sands development came online.
Figure 3: Interest in the development of the oil sands has increased as crude prices have risen
crude oil price in 2004 dollars ($/bbl)
100 80 60 40 20 0 1920 1930 1940 1950 1960 1970 1980 1990 2000
1930s: Diesel produced from oil sands at Abasand Oils venture near Ft McMurray 1920s: Hot water flotation methods proven to separate sand and bitumen 1978: Syncrude begins production 1967: Great Canadian Oil Sands begins production 1985: Cold Lake begins commercial in-situ production
2001: Foster Creek begins commercial in-situ SAGD production
Source: BP Statistical Review 2006, CERI, Syncrude, JPMorgan.
Three main projects form the backbone of the oil sands industry. Great Canadian Oil Sands (GCOS), later folded into what is now Suncor, began initial development in 1963. Sun Oil (at the time) invested nearly Cdn$250 million in what was described as the biggest gamble in history to develop a facility to mine and upgrade crude bitumen north of Fort McMurray. The facility came online in 1967 at a production rate of 45,000 barrels per day. In 1964, the Syncrude consortium was formed with an initial objective of determining the commercial viability of mining the Athabasca oil sands for crude oil. A proposal was granted approval in 1969 and in 1973, construction on the Mildred Lake site began. The first barrels were shipped in 1978. The third flagship project in the development of the oil sands was also the first to recover bitumen from below the surface as opposed to using strip mining techniques. In 1985, Imperial Oil began commercial development at Cold Lake following extensive research and a pilot phase in the 1960s and 1970s. The Cold Lake development employs Cyclic Steam Stimulation (CSS) and produces from the Clearwater formation, more than 1,300 feet (400 m) below the surface. Initial production volumes were around 50,000 barrels per day, on scale with early production volumes at Suncor and Syncrude's mining developments, proving the viability of in-situ recovery.
Production Outlook
Oil sands production is expected to grow from 1 MMbpd to 3 MMbpd by 2015E, an annualized growth rate of more than 10%.
Production is expected to triple by 2015. Unlike conventional crude oil production in Alberta, oil sands production in Alberta has grown at a healthy rate of 9% over the 1996-2005 time frame to 1 MMbpd, according to the Alberta Energy and Utilities Board (EUB). By contrast, conventional crude production in Alberta has declined by roughly 6% annually over the same period. Based on the National Energy Boards (NEB) base case scenario, which does not assume that all announced projects move forward, oil sands production is expected to continue at a similar growth rate through 2015, reaching 3 MMbpd, an annualized growth rate of over 10%.
Figure 4: Oil sands production is expected to triple from 2005 to 2015E

production of conventional crude and oil sands, mbpd
3,500 3,000 2,500 2,000 1,500 1,000 500 0 1996 1998 2000 2002 2004 2006E 2008E 2010E Conv entional crude 2012E 2014E Oil sands
Source: NEB, JPMorgan estimates.
For an explanation of mining and in-situ production techniques, please see Production Techniques on page 24.
Production to become more evenly split between mining and in-situ operations by 2015. The bitumen in Albertas oil sands can be produced using either mining techniques, for those deposits close to the surface, or in-situ techniques for those located deeper than 250 feet. Only the Athabasca OSA has oil sands shallow enough to be recovered with mining techniques, meaning in-situ recovery is necessary for Cold Lake, Peace River, and a portion of the Athabasca deposits. Mining has been responsible for nearly 70% of crude bitumen production to date and represents nearly 75% of all current development projects. However, less than 20% of the remaining established oil sands reserves are recoverable with mining operations, meaning that in-situ production will become increasingly important as the resource base is exploited. By 2015, we estimate that 45-50% of oil sands production in Alberta will come from in-situ operations, up from 28% in 2005.
Figure 5: Most current oil sands production is from mining operations
production balance, 2005
Figure 6: but by 2015E the split should be fairly balanced

production balance, 2015E
In situ 28% Mining 72%

Source: NEB, JPMorgan.
Source: NEB, JPMorgan.
Future mining projects At present, there are several large-scale mining projects slated to come online. These projects are expected to increase mined bitumen volumes by more than 1.6 million barrels per day by 2015, assuming all announced projects move forward. Major projects consist of: Athabasca Oil Sands Muskeg and Jackpine, CNRLs Horizon,
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Imperials Kearl Lake, Petro-Canadas Fort Hills, Suncors Voyageur, Syncrudes Mildred Lake and Aurora, Synencos Northern Lights, and Totals Joslyn projects (see Table 3).
Table 3: Most upcoming mining projects are new developments, though current projects have planned expansions in the coming years
Operator Athabasca Oil Sands Athabasca Oil Sands CNRL Imperial Petro-Canada Suncor Syncrude Synenco Total TOTAL Projects Muskeg Jackpine Horizon Kearl Lake Fort Hills Voyageur Mildred Lake & Aurora Northern Lights Joslyn Type Expansion New New New New Expansion Expansion New New Start-up 2010 2010 2008 2010 2011 2008 2011 2010 2010 Mining production (mbpd) Current by 2010 by 2015 155 270 270 100 300 135 415 100 200 190 260 283 283 350 350 536 50 100 50 100 765 1,338 2,394 Upgrading capacity (mbpd) Current by 2010 by 2015 155 290 290 203 190 260 532 610 350 350 536 50 100 50 100 765 1,272 2,029
Source: National Energy Board, Company reports, JPMorgan. Table includes all announced projects. Note: Suncors Voyageur upgrader will take mined and in-situ production.
Future in-situ projects We estimate that in-situ projects slated to come online through the end of the decade will increase in-situ production to more than 1.3 million barrels per day, increasing in the five years thereafter to more than 2.3 million barrels per day by 2015. We expect the majority of production will be in the Athabasca OSA and will employ steamassisted gravity drainage (SAGD) technology.
Table 4: In-situ production is expected to reach over 2 MMbpd by 2015
Operator Black Rock CNRL Connacher ConocoPhillips Devon EnCana Husky Imperial JACOS MEG North American OPTI/Nexen Petro-Canada Shell Suncor Total Value Creation Projects Orion Birch Mountain, Gregoire Lake, Kirby, Primrose Great Divide Surmont Jackfish Christina Lake, Foster Creek, Borealis Sunrise, Tucker Lake Cold Lake Hangingstone Christina Lake Kai Kos Dehseh Long Lake MacKay River Cadotte Lake, Carmon Creek Firebag Joslyn Halfway Creek Location Cold Lake Athabasca, Cold Lake Athabasca Athabasca Athabasca Athabasca Athabasca, Cold Lake Cold Lake Athabasca Athabasca Athabasca Athabasca Athabasca Peace River Athabasca Athabasca Athabasca Technology THAI SAGD SAGD SAGD SAGD SAGD SAGD CSS SAGD SAGD SAGD SAGD SAGD CSS, SAGD SAGD SAGD SAGD TOTAL
Source: National Energy Board, company reports, JPMorgan. Note: Table includes all announced projects.
Initial start-up 1997 1985 2006 2006 2008 2001 2008 1985 2002 2007 2008 2003 2002 1979 2004 2006 2009
2005 1 50 50 140 10 3 35 12 19 319
Production (mbpd) by 2010 21 110 10 50 70 245 130 170 35 25 40 147 75 30 170 25 10 1,362
by 2015 21 200 10 100 70 500 230 170 60 25 160 219 75 100 350 40 10 2,339
Figure 7: Based on announced projects, over 80% of in-situ production will come from the Athabasca OSA by 2015E . . .
%
Figure 8: . . . and 90% of in-situ production will employ SAGD technology

%
THAI 1%
Peace Cold Lake 14% Riv er 4%
CSS 9%
Athabasca 82%
SAGD 90%
Source: NEB, company reports, JPMorgan.
Source: NEB, company reports, JPMorgan.
Marketing Oil Sands

The synthetic crude oil and crude bitumen produced in Alberta far exceeds the local capacity to refine the crude into finished products. Thus, whether fully upgraded synthetic or a diluted heavy blend, the resulting product must be marketed to locations outside Alberta, and frequently outside Canada.
Synthetic crude or bitumen?

A key decision facing oil sands producers is whether or not to upgrade the bitumen. Once bitumen has been extracted from the oil sands deposits, either through mining or in-situ operations, the resulting product is a heavy oil, inferior in quality to the heaviest of conventionally produced crude oils. Producers are faced with the choice of selling a heavy crude oil into the market or upgrading the bitumen into a lighter synthetic crude oil (SCO). Suncor and Syncrude upgrade their respective bitumen production, producing synthetic crude oil and high-value products. However, given the costs and logistical constraints associated with constructing or securing upgrading capacity, many oil sands producers sell a lowervalue, heavy bitumen blend into the market.
Figure 9: Year to date, the spread between bitumen blends and synthetic crude oil has averaged nearly US$30 per barrel
bitumen blend and synthetic crude oil prices, 2006YTD US$/bbl
80 60 40 20 Jan-06 Feb-06 Mar-06 Apr-06 May -06 Jun-06 Bitumen blend

Source: Bloomberg, JPMorgan.
Jul-06
Aug-06 Sep-06 Oct-06 Nov -06 SCO
Recent crude quality differentials have made upgrading an enticing option. With the light-heavy (WTI-Maya) differential hovering around $15 per barrel, and bitumen blends priced at a discount to Maya, upgrading becomes an attractive option for oil sands operators. At present, all the bitumen that is mined in Alberta is upgraded, while bitumen that is recovered with in-situ techniques may be either upgraded or blended with diluent and shipped as a heavy crude via pipelines to refineries that can handle the lower-grade hydrocarbons.
Figure 10: Bitumen blends trade at a significant discount to even heavy crude oil such as Maya
crude oil and bitumen blend prices, US$ per barrel
80 60 40 20 0 Jan-06 Mar-06 WTI Flint Hills Bitumen @ Hardisty

May -06
Jul-06 May a
Sep-06
Nov -06
Lloy d Blend @ Edmonton
Synthetic crude easier to market, but can be expensive to produce. Synthetic crude oil is worth more to refiners, as SCO is very high quality and easily refined into high-value, light products without requiring special processing capacity such as a coker. Thus, the product commands a market premium to bitumen. In addition, as no specific refinery configuration is required, SCO can be marketed without a specific end-user in mind. However, producing SCO requires either captive upgrading capacity or a firm agreement with a third-party upgrader, adding both capital and operating costs. Installing upgrading capacity today can require significant capital costs up front. Based on recently announced projects, we estimate
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the all-in cost of a new upgrader to average US$25,000-35,000 per barrel per day of capacity, giving an average-sized 150,000 barrel per day upgrader a US$4.5 billion price tag, at the midpoint. In addition, expansions to existing upgraders can cost over US$20,000 per barrel per day of capacity, as is the case with Suncors US$1.8 billion 90,000 barrel per day expansion of its existing upgrader.
Dilbit is a bitumen blend of roughly 30% diluent, 70% bitumen. Synbit is a bitumen blend of 50% synthetic crude oil and 50% bitumen.
Electing to sell bitumen is a less capital-intensive choice, but requires the use of a diluent. Non-upgraded bitumen must be diluted with a lighter-viscosity product, known as diluent, before it meets pipeline shipping specifications. Bitumen is commonly diluted with condensate in order to increase its API gravity and render it pipeline-ready. On average, blended bitumen requires approximately 30% condensate by volume this blend is referred to as dilbit. Athabasca Bitumen Blend contains 33% condensate and increases the API gravity of Athabasca bitumen from 7.9 to 22.5, approximately the specific gravity of Maya crude. Similarly, Cold Lake Bitumen Blend contains 28% condensate by volume, raising the API gravity from 8.7 to 22.5. Synthetic crude is another diluent. However, as synthetic crude is heavier than condensate, about 50% SCO by volume is required to lower the viscosity of bitumen to a level appropriate for pipeline transport. Bitumen diluted with synthetic crude oil is commonly called synbit.
Available refining capacity for crude off-take

Refining capacity in Alberta is limited, and coking capacity is even more limited. There are only five refineries in Alberta with a total of just over 440,000 barrels per day of refining capacity. However, the refineries are of relatively low complexity, and coking capacity among the refineries is limited to 15,000 barrels per day. With production of non-upgraded bitumen alone totaling nearly 440,000 barrels per day in 2005, and total synthetic crude oil and bitumen blends exceeding 1 million barrels per day, production from the Canadian oil sands must be sent to refiners outside the region.
Table 5: Refineries in Alberta are ill-equipped to process Canadian oil sands production
Alberta refineries Company Shell Petro-Canada Parkland Refining Imperial Oil Husky Oil Location Scotford Edmonton Bowden Edmonton Lloydminster Total
Source: Oil and Gas Journal, CERI, JPMorgan.
Crude Capacity (bpd) 97,900 125,200 6,000 187,200 25,000 441,300
Nelson Complexity 6.5 7.9 12.7 7.7 2.9 7.3
Coking Capacity (bpd) 7,500 7,500 15,000
Much of the Canadian heavy crude blends are sent to refineries in the midcontinent (PADD 2) region of the United States, where refining capacity exceeds 3.6 MMbbls per day, roughly 20% of overall US capacity. At present, three major refineries process the majority of Canadian heavy crude: BP's Whiting refinery (405,000 bpd), ExxonMobil's Joliet refinery (238,000 bpd), and Flint Hills's Rosemount refinery (280,000 bpd).
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Figure 11: Refiners with significant PADD 2 capacity are likely purchasers of Canadian heavy crude
PADD 2 refining capacity by company, mbpd
700 600 500 400 300 200 100 MRO BP COP VLO Flint Hills SUN XOM PDVSA Farmland Industries
Source: Oil and Gas Journal, company reports, JPMorgan.
FTO
Though there is significant refining capacity in the Gulf Coast region (PADD 3), where nearly half of all US capacity is located, Canadian heavy crudes must displace heavy crudes from Latin America as they migrate south. Thus, it is likely that the majority of Canadian heavy crudes will be sent to refineries in PADD 2.
Recent deals highlight growing integration between US refiners and Canadian oil sands producers
Recent transaction announcements demonstrate the increasing integration between US refiners and Canadian oil sands producers. These announcements include the joint venture between ConocoPhillips and Encana, Marathon's request for proposals from oil sands producers for the formation of an oil sands joint venture, and BP's intention to increase Canadian crude oil processing capability at its Whiting refinery. In our view, this trend will likely continue, as we see a shortage of upgrading capacity expansion in Canada, and we believe producers will increasingly seek external markets for their bitumen.
For a more detailed report on the EnCana/ConocoPhillips oil sands joint venture, please see JPMorgans ConocoPhillips: Oil Sands Venture Enhances Portfolio, but Echoes Familiar Challenges, published 6 October 2006.
EnCana/ConocoPhillips: spanning the value chain In October 2006, ConocoPhillips (COP) and Encana (ECA) announced a deal creating two separate but operationally intertwined joint ventures, linking two of COPs North American refineries, Borger and Wood River, with ECAs Foster Creek and Christina Lake in-situ oil sands production operations located south of Fort McMurray, Alberta. Plans are to grow production at Foster Creek and Christina Lake from 50 mbpd currently to 400 mbpd by 2015. At the same time, the companies will expand the combined capacity of the two refineries from 450 mbpd today with 30 mbpd of bitumen processing capability to 600 mbpd with 275 mbpd of bitumen processing capability by 2013. Marathon: in search of partners Marathon Oil (MRO) is currently exploring reconfiguring at least two of its Midwest refineries, Detroit and Catlettsburg, for processing Canadian heavy crude blends. In addition, the company is seeking proposals from oil sands producers for the formation of an oil sands joint venture, similar to the one announced between ConocoPhillips and EnCana. At present, MRO processes just over 100 mbpd of
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Canadian heavy crude at its PADD 2 refineries. Potential work on the Detroit and Catlettsburg refineries would enable the company to process a total of 280,000 barrels per day of Canadian heavy crude. BP: aggressively looking to expand its oil sands processing capability In September 2006, BP announced that it is in the final planning stage of a $3 billion investment at its 405 mbpd Whiting refinery located in northwest Indiana. The company intends to reconfigure its Whiting refinery to increase Canadian heavy crude oil processing capability by about 260,000 barrels per day. Construction of the project is tentatively scheduled to begin in 2007 and should be completed by 2011, pending regulatory approvals.
Pipeline transportation another bottleneck in the supply chain

Both synthetic crude oil and Canadian heavy crude blends must be transported to end markets through pipelines. The first step is transporting the product to a nearby hub, usually Edmonton or Hardisty. Some heavy crude blends may also be transported directly from the oil sands areas to Lloydminster, to the 25,000 bpd Husky refinery. From the hubs, the crude is sent on major export pipelines to the broader market. Intra-Alberta pipelines Transportation to one of the hubs takes place over one of the smaller intra-Alberta crude pipelines. At present, intra-Alberta pipelines have the capacity to carry over 1.6 million barrels per day to the larger hubs, with 900,000 barrels per day sent to Edmonton and 700,000 barrels per day sent to Hardisty. There are also several projects under development that are scheduled to provide just under 1 million barrels per day of additional capacity between the Fort McMurray area and Edmonton.
Table 6: Oil sands crude must be transported from the fields to larger hubs over one of the following pipelines
Pipeline Athabasca Corridor Alberta Oil Sands Oil Sands Cold Lake Heavy Oil Cold Lake Heavy Oil Husky Oil Husky Oil Echo Corridor expansion Horizon Access Waupisoo Current capacity Origin Fort McMurray Fort McMurray Fort McMurray Fort McMurray Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Fort McMurray Fort McMurray Fort McMurray Fort McMurray Fort McMurray Fort McMurray Cold Lake Cold Lake Fort McMurray Destination Hardisty Edmonton Edmonton Edmonton Hardisty Edmonton Hardisty Lloydminster Hardisty Edmonton Edmonton Edmonton Edmonton Edmonton Hardisty Edmonton Hardisty Edmonton Capacity (mbpd) 300 260 389 145 194 118 133 226 75 240 250 150 350 793 300 118 403 989 Status Existing Existing Existing Existing Existing Existing Existing Existing Existing Proposed for 2009 Proposed for mid-2008 Proposed for mid-2006 Proposed for 2008
Proposed capacity
Source: EUB, CERI, JPMorgan.
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Export pipelines After the synthetic crude or heavy blend is sent to Edmonton or Hardisty, it is sent to refineries along major export pipelines. Currently, these pipelines have the capacity to transport 2.6 million barrels per day, primarily to the Midwest and Eastern United States. Modifications, expansions, and new construction are expected to augment this to about 5 million barrels per day in the next several years. We expect the expansions to focus primarily on transporting crude to the Midwestern United States, though one ambitious project slated for 2010 or later links Alberta with the US Gulf Coast. In addition, major pipelines such as the Gateway and Trans Mountain Express will link Alberta with the western coast of Canada and increase crude oil transportation capacity to ports linking Canada to Asian markets.
Table 7: Major export pipelines transport crude from Alberta to major refining markets
Pipeline Enbridge Express Trans Mountain Milk River Rangeland Gateway Trans Mountain Exp Keystone Southern Access Altex Alberta Clipper Current capacity Origin Edmonton Hardisty Edmonton Edmonton Cold Lake Edmonton Edmonton Hardisty Edmonton N Alberta Hardisty Destination Midwest, East Coast, E Canada US Rockies, Midwest British Columbia, US West Coast Montana Montana Kitimat, BC Vancouver and/or Kitimat, BC Wood River Superior, Wood River US Gulf Coast Superior Eastern US Midwestern US Rockies Western US Midwestern US Gulf Coast West Coast Capacity (mbpd) 1,840 282 285 118 65 400 625 400 403 250 403 1,840 2,122 465 285 1,205 250 625 Status Existing Existing Existing Existing Existing Proposed for 2010 Proposed for 2010 Proposed for 2009 Proposed for 2008/09 Proposed for 2010+ Proposed for 2010+
Proposed capacity
Source: EUB, CERI, JPMorgan.
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Figure 12: Major pipelines are planned to expand Albertas link with US and overseas markets
Source: Alberta Energy and Utilities Board.
Challenges Facing the Industry

Oil sands production poses some of the same challenges as conventional crude oil production, with some unique differences. While some of the technological and economic challenges are by no means unique to oil sands, the developments do consume vast amounts of energy and face relatively stringent environmental regulations. On the other hand, low geological risk and a friendly fiscal regime add to the appeal of the play.
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Table 8: Oil sands production faces many of the same challenges as conventional crude oil production, but also poses its own set of challenges
Challenge Exploration risk Conventional production Oil sands Comments The extent of the oil sands deposits is welldocumented, unlike conventional reservoirs which must be located with expensive drilling programs. Oil sands production uses a significant amount of fuel to run equipment, produce steam, and generate electricity. Conversely, some conventional production requires minimal energy, especially in primary recovery when wells flow under natural pressure. Oil sands operations have a considerable impact on the surrounding environment, including water, land, and greenhouse gas emissions. To minimize this, Canada poses strict environmental constraints on oil sands producers. Less than 20% of the oil sands resources are thought to be ultimately recoverable. By contrast, conventional reserves are thought to be up to 60% recoverable with tertiary recovery techniques. Canada offers a stable and transparent fiscal regime and is actively encouraging development of its resources. Many of the worlds conventional crude resources are located in countries with captive national oil companies and unfriendly fiscal terms. Oil sands developments are currently under significant cost pressures in both the capital and operating cost phases. Conventional crude production operations also face significant cost inflation, especially in rising crude price environments. The quality of the bitumen produced from the oil sands is very low compared with world benchmark crudes, meaning that the bitumen must be sold at a significant discount or go through an upgrading process.
Energy usage - challenge is sufficient to be a major consideration in project development and operations and may impede progress - challenge is a factor in development and operations, but is rarely an impediment to progress - challenge is rarely a factor influencing development or operating decisions
Environmental constraints
Recoverability
Fiscal terms
Cost inflation
Crude quality
Source: JPMorgan.
Exploration risk
Though high for most conventional crude production, exploration risk is virtually zero for oil sands. The extent of the oil sands resource base is well delineated, and the extent of the economic resource base is also regularly revised and made publicly available in regular reports from the provincial and federal governments. Drilling that is undertaken in conjunction with oil sands development is comparable to appraisal drilling, and usually involves extracting core samples from a deposit that is to be exploited using in-situ techniques. These samples can provide a breakdown of the quality of the reservoir and aid in determining the most efficient configuration of the development.
Energy usage
Oil sands developments are notoriously energy-intensive, with substantial volumes of fuel and natural gas consumed at virtually all stages of the production process. Mining operations use considerable fuel to power the trucks and shovels, and in-situ operations use natural gas to generate heat in thermal
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recovery. Upgrading facilities also use natural gas to generate heat and electricity and as a source of hydrogen to add to the bitumen. On average, producing one barrel of bitumen requires one mmbtu of natural gas. This adds to the field-level operating costs, making the economic recoverability of bitumen dependent on the market prices of not only crude oil but also natural gas.
Environmental constraints
Oil sands operations have significant impacts on the surrounding environment. Though environmental regulations are fairly strict and every effort is made by the producers to minimize the operations impact on the environment, the projects attract substantial scrutiny and ample criticism from environmental advocates. The oil sands operations effects on surrounding land and water, as well as their greenhouse gas emissions, attract perhaps the most attention. Water and land impacts Bitumen production requires considerable amounts of water, which is used throughout the production process. On average, producing one barrel of bitumen requires three barrels of water. Water is used in mining operations, where it is mixed with the oil sands in the hydrotransport and bitumen extraction stages; in in-situ recovery operations1, where it is heated to a vapor and injected into the subsurface formation; and in upgrading, where it is used as a cooler. Current mining projects are licensed to divert up to 2.3 billion barrels of water per year from the Athabasca River, the vast majority of which ends up in tailings ponds. Steam-oil ratios A steam-oil ratio (SOR) indicates the amount of steam used to produce a given quantity of crude bitumen. The SOR is a key indicator of the operational efficiency of an in-situ operation. A project with a steam-oil ratio of 2.0 uses 2.0 barrels of steam for every barrel of bitumen produced. Tailings disposal Disposal of the tailings generated from mining operations spans both the water and land impacts of oil sands production operations. Water used in the ore processing and bitumen extraction phases of mining operations are ultimately extracted from the mixture along with the other tailings. These tailings are sent to tailings ponds, which are in essence large bodies of water held back with dykes created with the previously-removed overburden. Though every effort is made to contain the tailings, the sheer volume of tailings opens the possibility of groundwater or nearby soil and surface water contamination. Technological advances are currently being made toward minimizing the environmental impact of the tailings. Land usage and reclamation The overall surface footprint of oil sands operations can range from modest, in the case of in-situ production and upgrading operations, to very large, as in the case of mining operations. Companies make substantial efforts to minimize the surface footprint of their operations, though for mining ventures there is little that can be done to minimize the scope of surface-level disturbance. As a result, operators
Though research is progressing on technologies that use little water to recover in situ bitumen, such as THAI and VAPEX, commercial in situ operations still employ CSS and SAGD, both of which use steam.
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1
attempt to restore the disturbed land to a reclaimed state once an operation has been exploited. This involves replacing the tailings into the landscape and rendering the land suitable for another use similar (but likely not identical) to that in the pre-mined state. Following criticism that land was not being reclaimed quickly enough, producers have adopted a practice called progressive reclamation in an effort to reclaim land as soon as is technically feasible. However, it is estimated that even the first steps toward reclamation will not be taken for the first 20 to 30 years after operations commence. Greenhouse gas emissions Oil sands operations are the largest contributors to the growth in Canadas increasing greenhouse gas emissions, and greenhouse emissions resulting from the production of bitumen and synthetic crude oil are more intense than for conventional production. Though considerable progress has been made to reduce the intensity of the greenhouse gas emissions from the oil sands operations, the rapid expansion of the oil sands operations has resulted in a net increase in greenhouse gas emissions. Currently, researchers are exploring the possibility of capturing the CO2 emitted in oil sands operations. The CO2 would be stored and used in CO2flooding enhanced oil recovery efforts at mature conventional reservoirs. However, these studies are still in early stages.
Recoverability
Despite the vast expanse of the Canadian oil sands, less than 20% of the resources are thought to be ultimately recoverable, even with technological advancements. This is considerably lower than the recoverability factor of conventional crude oil production, which, according to the EIA, can range 30%-60% once tertiary and enhanced oil recovery methods have been employed.
Fiscal regime
Canada has a relatively stable fiscal regime, providing oil sands projects with a tremendous advantage over projects in many other resource-rich areas. Especially in the current high crude price environment, many countries are renegotiating contracts and overhauling legislation in an effort to increase their take, often retroactively. This behavior is by no means limited to any particular location or type of regime, as evidenced by recent production tax hikes in the UK North Sea as well as murmurings of windfall profit tax proposals in the US. Royalty rates In mid-1997, Alberta adopted a generic royalty regime for its oil sands projects, rather than having individual agreements with respective projects. The terms adopted in 1997 apply to all new and expansion projects. Similar to a production sharing contract, the royalty regime views projects in two separate phases: (1) a prepayout period, before capital costs are recovered, and (2) a post-payout period, following the recovery of capital costs. During the pre-payout period, the royalty rate is set at 1% of gross revenue. During the post-payout period, the projects pay the greater of 1% of gross revenue or 25% of net revenue. According to the Alberta Department of Energy, the post-payout royalty is about 11% of gross revenue.
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Impact of oil sands on Alberta We expect the fiscal regime in Canada to remain friendly and open to oil sands investment given the contribution the industry has made to the Albertan and greater Canadian economies. Oil sands operations have a positive impact on both government revenue and GDP, according to the Canadian Energy Research Institute (CERI). CERI estimates that the oil sands operations will contribute nearly Cdn$800 billion to Canadian GDP over the 2000-2020 period, with 57% of this contribution coming directly from the industry itself and the remaining 43% coming from the impact on other sectors, from retail to education to financial services. Oil sands operations are expected to result in more than US$100 billion (Cdn$123 billion) in additional government revenue throughout Canada, with 40% going directly to the federal government and 35% to the Alberta provincial government.
Table 9: Oil sands have a substantial impact on the Canadian economy both directly and indirectly
oil sands cumulative contributions to GDP, employment, and government revenue, 2000-2020E Alberta GDP impact (Cdn$ MM, 2004) Oil sands direct impact Total impact % direct impact Employment impact (thousand person years) Oil sands direct impact Total impact % direct impact Government Revenue impact (Cdn$ MM, 2004) Royalties Indirect tax Corporate income tax Personal income tax Property tax Total % Royalties
Source: CERI: Economic Impacts of Alberta's Oil Sands, JPMorgan.
Canada 448,581 789,147 57% 1,150 5,425 21% Federal 14,089 16,280 20,721 51,090 0% Total Canada 26,762 18,742 24,517 30,586 22,684 123,291 22%
404,573 633,903 64% 1,043 3,649 29% Alberta Provincial 26,762 5,989 6,521 4,522 43,794 61%
Cost inflation
Like many other energy projects, oil sands projects have faced considerable cost inflation of late. Capital and operating costs have increased as more projects compete for scarce material, labor, and fuel resources. Capital cost escalations have been significant in recent years, with several large projects revisiting and revising their cost estimates several times over. For example, the last expansion at Syncrude, Stage Three, was originally estimated to cost about US$3.3 billion (Cdn$4 billion). The estimate was revised upward by 40%, then by 95% eighteen months later. Completed this year, Stage Three came in at a final cost of US$7 billion (Cdn$8.4 billion), exceeding the original budget by 110%. The Athabasca Oil Sands Project, including the Muskeg River Mine and the Scotford Upgrader, was originally budgeted at nearly US$3 billion (Cdn$3.5 billion). The final cost, however, was more than 60% over budget, at over US$4.7 billion (Cdn$5.7 billion). Operating costs are similarly not immune to upward pressure. Operating costs have increased appreciably across oil sands projects, at both mining and in-situ
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operations, as a result of higher fuel and higher labor costs. At Suncor, current nonfuel cash operating costs are up more than 60% on a per-barrel basis since 2003, with total cash operating costs (including fuel) up nearly 75% over the same period.
Crude quality: lower than conventional crude

As discussed earlier, bitumen is by its nature an inferior grade of hydrocarbon, both heavy and containing high amounts of sulfur. In order to be transported in a pipeline, bitumen must be diluted, and even in its diluted state, the resulting bitumen blend is comparable to a low-grade crude such as Maya. Bitumen blends sell at a discount to higher-quality benchmark crude oils, such as WTI. The only way for oil sands producers to capture the spread between the bitumen blends and the higher quality crudes is to upgrade their bitumen into a light sweet or light sour crude. This can be capital intensive and raise operating costs.
Economic Analysis: Value Creators or Big Digs?

Throughout their history of development, the oil sands have usually been considered a marginal source of crude oil supply because of the capital-intensive nature of development projects. White elephants of sorts, the projects held tremendous potential, but required significant capital investment and lofty operating expenditures. Sharply rising crude prices and improvements in technology have made the developments more lucrative and brought them into the mainstream, but the sudden deluge of new development projects has strained the development environment, pressuring prices for raw materials and labor. On an ongoing basis, fuel cost considerations pose another challenge, as the projects are energy-intensive. In analyzing the economics of oil sands development projects, we have developed a set of cash flow models for generic oil sands development projects. We review the output of these models to determine the economic viability of the projects under various assumptions regarding crude price, capital expenditures, operating costs, and upfront capex.
Mining
One major economic consideration for a mining project is whether to construct an upgrader. As discussed previously, all the commercial mining projects currently in operation are fully integrated, that is, they have a dedicated upgrader and sell synthetic crude rather than a bitumen blend. However, examining the current set of announced mining projects, we estimate that mined volumes will exceed upgrading capacity by 2010, and we expect that difference to further increase by 2015. Economics of a stand-alone mining project A stand-alone mining project, whether a new mine or an expansion of an existing project, will likely sell a heavy blend of bitumen and diluent into the market. While the project will be unable to capture the differential between light, sweet crude and heavy crude, the project will see upfront savings without the cost of an upgrader in addition to fuel cost savings throughout the life of the project. However, operating costs will include the purchase of diluent for blending with the bitumen.
Our analysis shows that a standalone mining project is economical even at a long-term WTI price of US$35/bbl.
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We use the following set of standard assumptions to analyze a stand-alone mining project.
Table 10: Our generic mining model uses a standard set of operating assumptions
mining project cash flow model inputs Project details Mining capacity (mbpd) Product sales mix Bitumen Heavy crude blend Diluent as % of volumes Production start Ramp-up period (years) Terminal year Environmental remediation (Cdn$ MM) Crude quality differential (% of WTI) Bitumen Heavy crude blend
Source: JPMorgan.
100 0% 100% 30% 2009 2 2035 1,000 50% 35%
Operating costs and taxes Natural gas consumption (mmbtu/bbl) Non-fuel costs (Cdn$/bbl) Overburden removal (Cdn$/bbl) Diluent addition cost (Cdn$/bbl) Maintenance capex (Cdn$/bbl) SG&A (Cdn$ MM/yr) Cost escalation factor (annual) Tax rate Deferred tax rate Cash tax rate Exchange rate (Cdn$/US$) Capital costs (Cdn$ per bpd capacity)
0.30 7.50 2.50 6.00 1.00 10 2% 38% 33% 25% 1.20 20,000
JPMorgan Commodity Price Forecast WTI crude oil (US$/bbl) 2007: $64 2008: $55 Henry Hub natural gas (US$/mcf) 2007: $7.5 2008: $7.0
The above set of assumptions results in a non-fuel cash cost per barrel of heavy blended crude of more than Cdn$16.4, including SG&A, and an all-in cash cost per barrel of Cdn$19, including fuel costs. We also apply the standard Alberta royalties to the project, with royalties equal to 1% of revenue before project payout and the greater of 1% of gross revenue or 25% of net revenue after project payout. We also apply our JPMorgan commodity price forecast for crude oil and natural gas through 2008, reverting to various long-term crude prices thereafter. On these assumptions, we find that a stand-alone mining project with capital cost of Cdn$20,000 per barrel per day of capacity will generate an unlevered after-tax return of 11% on a long-term WTI crude price assumption of US$35/bbl. The following table shows various rates of return on several sets of capital cost and crude price assumptions.
Table 11: Estimated IRRs of a stand-alone mining project on various capital cost and crude price assumptions
project IRR Capital cost (Cdn$ per bpd capacity) 10,000 15,000 20,000 25,000 30,000
Source: JPMorgan.
35 17.8% 13.6% 10.9% 9.5% 8.4%
Long-term crude price WTI (US$/bbl) 40 45 50 55 25.5% 30.1% 35.2% 39.8% 19.5% 23.8% 28.0% 30.5% 15.7% 19.9% 22.9% 26.2% 13.6% 17.0% 20.2% 22.4% 12.1% 15.2% 17.7% 20.3%
60 44.0% 33.9% 29.2% 25.1% 22.1%
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Our analysis shows that an integrated mining project is economical at a long-term WTI price of US$40-$45/bbl.
Economics of an integrated mining project Including an upgrader changes the economics of the project considerably. Using the same set of assumptions as above, we include an upgrader with a production capacity of 80,000 barrels per day (to match the assumed bitumen yield factor of 80%), with a configuration yielding only light, sweet synthetic crude oil, that is, with hydrotreating capacity sufficient to remove sulfur from all the processed barrels of bitumen. Our new set of assumptions is listed below, with the upgrading-specific assumptions highlighted.
Table 12: Our generic integrated mining model includes the following additional assumptions
mining and upgrading project cash flow model inputs (upgrading-specific inputs shaded) Project details Mining capacity (mbpd) Upgrading capacity (mbpd) Bitumen yield factor Product sales mix Sweet synthetic crude Sour synthetic crude Production start Ramp-up period (years) Terminal year Environmental remediation (Cdn$ MM) 100 80 80% 100% 0% 2009 2 2035 1,000 Mining non-fuel costs (Cdn$/bbl) Overburden removal (Cdn$/bbl) Diluent addition cost (Cdn$/bbl) Upgrading non-fuel costs (Cdn$/bbl) Maintenance capex (Cdn$/bbl) SG&A (Cdn$ MM/yr) Cost escalation factor (annual) Tax rate Deferred tax rate Cash tax rate Exchange rate (Cdn$/US$) Capital costs (Cdn$ per bpd capacity) Mining Upgrading 7.50 2.50 6.00 5.00 2.00 15 2% 38% 33% 25% 1.20 20,000 30,000 Operating costs and taxes Natural gas consumption (mmbtu/bbl) Mining Upgrading
0.30 0.70
Crude quality differential (% of WTI) Sweet synthetic crude discount Sour synthetic discount
0% 6%
Source: JPMorgan.
This set of assumptions results in a non-fuel cash cost of about Cdn$21 per barrel of synthetic crude oil in 2012, when the project is at full run rates. This includes SG&A and allows for a yield factor of 80%, that is, 20% of the bitumen is lost in the upgrading process. On this set of assumptions, all-in cash costs, including fuel, are just under Cdn$28 per barrel. We assume the mining project costs Cdn$20,000 per barrel per day. Our model then indicates that an upgrader costing Cdn$30,000 per barrel per day needs a long-term WTI crude price of over $40/bbl in order to generate returns of more than 10%.
Table 13: Estimated IRRs of an integrated mining project on various capital cost and crude price assumptions
project IRR Capital cost (Cdn$ per bpd capacity) Total Upgrader 40,000 20,000 45,000 25,000 50,000 30,000 55,000 35,000 60,000 40,000
Source: JPMorgan.
35 7.9% 7.5% 7.2% 6.9% 6.6%
Long-term crude price WTI (US$/bbl) 40 45 50 55 10.6% 12.7% 14.7% 16.8% 9.9% 12.0% 13.9% 15.6% 9.4% 11.3% 13.1% 14.6% 9.0% 10.8% 12.5% 14.0% 8.6% 10.4% 11.8% 13.3%
60 18.3% 17.0% 16.3% 15.3% 14.8%
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In-situ development
Our analysis shows that an insitu project is economical at a long-term WTI price of US$35/bbl.
We believe that most in-situ developments will not include an upgrader, and as such, these projects will be stand-alone, selling a heavy blend of diluted bitumen into the market rather than upgraded synthetic crude oil. In-situ developments are much more energy-intensive than mining operations, though they are less labor-intensive. Examining the economics of in-situ development, we have modeled a generic project employing SAGD, as this is one of the more commonly-employed production methods for new in-situ projects. We pay close attention to the steam-oil ratio as a gauge for the amount of fuel the project will require on an ongoing basis. In addition, we note that in-situ developments trend toward their design steam-oil ratio over a period of time, as steam is initially injected into the reservoir with little or no resultant production.
Table 14: Our generic in-situ project model uses the following assumptions
in-situ project cash flow model inputs Project details Design capacity (mbpd) Product sales mix Unblended bitumen Heavy bitumen blend Diluent % by volume Production start Ramp-up period (years) Terminal year Terminal EBITDA multiple Crude quality differential (% of WTI) Bitumen Heavy crude blend
Source: JPMorgan.
100 0% 100% 30% 2009 5 2035 3.0 50% 35%
Operating costs and taxes Design steam-oil ratio Years to reach design SOR Natural gas usage (mcf/bbl steam) Non-fuel costs (Cdn$/bbl) Diluent addition cost (Cdn$/bbl) Maintenance capex (Cdn$/bbl) SG&A (Cdn$ MM/yr) Cost escalation factor (annual) Tax rate Deferred tax rate Cash tax rate Exchange rate (Cdn$/US$) Capital costs (Cdn$ per bpd capacity)
2.0 5 0.5 4.00 6.00 2.00 10 2% 38% 33% 25% 1.20 20,000
On these assumptions, our project has non-fuel cash costs of Cdn$8.25/bbl and trends toward an all-in cash cost of Cdn$12/bbl when the design steam-oil ratio is reached. Our model then indicates that at a project cost of Cdn$20,000 per barrel per day of production capacity, the project will generate a return of nearly 20% on a long-term WTI crude price assumption of $35/bbl.
Table 15: Our in-situ model shows various rates of return on different sets of capex and crude price assumptions
project IRR Capital cost (Cdn$ per bpd capacity) 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000
Source: JPMorgan.
30 23.8% 21.5% 19.8% 18.9% 17.8% 16.8% 16.3% 15.6%
35 27.2% 25.3% 23.2% 21.6% 20.2% 19.6% 18.6% 17.8%
Long-term crude price WTI (US$/bbl) 40 45 50 30.7% 33.9% 36.9% 27.8% 30.8% 33.5% 26.3% 28.3% 30.8% 24.4% 26.3% 28.7% 22.9% 25.3% 26.9% 21.6% 23.9% 26.0% 20.5% 22.6% 24.7% 20.1% 21.6% 23.5%
55 38.7% 36.0% 33.1% 30.8% 28.9% 27.3% 26.5% 25.3%
60 41.1% 37.4% 35.3% 32.9% 30.8% 29.1% 27.7% 27.0%
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Production Techniques
Production will come mainly from mining projects, though in-situ will grow in importance. The bitumen in Albertas oil sands can be produced using either mining techniques, for those deposits close to the surface, or in situ techniques for those located deeper than 250 feet. Only the Athabasca OSA has oil sands shallow enough to be recovered with mining techniques, meaning in-situ recovery is necessary for Cold Lake, Peace River, and a portion of the Athabasca deposits. Mining has been responsible for nearly 70% of crude bitumen production to date and represents nearly 75% of all current development projects. However, less than 20% of the remaining established oil sands reserves are recoverable with mining operations, meaning that in-situ production will become increasingly important as the resource base is exploited.
Figure 13: Though mining represents the majority of production to date, in-situ recovery will be required to reach the majority of reserves
initial reserves and cumulative production by recovery method, billion barrels
143.4
35.2 3.4 Mining (10% ex ploited) Initial established reserv es

Source: EUB, JPMorgan.
1.6 In situ (1% ex ploited) Cumulativ e production
Mining: scratching the surface

Mining is the pioneering method of oil sands development, and the first two commercial oil sands projects employed mining techniques to recover bitumen. Oil sands are considered mineable if they sit no deeper than 250 feet (80 m) below the surface.
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Figure 14: Over 80% of remaining reserves will require in-situ recovery techniques
remaining reserves
Figure 15: However, most active development focuses on mining operations

reserves under active development
Mining 18%
In situ 82%
Mine planning As with other mining operations, successful commercial development of a mine begins with a solid mine plan. In the case of oil sands mining, the mine plan must take into account not only space for the overburden and tailings, but also must incorporate an extraction facility and often an upgrader. Ideally, these facilities would be located on a relatively low-value section of the mine, for example, an area with low bitumen concentration, as oil sands located beneath the plants will obviously not be recovered. In addition, the mine plan must consider the overall distance the oil sands must travel. As hauling costs are a considerable factor for the mining operation, they must be minimized over the life of the mine. Environmental factors may also come into play when developing a mine, as certain sites will be located near bodies of water or other natural resources that constrain the development. Finally the economically recoverable deposits of oil sands may look markedly different on various ore grade and crude price assumptions. Thus, the mine plan may be re-optimized before groundbreaking begins.
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Figure 16: Mine plans may be re-optimized under different physical and market assumptions
Fort Hills mine plan
Source: Petro-Canada.
Overburden removal Mineable oil sands deposits sit beneath a layer of earth called the overburden, which is up to 250 feet (80 m) deep. The overburden, in turn, is covered with muskeg, a swampy layer of moist, decaying vegetation, often covered by moss, sitting one to three meters thick. Mining operations require removal of the muskeg and any surface vegetation before the overburden removal can begin. In Canada, the muskeg is frequently removed during the winter when it is frozen and is stored to be replaced or used elsewhere. The overburden is then removed using the same trucks and shovels that are used in the oil sands mining operations. Once the overburden is removed, the site is prepared for mining operations. The overburden itself may be used to create dykes or, in the case of mine extensions, may be used to back-fill pits that have already been mined. Heavy haulers Perhaps the most iconic figures in the Canadian oil sands operations are the enormous trucks that are used to haul the oil sands from their original locations in the mine to the ore preparation and extraction facilities. The largest of these trucks is nearly 30 feet (10 m) wide, 50 ft (15 m) long, and, when loaded, over 50 ft (15 m) high, approximately the size of a two-storey house. The larger trucks have over 3,500 horsepower and come with a price tag of US$5-6 million. During the mining process, these massive machines are loaded with up to 400 tons of oil sands at a time.
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Figure 17: An oil sands truck is comparable in size to a two-storey house
Source: Canadian Natural Resources Limited, Horizon Oil Sands Project.
Oil sands mining operations Extracting the bitumen from the oil sands takes several steps, from processing the ore to separating the bitumen from the sand, water, and clay. The process is energyintensive, and produces a substantial amount of by-product in the form of tailings. Once the bitumen has been extracted from the oil sands, it is ready for upgrading or for blending into a heavy crude blend.
Figure 18: Extracting bitumen from oil sands is an involved process
ORE PROCESSING Truck and shovel mining bitumen Crusher sand sand hot water Secondary separation froth froth sand water bitumen slurry BITUMEN EXTRACTION water Primary separation vessel water Tailings disposal
sand
middlings
Bitumen now ready for upgrading or blending with diluent
FROTH TREATMENT bitumen
Source: JPMorgan.
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Ore processing Trucks are loaded with oil sands in the excavated portion of the mine and then transport the oil sands to a crusher, which breaks up larger clumps. Next, the oil sands are mixed with hot water, forming a slurry, and transported in a pipeline to an extraction plant. This method, called hydrotransport, has been one of the more cost effective advancements in oil sands operations. Hydrotransport replaced the older conveyor belt system and eliminated the need for a separate conditioning step, as the hot water mixes with the oil sands in transit, conditioning the bitumen by loosening it from the sand and water mixture. Bitumen extraction The next step involves extracting the bitumen from the rest of the mixture. The slurry is sent to Primary Separation Vessels (PSVs) that allow the mixture to settle into three layers: sand falls to the bottom, bitumen floats to the top as froth, and a mixture of sand, water, and bitumen remains in the middle layer, known as middlings. The sand is drawn from the bottom of the PSVs and sent to tailings ponds, the froth is drawn off for additional treatment, and the middlings are sent through a secondary separation process. In secondary separation, air is added to the mixture to extract additional froth, which then joins the froth from the primary recovery. The froth is then heated with steam and de-aerated before being treated. Froth treatment The final step in bitumen extraction is treating the froth, removing lingering sands and water. In froth treatment, bitumen diluted with naphtha is sent through inclined plate settlers and centrifuges that further separate the bitumen from the heavier rocks and clays and from water. These tailings are further cleaned of residual naphtha before being sent to tailings ponds. The resultant bitumen, containing less than 5% water and less than 0.5% other solids, is then ready for upgrading into synthetic crude oil. Recovery factor The overall recoverability of the commercially viable deposits of mineable bitumen in Alberta is well less than the in-place volumes. Despite all attempts to recover maximum bitumen from the deposits, two key limiting factors hinder full recoverability. First, environmental and logistical constraints make it extremely difficult to mine an entire lease. As discussed above, mine plans must take into account tailings ponds, processing and extraction facilities, and often upgraders, which sometimes must consume space on commercially viable deposits. In addition, environmental constraints often limit the extent of mining operations on a lease, especially when the lease is adjacent to a river, for example. The Alberta Energy and Utilities Board estimates that this reduces commercial recovery by 10%, on average. In addition, inefficiencies in the mining operations and extraction processes result in an additional combined loss of 15-20% of mineable bitumen, on average. Thus, overall recoverability of the initially mineable volumes is only 70-75%.
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Figure 19: Only three quarters of the initial mineable volumes are actually recovered in mining operations
percent loss from various factors in oil sands mining
10% 15-20% 100% 70-75%
Initial mineable v olume
Logistical and env ironmental loss
Processing and ex traction loss
Ultimate recov ered v olumes
Major projects currently online Despite all the attention focused on oil sands mining operations, there are at present only three major mining operations actively producing bitumen in Alberta. The first two forays into oil sands production, Suncor and Syncrude, discussed earlier, are still in operation, albeit with expanded scope since their initial start-ups. A third project, the Athabasca Oil Sands Project, came online in 2002.
Table 16: Three projects are responsible for the current commercial oil sands mining operations
Development Athabasca Oil Sands Project Suncor Syncrude Partners / Ownership Shell Canada (60%) Chevron (20%) Western Oil Sands (20%) Suncor (100%) Canadian Oil Sands Ltd (32%) Imperial (25%) Petro-Canada (12%) ConocoPhillips (9%) Nexen (7%), Mocal (5%) Murphy (5%) Canadian Oil Sands Partship (5%) Start-up year 2002 1967 1978 Design capacity (mbpd) 155 260 350 Primary Mines Muskeg River Steepbank Millennium Base Mine North Mine Aurora North Upgraders Scotford Tar Island Millennium Syncrude
Source: EUB, company reports, JPMorgan.
Athabasca Oil Sands Project The newest of the mining operations to come online, the Athabasca Oil Sands Project is a venture between Shell Canada (60%), Chevron (20%), and Western Oil Sands (20%). The AOSP came online in 2002 and currently produces around 175,000 barrels per day, beyond its design capacity of 155,000 barrels per day. As part of the structure of the partnership, Albian Sands Energy mines oil sands from the Muskeg River mine north of Fort McMurray. The oil sands are processed and bitumen is extracted at the mine. Diluted bitumen is then sent more than 280 miles (450 km) to the Scotford upgrader near Edmonton via the Corridor Pipeline.
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For additional detail on Suncors oil sands operations, please see our initiation report on Suncor, published 20 November 2006
Suncor As discussed earlier, Suncor pioneered oil sands mining operations by bringing the first oil sands mining project online in 1967. From an initial production rate of 45,000 barrels per day, the project has since expanded to over 200,000 barrels per day, with production more than doubling since the late 1990s. Suncor has 260,000 barrels per day of upgrading capacity at its operations north of Fort McMurray, and upgrades all the bitumen it mines. Mining takes place at the Steepbank/Millennium mines, and an expansion into the northern part of the Steepbank mine is planned. In addition to expanding into the northern portion of the Steepbank mine, the company also holds leases on two other mineable sites, Lease 23 and Audet; however, these sites will likely not be mined until after the company pursues other growth initiatives. Syncrude The Syncrude consortium operates the largest oil sands mining initiative in Alberta. Syncrude is a joint venture between eight entities, with Canadian Oil Sands Ltd, Imperial, and Petro-Canada holding the three largest portions and collectively holding two-thirds of the operation. The project sold its first production volumes in 1978 and has expanded from initial volumes of about 50,000 barrels per day to a design capacity of 350,000 barrels per day at present. Syncrude upgrades its bitumen into a synthetic crude oil called Syncrude Sweet Blend (SSB). SSB is a high-quality, light sweet crude with a sulfur content lower than that of West Texas Intermediate. There are three mines currently being exploited by Syncrude: the Base Mine, the North Mine, and the Aurora North Mine, with the latter two having commenced operations in 1997 and 2000, respectively. The Aurora North Mine was responsible for 50% of the oil sands volumes mined in 2005, and according to Syncrude, its share is expected to increase in the next several years, and the Base Mine will be the first to be decommissioned. The operations use 15-20 shovels and 70-80 hauling trucks. Syncrude recently completed its Stage Three growth initiative, encompassing increases to both mining and upgrading capacities. Stage Three included an expansion of the Aurora Mine and a 100,000 barrel per day expansion of the upgrader. The expansion suffered significant cost overruns, more than doubling its original cost estimate of US$3.5 billion (Cdn$4 billion). The final cost of the expansion is reported at US$7 billion (Cdn$8.4 billion).
30
Figure 20: The mineable resources under active development have been approximately 30% recovered
cumulative production and remaining reserves at current oil sands mining operations
4,063 2,529 1,969 975 145 Albian Sands Suncor Cumulativ e prod'n
Source: EUB, JPMorgan. Note: Remaining reserves represent those remaining in the initial project approval areas, and do not include reserves in expansions that have not yet been approved.
1,271
Sy ncrude
Remaining reserv es
In-situ: going deeper to access more resource

In-situ recovery is appropriate for those resources that sit more than 80m (250 feet) below the surface. In-situ techniques are required in the Cold Lake and Peace River OSAs, as well as in parts of Athabasca. Latin for in-place, in-situ refers to bitumen extraction from below the surface, that is, the surrounding sands are not removed from their position. As the majority of oil sands resources are not mineable, in-situ recovery will be increasingly important as the full resource base is exploited. In-situ recovery is similar to traditional conventional oil and gas production, in which wells are drilled and hydrocarbons are brought to the surface, either under their own pressure or aided by advanced techniques. Since crude bitumen is very viscous and resistant to flow in its natural state, most in-situ projects will employ enhanced recovery techniques. Primary recovery In primary recovery, hydrocarbons flow through the reservoir to a well under their own pressure. Though primary recovery of the bitumen in the oil sands is not impossible, the recovery factor is very low, at around 5%-10%. Secondary recovery Secondary recovery techniques, such as waterflooding, can improve the recovery factor of crude bitumen somewhat over that seen in primary recovery. In the Athabasca area, Canadian Natural Resources and EnCana have employed waterflooding techniques at the Brintnell area. However, according to the most recent project updates filed with the EUB, the incremental recovery from waterflooding does not increase the overall recovery factor to a level competitive with thermal recovery. Thermal and solvent-based tertiary recovery The addition of heat into the in-situ recovery process can drive significant improvements in crude bitumen recovery factors, heating the bitumen and reducing the viscosity, enabling it to flow more easily (or, in some cases, at all) to a producing
31
well. According to the EUB, the recovery factors for in-situ projects range from 25% in the Cold Lake area to 50% in the Athabasca area. Thermal recovery may use steam or, in the case of Toe to Heel Air Injection, air to heat the bitumen. Cyclic Steam Stimulation (CSS) The first in-situ project, Imperials Cold Lake development, employed the Cyclic Steam Stimulation method to heat bitumen and increase reservoir pressure, forcing bitumen to flow through the reservoir to the well. CSS uses a single well, rather than a well pair, throughout the entire cycle. In CSS, high-pressure steam is injected into the reservoir. The steam injection step may take one to two months. In the second stage of CSS, the steam is allowed to soak into the reservoir, heating the bitumen and fracturing the formation under increased pressure. The soaking may also take several weeks, depending on the reservoir. The final step in CSS is producing the now loosened bitumen from the reservoir. Water is also produced with the crude bitumen, which must then be separated and treated. At Imperials Cold Lake operation, the produced water is reclaimed and recycled. The production phase may last for several months, again depending on the characteristics of the reservoir. The cycle may be repeated several times over the producing life of the reservoir.
32
Figure 21: CSS recovers bitumen in stages, using the same well to inject steam and produce bitumen
CSS multi-stage process graphic
Heated oil and water are pumped to the surface Steam and condensed water heat the viscous oil Steam is injected into the reservoir Source: Petroleum Communication Foundation, CERI.
In 2005, projects employing CSS cumulatively produced over 150,000 barrels per day, with Imperials Cold Lake operation producing the majority, at approximately 140,000 barrels per day. By 2015, this is expected to increase to 220,000 barrels per day. Steam Assisted Gravity Drainage (SAGD) A newer technology, SAGD has become increasingly popular among in-situ producers and is currently the in-situ method of choice for new projects. In SAGD, horizontal well pairs up to 3300 feet (1000 m) long are drilled into the underlying formation, with one well sitting directly above the other, spaced usually about 15 feet (5 m) apart. The production well, the lower well, is situated as close to the bottom of the pay zone as possible. Steam is injected into the formation via the upper well, referred to as the injection well. The steam heats the bitumen, lowering viscosity and encouraging it to flow downward in the formation toward the production well. Water is also injected into the formation to maintain pressure and stability.
33
The success of SAGD depends on several factors, including reservoir-specific characteristics such as thickness, permeability, and saturation, and on operational factors such as proper pressure maintenance and ensuring that steam does not enter the producing well.
Figure 22: SAGD, by contrast, uses two wells to recover bitumen, with an injection well placed parallel to and directly above a production well
SAGD process graphic
Source: Suncor company website.
In 2005, approximately 170,000 barrels per day were produced using SAGD methods. Based on currently-planned expansions, this is expected to increase to over 2 million barrels per day by 2015.
Figure 23: SAGD is poised to outpace CSS as the dominant method of in-situ recovery
production from various in-situ methods, mbpd
2,099
152
167
220
2005 CSS
Source: EUB, JPMorgan estimates.
2015E SAGD
34
Toe-to-Heel Air Injection (THAI) Unlike CSS and SAGD, the third method of thermal recovery does not involve the use of steam. Instead, toe-to-heel air injection (THAI) involves two wells, a horizontal producing well and a vertical injection well located at the end (toe) of the producing well. Hot air is injected into the formation, loosening the bitumen from the toe of the well to the heel, where the well is redirected vertically to above ground. The heat injected into the formation in THAI is sufficient to partially upgrade the bitumen within the formation.
Figure 24: THAI uses two wells and injects hot air, rather than steam, to loosen and produce bitumen
THAI process graphic
Source: CERI.
The technology is in its pilot phases, currently producing less than 2,000 barrels per day. However, the project has attracted additional financing and remains a technology to watch in the coming years, as it offers several advantages over SAGD and CSS, including reduced natural gas usage, decreased need for diluent, and a lower cost structure. Solvent-based tertiary recovery The Vapor Extraction Process (VAPEX) employs non-thermal methods to loosen insitu bitumen. In VAPEX, a paraffin-based solvent, such as ethane, propane or butane, is injected into the formation through an injection well. The solvent, which is lighter than bitumen, partially upgrades the bitumen, which then flows to a producing well. The solvent is then reclaimed and reused. The technology is still in its early stages, undergoing tests at various sites. The Dover VAPEX project is an eight-year project among eleven partners and the Alberta and Canadian governments. EnCana is also testing solvent-addition techniques at Foster Creek and Christina Lake, and Suncor is testing a hybrid method of adding thermal solvent at its Firebag operation.
35
One key advantage of solvent-based recovery over thermal recovery is the significant reduction in energy consumption, as there is no steam or hot air requirement. In addition, as in THAI, the bitumen produced is partially upgraded when it reaches the well surface. However, a key drawback is that the solvent itself can be very costly.
Upgrading: extracting more value from the barrel

Once bitumen has been extracted from the oil sands deposits, either through mining or in-situ operations, the resulting product is a heavy oil, inferior in quality to the heaviest of conventionally-produced crude oils, such as PEMEXs Maya crude. Producers are faced with the choice of selling a heavy crude oil into the market or upgrading the bitumen into a lighter crude oil. With the light-heavy (WTI-Maya) differential hovering around $15 per barrel, and bitumen priced at a discount to Maya, upgrading becomes an attractive option for oil sands operators. At present, all the bitumen that is mined in Alberta is upgraded, while bitumen that is recovered with in-situ techniques may be either upgraded or blended with diluent and shipped as a heavy crude via pipelines to refineries that can handle the lower-grade hydrocarbons.
Figure 25: Bitumen trades at a significant discount to even heavy crude oil such as Maya
crude oil and bitumen prices, US$ per barrel
80 60 40 20 0 Jan-06 Mar-06 May -06 WTI

Jul-06 May a
Sep-06 Bitumen
Nov -06
Fundamentally, the upgrading process involves breaking the carbon-carbon bonds that characterize heavy oil, lightening the molecules and converting them into more valuable products. This process involves several steps. Distillation The first step in upgrading is separating the hydrocarbon molecules through distillation, in which differing hydrocarbons are separated based on their boiling points. Diluted bitumen is fed into the distillation unit, where it is heated, and lighter (higher value) molecules rise to the top of the column, while heavier (lower value) molecules drift to the bottom of the column. Heating in the distillation unit is not sufficient to alter the chemical properties of the hydrocarbons, relying instead on their differing physical properties.
36
Primary upgrading After distillation, primary upgrading begins. The goal of primary upgrading is to alter the chemical composition of the hydrocarbons, specifically breaking the carboncarbon bonds and improving the overall hydrogen to carbon ratio of the oil. As bitumen in carbon-rich and relatively hydrogen-deficient, this can be achieved by either removing carbon (coking) or adding hydrogen (hydroconversion). Coking Coking is a thermal process in which the oil is heated to such extreme temperatures (between 480 C and 540 C) that the carbon bonds are broken in the absence of a chemical catalyst. The process takes place under relatively low pressure, compared with hydroconversion. Coking is a well-tested process employed at conventional refineries worldwide, and is relatively low cost. However, it also yields only about 85% of the hydrocarbon volumes fed into the coker. The coking process itself is so extreme that a by-product of the process is a form of pure carbon known as petroleum coke, which must be disposed of or used in other applications. Petroleum coke has a high heat content and is often used as a fuel; however, more coke is produced than is consumed. There are two main types of technology used in cokingdelayed coking and fluid coking. Delayed coking employs a batch process, wherein the heated bitumen is sent to one of two adjacent coking drums. The bitumen separates into both a gas hydrocarbon and a solid coke. The coke settles in the drum and when one drum is full, the bitumen is sent into the other while the original drum is cleaned. Fluid coking involves only one coking drum. Most oil sands upgraders use a delayed coking process, though Syncrude uses a fluid coker. Hydroconversion In contrast to coking, hydroconversion involves adding hydrogen to the bitumen to increase the hydrogen -to-carbon ratio. Hydroconversion involves heat in addition to a chemical catalyst to break the carbon bonds and enable the added hydrogen molecules to attach to the lighter molecules. Because the hydroconversion process involves adding hydrogen to the bitumen rather than removing carbon, it has a higher yield of upgraded crude than coking. However, hydroconversion also has a higher cost structure than coking, both in the upfront capital outlay (estimated to be about 30% higher than coking) and in the operating costs, as hydrogen must be purchased as a feedstock. Moreover, the technology is not as frequently employed as coking, with fewer than 10 full-scale hydroconversion units in operation worldwide. Secondary upgrading The next step in upgrading bitumen is secondary upgrading, which removes contaminants and further lightens the resultant products. This involves processes such as hydrocracking and hydrotreating. Hydrocracking, like hydroconversion, involves the addition of heat, hydrogen and a catalyst. In addition, hydrocracking takes place under very high pressures. The heavy feedstock is converted to ever lighter products as the heat, pressure, and catalysts further break down the carbon bonds and produce higher-value products. In hydrotreating, contaminants are removed as the catalysts cause chemical reactions between the added hydrogen and the nitrogen, sulfur, oxygen, and other metals, yielding by-products such as hydrogen sulfide, ammonia, and water.
37
Other operations Upgrading facilities may also include several operations germane to the upgrading process, such as natural gas treatment, hydrogen production, sulfur recovery, water treatment, and power generation. In addition, upgraders have continued to improve on their processes and are incorporating proprietary technologies that increase the yield of high-value products while reducing the production of less-valuable by-products. OrCrude Process The OrCrude process, proprietary to OPTI, completely processes crude bitumen in a continuous closed loop system. In the process, diluted bitumen is fed into a distillation unit, resulting in sour synthetic crude and heavier residuals. The sour synthetic crude is sent to a hydrocracker for further upgrading. The heavier residuals are sent to a solvent deasphalter, which separates them into two streams: asphaltenes and deasphalted oil. The deasphalted oil is sent to a thermal cracker and recycled to the distillation unit. The asphaltenes are converted into synthetic gas that provides hydrogen to the hydrotreater and a fuel to the other processes. OPTI claims that the process offers three distinct advantages: (1) eliminating of the need for natural gas purchases, (2) reducing exposure to crude quality differentials by upgrading to a premium synthetic crude on site, and (3) recycling diluent. Synthetic Crude Oil The upgrading processs resulting product is a synthetic crude oil (SCO). Depending on the extent of the processes used to increase the hydrogen-to-carbon ratios and the degree to which the resultant crude was treated to remove impurities, the synthetic crude can be highly valuable. SSB, the crude produced by Syncrude, for example, is a high-quality, light, sweet crude oil that contains no residual bottoms and has only trace amounts of sulfur, making it a highly attractive crude for simple refiners. SSB is often sold for a higher price per barrel than WTI, the benchmark light, sweet crude.
Figure 26: Synthetic crude trades relatively in line with WTI crude
WTI and sweet SCO prices, US$ per barrel
80 70 60 50 40 Jan-05 Apr-05 Jul-05 Oct-05 WTI

Jan-06 SCO
Apr-06
Jul-06
Oct-06
38
Appendix I: Glossary of key terms

Bitumen: Thick, heavy oil with a high carbon/hydrogen ratio prevalent in Canadas oil sands deposits Coking: Process by which complex (heavy) hydrocarbon molecules are converted to simpler (lighter) molecules by breaking carbon-carbon bonds CSS: Cyclic Steam Stimulation. A technique for recovering in-situ bitumen in oil sands deposits in which one well is used both to inject high-pressure steam into the reservoir and to produce loosened bitumen Dilbit: Bitumen diluted with condensate to 70% bitumen / 30% condensate by volume Diluent: A substance lighter than bitumen that is used to dilute bitumen, lowering the viscosity and enabling it to flow through a pipeline Froth: Bitumen that floats to the top of the primary separation vessels, above a middle layer of middlings and a lower layer of sand, in the process of extracting bitumen from the oil sands Hydrocracking: Adding hydrogen, heat, and a catalyst to heavy hydrocarbons under very high pressure in order to break down carbon bonds and produce high value, light products Hydrotreating: Adding hydrogen to hydrocarbons in order to increase the hydrogen-carbon ratio and lower the viscosity, thereby increasing their value In-situ: Latin for in place. Refers to the extraction of oil sands deposits that are too deep to recover by mining, ordinarily located more than 250 feet below the surface Middlings: A combination of water, clay, and bitumen that forms in the middle of a primary separation vessel, above a layer of heavier sand. Middlings are sent through a secondary extraction process to remove the bitumen Mining: Process by which bitumen deposited in oil sands less than 250 feet from the surface is recovered. The top layer of earth covering the oil sands is excavated and the oil sands are physically removed from the mine Muskeg: Swampy layer of moist, decaying vegetation, often covered by moss, sitting one to three meters thick on top of oil sands overburden Overburden: Layer of rocky or clay-like soil overlaying oil sands or other mineral deposits Petroleum coke: Form of pure carbon that results from thermal cracking of heavy crude oil. Petroleum coke has a high heat content and can be used as a fuel
39
SAGD: Steam Assisted Gravity Drainage. A technique for recovering in-situ bitumen in oil sands deposits in which two parallel horizontal wells are drilled with the top (injection) well delivering steam into the formation to loosen the bitumen and the bottom (production) well producing heated bitumen Sour crude: Crude oil with a high sulfur content. Usually priced at a discount to sweet crude oil to compensate for the cost of extracting the sulfur in the refining process Steam-oil ratio (SOR): The ratio of steam injected to oil produced in thermal in-situ recovery projects. Low SORs are preferable, as significant natural gas or other fuel is required to produce the steam Synbit: A diluted bitumen mixture of approximately 50% bitumen and 50% synthetic crude oil, by volume Synthetic Crude Oil (SCO): Hydrocarbon mixture chemically similar to crude oil that has been altered from its natural occurring state, that is, bitumen Tailings: Mixture of water, sand, and clay that is a by-product of the bitumen extraction process in oil sands mining operations Upgrading: Process of converting heavy, low grade bitumen to light, high grade synthetic crude oil VAPEX: Vapor Extraction Process. In-situ recovery method employing nonthermal methods to loosen in-situ bitumen. A solvent such as ethane, propane or butane, is injected into the formation through an injection well, partially upgrading the bitumen, which then flows to a producing well
40
Appendix II: Oil Sands Projects

Table 17: Current and announced oil sands mining projects
Area Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Operator Athabasca Oil Sands Athabasca Oil Sands Athabasca Oil Sands Athabasca Oil Sands Athabasca Oil Sands CNRL CNRL CNRL CNRL CNRL Imperial Imperial Imperial Petro-Canada Petro-Canada Suncor Suncor Suncor Syncrude Syncrude Syncrude Syncrude Synenco Synenco Total Total Total Total Project Muskeg River Mine Muskeg River Mine Jackpine Mine 1 Jackpine Mine 1 Jackpine Mine 1 Horizon Horizon Horizon Horizon Horizon Kearl Kearl Kearl Fort Hills Fort Hills Steepbank & Millennium Steepbank & Millennium Steepbank & Millennium Milred Lake & Aurora Milred Lake & Aurora Milred Lake & Aurora Milred Lake & Aurora Northern Lights Northern Lights Joslyn Mine Joslyn Mine Joslyn Mine Joslyn Mine Phase expansion existing 1A 1B 2 1 2 3 4 5 1 2 3 1&2 3&4 existing debottlenecking debottlenecking existing 3 expansion 3 4 1 2 1 2 3 4 Status application operating approved approved disclosure construction approved approved announced announced application application application approved approved operating construction construction operating construction announced announced disclosure disclosure application application announced announced Start-up 2010 2002 2010 2012 2014 2008 2011 2011 2015 2017 2010 2012 2018 2011 2014 1967 2006 2008 1978 2006 2011 2015 2009 2011 2010 2013 2016 2019 Production (mbpd) 115 155 100 100 100 135 45 90 145 162 100 100 100 100 90 276 25 23 291 116 47 140 50 50 50 50 50 50
Source: National Energy Board, Company reports.
41
Table 18: Current and announced oil sands upgrading projects

Area Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Operator Athabasca Oil Sands Athabasca Oil Sands Athabasca Oil Sands CNRL CNRL Husky Husky Husky OPTI/Nexen OPTI/Nexen OPTI/Nexen OPTI/Nexen Petro-Canada Petro-Canada Suncor Suncor Suncor Suncor Suncor Syncrude Syncrude Syncrude Syncrude Synenco Synenco Total Total Value Creation Project Scotford upgrader Scotford upgrader Scotford upgrader Primrose Primrose Lloydminster Lloydminster Lloydminster Long Lake Upgrader Long Lake Upgrader Long Lake Upgrader Long Lake Upgrader Fort Hills Upgrader Fort Hills Upgrader Tar Island Tar Island Tar Island Voyageur Voyageur Milred Lake & Aurora Upgrader Milred Lake & Aurora Upgrader Milred Lake & Aurora Upgrader Milred Lake & Aurora Upgrader Northern Lights Upgrader Northern Lights Upgrader Joslyn/Surmont Joslyn/Surmont North Joslyn Upgrader Phase existing debottlenecking expansion 1 2 existing debottlenecking expansion 1 2 3 4 1&2 3&4 existing Millennium vacuum Millennium coker 1 2 existing 3 expansion 3 4 1 2 1 2 1 Status operating application application announced announced operating construction announced construction approved announced announced announced announced operating operating construction application application operating construction announced announced disclosure disclosure announced announced announced Start-up 2003 2007 2009 2012 2015 1992 2006 TBD 2007 2011 2013 2015 2011 2014 1967 2005 2008 2010 2012 1978 2006 2011 2015 2010 2012 2010 2013 TBD Capacity (mbpd) 155 45 90 145 58 71 12 67 72 72 72 72 100 90 281 43 116 156 78 291 116 47 140 50 50 50 50 40
42
Table 19: Current and announced in-situ bitumen production projects

Area Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Operator CNRL CNRL CNRL CNRL CNRL CNRL CNRL Connacher ConocoPhillips ConocoPhillips ConocoPhillips ConocoPhillips Devon Devon EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana EnCana Husky Husky Husky Husky JACOS JACOS JACOS MEG MEG North American North American North American North American North American OPTI/Nexen OPTI/Nexen OPTI/Nexen OPTI/Nexen OPTI/Nexen Orion Petro-Canada Petro-Canada Petro-Canada Petro-Canada Petro-Canada Petro-Canada Petro-Canada Petro-Canada Suncor Suncor Project Birch Mountain Birch Mountain Gregoire Lake Gregoire Lake Gregoire Lake Gregoire Lake Kirby Great Divide Surmont Surmont Surmont Surmont Jackfish Jackfish Borealis Borealis Borealis Borealis Borealis Christina Lake Christina Lake Christina Lake Christina Lake Christina Lake Christina Lake Christina Lake Christina Lake Foster Creek Foster Creek Foster Creek Foster Creek Foster Creek Foster Creek Foster Creek Foster Creek Sunrise Sunrise Sunrise Sunrise Hangingstone Hangingstone Hangingstone Christina Lake Christina Lake Kai Kos Dehseh Kai Kos Dehseh Kai Kos Dehseh Kai Kos Dehseh Kai Kos Dehseh Long Lake Long Lake Long Lake Long Lake Long Lake Whitesands Dover Dover MacKay River MacKay River Meadow Creek Meadow Creek Lewis Lewis Firebag Firebag Phase 1 2 1 2 3 4 1 1 1 2 3 4 1 2 1 2 3 4 5 1A 1B 1C 1D 2 3 4 5 1A 1B 1C 1C 1D 1E 2 3 1 2 3 4 existing 1 2 pilot commercial 1 2 3 4 5 1 2 3 4 5 pilot SAGD VAPEX 1 2 1 2 1 2 1 2 Status announced announced announced announced announced announced approved application construction approved approved approved construction disclosure announced announced announced announced announced operating approved approved announced announced announced announced announced operating operating operating construction announced announced announced announced approved approved approved approved operating disclosure disclosure construction application announced announced announced announced announced operating construction disclosure announced announced startup operating operating operating application approved approved disclosure disclosure operating operating Start-up 2013 2015 2016 2018 2020 2023 2011 2006 2006 2008 2011 2014 2008 2010 2010 2011 2012 2013 2014 2002 2008 2009 2010 2011 2012 2013 2014 2001 2003 2005 2006 2006 2007 2009 2011 2008 2010 2012 2014 2002 2010 2012 2007 2008 2008 2010 2011 2013 2015 2003 2006 2010 2012 2014 2006 2001 2003 2002 2009 TBD TBD TBD TBD 2004 2006 Production (mbpd) 30 30 30 30 30 30 30 10 25 25 25 25 35 35 20 20 20 20 20 10 30 30 30 30 30 30 30 24 6 10 20 20 20 25 25 50 50 50 50 10 25 25 3 22 10 30 40 40 40 3 72 72 72 2 1 0 33 40 40 33 35
43
Area Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Athabasca Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Cold Lake Peace River Peace River Peace River Peace River Peace River
Operator Suncor Suncor Suncor Suncor Suncor Suncor Suncor Total Total Total Total Value Creation Value Creation Black Rock Black Rock Black Rock CNRL CNRL CNRL Husky Imperial Imperial Imperial Shell Shell Shell Shell Shell
Project Firebag Firebag Firebag Firebag Firebag Firebag Firebag Joslyn Joslyn Joslyn Joslyn Halfway Creek North Joslyn Orion Orion Orion Primrose Primrose Primrose Tucker Lake Cold Lake Cold Lake Cold Lake Cadotte Lake Cadotte Lake Carmon Creek Carmon Creek Carmon Creek
Phase cogen & expansion 3 4 5 6 7 8 1 2 3a 3b 1 1 existing 1 2 South North East 1 1-10 11-13 14-16 pilot 1 1 1 expansion 2
Status construction approved approved announced announced announced announced operating construction disclosure disclosure announced announced operating approved approved operating construction application construction operating operating construction operating operating disclosure announced announced
Start-up 2009 2008 2009 2012 2013 2014 2015 2004 2006 2009 2011 2009 TBD 1997 2007 2009 1985 2006 2009 2006 1985 2003 2006 1979 1986 2009 2012 2015
Production (mbpd) 25 35 35 50 50 50 63 2 10 15 15 10 40 1 10 10 50 30 30 30 110 30 30 1 11 18 35 35
44
Appendix III: Mining Economic Model

Table 20: Integrated mining project cash flow model
Cdn$ millions, except where indicated
WTI (Cdn$/bbl) Natural gas (Cdn$/mcf) REVENUES Bitumen Heavy blended crude Sweet SCO Sour SCO TOTAL EXPENSES Mining Non-fuel operating costs Fuel costs Overburden removal Diluent purchases Upgrading Processing and upgrading Fuel costs SG&A EBITDA DD&A EBIT Interest expense Royalties Pre-tax earnings Income taxes Tax rate % taxes deferred Current tax rate NOPLAT DD&A Discretionary cash flow Capital commitment Maintenance capex Interest adjustment UNLVAFTER-TAX FCF NPV IRR 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 76.40 66.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 54.00 7.41 6.86 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21 5.21
788 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 788 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577 1,581 1,577 1,577 1,577
145 29 48 97 67 16 387 147 534 92 8 433 110 38% 33% 25% 323 147 470 (37) 69 502
296 57 99 198 133 16 778 147 924 92 16 816 208 38% 33% 25% 608 147 755 (73) 69 751
303 57 101 202 134 17 768 147 914 92 16 806 205 38% 33% 25% 601 147 748 (73) 69 743
308 57 103 206 133 17 753 147 900 92 16 792 202 38% 33% 25% 590 147 737 (73) 69 733
314 57 105 210 133 17 740 147 887 92 16 779 198 38% 33% 25% 581 147 727 (73) 69 723
321 57 107 214 133 18 728 147 874 92 16 766 195 38% 33% 25% 571 147 718 (73) 69 714
328 57 109 219 134 18 716 147 863 92 179 592 151 38% 33% 25% 441 147 588 (73) 69 583
334 57 111 222 133 18 701 147 848 92 175 580 148 38% 33% 25% 432 147 579 (73) 69 575
340 57 113 227 133 19 687 147 834 92 172 570 145 38% 33% 25% 425 147 571 (73) 69 567
347 57 116 231 133 19 673 147 820 92 168 559 142 38% 33% 25% 417 147 563 (73) 69 559
355 57 118 237 134 19 661 147 807 92 165 550 140 38% 33% 25% 410 147 557 (73) 69 552
361 57 120 241 133 20 644 147 791 92 161 538 137 38% 33% 25% 401 147 547 (73) 69 543
368 57 123 246 133 20 630 147 776 92 157 526 134 38% 33% 25% 392 147 539 (73) 69 535
376 57 125 251 133 21 614 147 761 92 154 515 131 38% 33% 25% 384 147 531 (73) 69 526
384 57 128 256 134 21 601 147 747 92 150 505 129 38% 33% 25% 376 147 523 (73) 69 519
391 57 130 261 133 21 583 147 730 92 146 492 125 38% 33% 25% 366 147 513 (73) 69 509
399 57 133 266 133 22 567 147 714 92 142 480 122 38% 33% 25% 357 147 504 (73) 69 500
407 57 136 271 133 22 551 147 697 92 138 467 119 38% 33% 25% 348 147 495 (73) 69 491
416 57 139 277 134 23 536 147 682 92 134 456 116 38% 33% 25% 340 147 487 (73) 69 482
423 57 141 282 133 23 517 147 664 92 129 442 113 38% 33% 25% 329 147 476 (73) 69 472
432 57 144 288 133 24 500 147 646 92 125 429 109 38% 33% 25% 320 147 466 (73) 69 462
440 57 147 294 133 24 482 147 628 92 120 416 106 38% 33% 25% 310 147 456 (73) 69 452
450 57 150 300 134 25 465 147 612 92 116 403 103 38% 33% 25% 300 147 447 (73) 69 443
458 57 153 305 133 25 445 147 592 92 111 388 99 38% 33% 25% 289 147 436 (73) 69 432
467 57 156 312 133 26 426 147 573 92 107 374 95 38% 33% 25% 279 147 426 (73) 69 421
477 57 159 318 133 26 407 147 554 92 102 360 92 38% 33% 25% 268 147 415 (73) 69
15 15 16 (15) (15) (16) (15) (15) (16) 92 92 92 (107) (108) (108) (27) (27) (27) 38% 38% 38% 33% 33% 33% 25% 25% 25% (80) (80) (81) (80) (80) (81) (1,467) (1,467) (1,467) 69 69 69 (1,478) (1,478) (1,478) 747 11.3%
TV 411 (1,000)
Source: JPMorgan estimates. Note: Uses US$45/bbl long-term WTI crude oil price.
45
Appendix IV: In-Situ Economic Model

Table 21: In-situ project cash flow model
$Cdn millions, except where indicated
WTI (Cdn$/bbl) Natural gas (Cdn$/mcf) REVENUES Bitumen Heavy blended crude TOTAL EXPENSES Non-fuel operating costs Fuel costs Diluent purchases SG&A EBITDA DD&A EBIT Interest expense Royalties Pre-tax earnings Income taxes Tax rate % taxes deferred Current tax rate NOPLAT DD&A Discretionary cash flow Capital commitment Maintenance capex Interest adjustment UNLV AFTER-TAX FCF NPV IRR 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 76.40 66.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 7.41 6.86 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71 3.71
10 (10) (10) 42 (52) (13) 38% 33% 25% (39) (39)
10 (10) (10) 42 (52) (13) 38% 33% 25% (39) (39)
10 (10) (10) 42 (52) (13) 38% 33% 25% (39) (39)
285 285 31 135 46 11 61 29 90 42 3 45 12 38% 33% 25% 34 29 63
569 569 63 217 95 11 184 58 242 42 6 194 50 38% 33% 25% 145 58 203
856 1,139 1,424 1,424 1,427 1,424 1,281 1,153 1,041 856 1,139 1,424 1,424 1,427 1,424 1,281 1,153 1,041 97 245 145 11 358 88 446 42 9 396 101 38% 33% 25% 295 88 383 (44) 31 370 132 168 217 135 197 252 11 11 582 857 117 146 699 1,003 42 42 11 14 645 947 164 241 38% 38% 33% 33% 25% 25% 481 706 117 146 598 852 (58) 31 571 (73) 31 810 171 135 257 12 849 146 995 42 212 740 189 38% 33% 25% 552 146 698 (73) 31 656 175 136 262 12 842 146 989 42 211 736 187 38% 33% 25% 549 146 695 (73) 31 653 178 135 267 12 831 146 977 42 208 727 185 38% 33% 25% 542 146 688 (73) 31 646 163 122 245 12 738 131 870 42 185 643 164 38% 33% 25% 479 131 611 (66) 31 576 150 110 225 13 656 118 774 42 164 568 145 38% 33% 25% 423 118 542 (59) 31 514 138 99 207 13 583 107 690 42 146 502 128 38% 33% 25% 374 107 481 (53) 31 459
934 934 126 89 190 13 516 96 612 42 129 441 112 38% 33% 25% 329 96 424 (48) 31 408
841 841 116 80 174 13 457 86 543 42 114 387 99 38% 33% 25% 288 86 375 (43) 31 363
757 757 107 72 160 14 404 78 482 42 101 339 86 38% 33% 25% 253 78 330 (39) 31 323
683 683 98 65 147 14 359 70 429 42 90 297 76 38% 33% 25% 221 70 291 (35) 31 288
613 613 90 58 135 14 316 63 379 42 79 258 66 38% 33% 25% 192 63 255 (31) 31 255
551 551 82 52 124 15 278 57 335 42 70 223 57 38% 33% 25% 167 57 223 (28) 31 226
496 496 76 47 113 15 245 51 296 42 61 193 49 38% 33% 25% 144 51 195 (25) 31 200
448 448 70 43 104 15 216 46 262 42 54 166 42 38% 33% 25% 124 46 170 (23) 31 178
402 402 64 38 96 15 189 41 230 42 47 141 36 38% 33% 25% 105 41 146 (21) 31 157
362 362 59 34 88 16 165 37 202 42 41 119 30 38% 33% 25% 89 37 126 (19) 31 139
326 326 54 31 81 16 144 33 178 42 36 100 25 38% 33% 25% 74 33 108 (17) 31 122
294 294 49 28 74 16 126 30 156 42 31 83 21 38% 33% 25% 62 30 92 (15) 31 108
264 264 45 25 68 17 109 27 136 42 27 67 17 38% 33% 25% 50 27 77 (14) 31 94
237 237 42 23 62 17 94 24 118 42 23 53 13 38% 33% 25% 39 24 64 (12) 31 83
214 214 38 20 57 17 81 22 102 42 20 40 10 38% 33% 25% 30 22 52 (11) 31 72
(400) (400) (400) (400) (400) 31 31 31 31 31 (407) (408) (408) (306) (165) 1,672 19.6%
TV 496
Source: JPMorgan estimates. Note: Uses US$35/bbl long-term WTI crude oil price.
46
47
48
49
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
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Coverage Universe: Jennifer Rowland, CFA: Alon USA Energy (ALJ), Chevron Corp (CVX), ConocoPhillips (COP), ExxonMobil (XOM), Frontier Oil Corporation (FTO), Hess Corporation (HES), Holly Corporation (HOC), Marathon Oil (MRO), Murphy Oil (MUR), Occidental Petroleum (OXY), Sunoco (SUN), Tesoro Corporation (TSO), Valero Energy (VLO), Western Refining (WNR)
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JPM - Canadian Oils Sands Primer

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JPM - Canadian Oils Sands Primer

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North America Equity Research

Canadian Oil Sands

Integrated Oils and Independent Refiners Jennifer Rowland, CFAAC

Katherine Lucas, CFA

Daniel Vetter, CFA

Albertas Oil Sands Areas

Oil Sands Heavy Hauler

Source: Canadian Natural Resources Limited, Horizon Oil Sands Project.

J.P. Morgan Securities Inc.

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Production Outlook ..................................................................6 Marketing Oil Sands .................................................................9

Challenges Facing the Industry ............................................15

Economic Analysis: Value Creators or Big Digs? ...............20

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Worlds second-largest resource base

Conv entional Oil

Oil Sands / Heav y Oil

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Source: EIA, Pemex, CERI, Syncrude, JPMorgan.

Origin and current position

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Source: Alberta Energy and Utilities Board

Size (sq km) 102,760 26,270 17,250 146,280

Resources (MMbbls) 1,369,478 195,072 129,058 1,693,608

% of resources 81% 12% 8% 100%

Development history has been influenced primarily by the crude price

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

2001: Foster Creek begins commercial in-situ SAGD production

Source: BP Statistical Review 2006, CERI, Syncrude, JPMorgan.

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Figure 4: Oil sands production is expected to triple from 2005 to 2015E

Source: NEB, JPMorgan estimates.

Figure 6: but by 2015E the split should be fairly balanced

In situ 28% Mining 72%

Source: NEB, JPMorgan.

Source: NEB, JPMorgan.

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

2005 1 50 50 140 10 3 35 12 19 319

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Figure 8: . . . and 90% of in-situ production will employ SAGD technology

Peace Cold Lake 14% Riv er 4%

Source: NEB, company reports, JPMorgan.

Source: NEB, company reports, JPMorgan.

Marketing Oil Sands

Synthetic crude or bitumen?

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

80 60 40 20 Jan-06 Feb-06 Mar-06 Apr-06 May -06 Jun-06 Bitumen blend

Aug-06 Sep-06 Oct-06 Nov -06 SCO

80 60 40 20 0 Jan-06 Mar-06 WTI Flint Hills Bitumen @ Hardisty

Lloy d Blend @ Edmonton

Jennifer Rowland, CFA (1-212) 622-6702 jennifer.c.rowland@jpmorgan.com

North America Equity Research 20 November 2006

Available refining capacity for crude off-take

Crude Capacity (bpd) 97,900 125,200 6,000 187,200 25,000 441,300