Canadian Oil and Gas Industry Presented by Landon

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Canadian Oil and Gas Industry Presented by: Landon Yao Holly Liu Kate Zhang

Canadian Oil and Gas Industry Presented by: Landon Yao Holly Liu Kate Zhang

Agenda ● Industry ○ Industry overview ○ Risk management ● Suncor ○ Company profile

Agenda ● Industry ○ Industry overview ○ Risk management ● Suncor ○ Company profile ○ Risk management

Why we need energy? ● Internatoinal Energy Agency (IEA) ○ Increase 30% demand on

Why we need energy? ● Internatoinal Energy Agency (IEA) ○ Increase 30% demand on energy by 2040. ○ hydrocarbons--world’s dominant source of energy, 50% of the world’s energy needs by 2040. ■ Crude Oil ■ Natural Gas

Why we need energy?

Why we need energy?

Canada’s Rank in World Energy ● ● Top 10 energy producers in the world

Canada’s Rank in World Energy ● ● Top 10 energy producers in the world Fourth largest producer & exporter of oil Fifth largest producer of gas Stringent environmental regulation ○ Reduce GHG

GHG Emissions

GHG Emissions

Crude oil ● An energy-rich liquid consisting mainly of hydrocarbons ● Third largest oil

Crude oil ● An energy-rich liquid consisting mainly of hydrocarbons ● Third largest oil reserve

Crude Oil ● 167. 7 billion barrels oil reserve ● 98% of Canada’s proven

Crude Oil ● 167. 7 billion barrels oil reserve ● 98% of Canada’s proven oil reserves are located in the oil sands

Oil Sands ● ● ● Natural mixture of sand, water and bitumen 142, 000

Oil Sands ● ● ● Natural mixture of sand, water and bitumen 142, 000 square kilometres 64% of Canada’s oil production C$243 billion of capital expenditures 2. 7 million per day -> 5. 2 million per day

Crude Oil ● Alberta ● Saskatchewan ● Newfoundland Labrador

Crude Oil ● Alberta ● Saskatchewan ● Newfoundland Labrador

Export ● Production > Consumption ● Largest supplier of oil and natural gas to

Export ● Production > Consumption ● Largest supplier of oil and natural gas to the U. S. ● U. S. (97%) , Europe and Asia (3%)

Export

Export

Pipelines ● Capacity constraint ● Rely on rail ● Transportation cost

Pipelines ● Capacity constraint ● Rely on rail ● Transportation cost

Economics ● $256 billion in provincial and federal tax ● $19 billion in revenues

Economics ● $256 billion in provincial and federal tax ● $19 billion in revenues ● 533, 000 jobs

Competitiveness ● Major pipelines built and create ● Implement efficient regulatory policies ● Uncertainty

Competitiveness ● Major pipelines built and create ● Implement efficient regulatory policies ● Uncertainty related to provincial and federal climate change policies ● Cancelled projects

Competitiveness ● Rising government cost ● Alleviate the burden of inefficient regulations ● Increase

Competitiveness ● Rising government cost ● Alleviate the burden of inefficient regulations ● Increase the infrastructure

Forecast

Forecast

Crude Oil Price

Crude Oil Price

Crude Oil Price Forecast

Crude Oil Price Forecast

Natural Gas ● The fifth-largest producer of natural gas ○ 51% of Canadian production

Natural Gas ● The fifth-largest producer of natural gas ○ 51% of Canadian production is exported ○ All Canadian exports go to the U. S. ○ The value of Canadian net exports (exports minus imports) was $6. 7 billion in 2017 ○ 97% of U. S. imports and 11% of U. S. consumption come from Canada ○ 98% of Canada’s imports and 20% of Canadian consumption comes from the U. S.

Natural Gas ● The upstream natural gas industry ○ made up of several hundred

Natural Gas ● The upstream natural gas industry ○ made up of several hundred companies ○ the companies engage in exploration, drilling, and production of raw natural gas ● The midstream natural gas industry ○ operates natural gas processing plants, natural gas storage facilities, gathering pipelines, and NGL facilities. ● The downstream natural gas industry ○ made up of long haul transmission pipelines and local distribution companies (LDCs)

Natural Gas ● Export and Import Data

Natural Gas ● Export and Import Data

Natural Gas

Natural Gas

Natural Gas Price

Natural Gas Price

Natural Gas Price ● Price determined in an open market ● Supply of natural

Natural Gas Price ● Price determined in an open market ● Supply of natural gas versus the demand for the fuel ● Price Sensitivity ○ Residential ○ Commercial ○ Industrial ○ Winter Season ○ Higher crude oil prices ○ Economic growth

Natural Gas Market Outlook Gas Natural gas is expected to be the fastest growing

Natural Gas Market Outlook Gas Natural gas is expected to be the fastest growing of the fossil fuels – with demand rising at an average of 1. 9% a year.

Natural Gas Forcasting

Natural Gas Forcasting

Natural Gas Forcasting ● Global demand for energy is expected to increase 33 per

Natural Gas Forcasting ● Global demand for energy is expected to increase 33 per cent by 2035 as economies in both developed and emerging countries ● Natural gas will be an important part of that growth and is expected to increase 48% by 2035.

Regulation on Industry ● Government: ○ Efficiency and market regulations (National Energy Board and

Regulation on Industry ● Government: ○ Efficiency and market regulations (National Energy Board and Office of Energy Efficiency of Natural Resources Canada) ○ Environmental Regulations (Environment Canada) ○ Property Regulations (Provincial Government and Federal Government) ● CAAP (The Canadian Association of Petroleum Producers) ● OPEC (The Organization of the Petroleum Exporting Countries)

CAPP ● CAAP’s mission is to Enhance the economic well-being and sustainability of the

CAPP ● CAAP’s mission is to Enhance the economic well-being and sustainability of the Canadian upstream petroleum industry in a socially, environmentally and technically responsible manner ● CAPP members produce "90% of Canada's natural gas and crude oil ● It represents large and small producer member companies ● An important part of a national industry with revenues of about $100 billion-a-year

OPEC ● The mission of the Organization of the Petroleum Exporting Countries (OPEC) is

OPEC ● The mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.

Regulation on Industry OPEC

Regulation on Industry OPEC

Major risk factor ● Market risk ○ commodity price risk ○ interest rate risk

Major risk factor ● Market risk ○ commodity price risk ○ interest rate risk ○ exchange rate risk ● Business risk ● Operational risk: arising from execution of company business function ● Environmental risk ● Credit risk ● Competition from new alternative energies. ● Reserve Replacement risk: feasibility of extraction and production, contingent resources

Risk Instruments ● Objective: Hedge risk of adverse price changes ● ● ● ●

Risk Instruments ● Objective: Hedge risk of adverse price changes ● ● ● ● Methods: Commodity hedging Interest rate swaps Cross currency swaps Bank credit facilities Foreign exchange contracts Future contracts Forward contracts

Suncor—Company Profile

Suncor—Company Profile

Suncor—Company Profile ● Founded in 1917, Montreal ● Since commercial development of Canada’s oil

Suncor—Company Profile ● Founded in 1917, Montreal ● Since commercial development of Canada’s oil sands ● Global recognition ○ Ex: Petro-Canada

Suncor—Company Profile Steve Williams - Chief Executive Officer Board of directors of Alcoa Corporation

Suncor—Company Profile Steve Williams - Chief Executive Officer Board of directors of Alcoa Corporation Board member of Business council of Canada

Suncor—Company Profile Eric Axford Chief Sustainability Officer Alister Cowan Chief Financial Officer Mark Little

Suncor—Company Profile Eric Axford Chief Sustainability Officer Alister Cowan Chief Financial Officer Mark Little Chief Operating Office

Suncor—Production

Suncor—Production

Suncor—Production

Suncor—Production

Suncor—Company report

Suncor—Company report

Suncor—Company report

Suncor—Company report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Suncor—Company Report

Hedging Activities ● Arrangements that qualify for designated hedge accounting treatment ○ Documentation ○

Hedging Activities ● Arrangements that qualify for designated hedge accounting treatment ○ Documentation ○ Relationship between derivative and the underlying hedged exposure ○ fair value of the hedged item are recognized in net earnings ● Cash flow hedge ○ Recognized in net earnings when the hedged item is realized ○ Ineffective portions of changes in the fair value are recognized in net earnings immediately

Derivative Financial Instrument ● Physical and financial contracts ○ manage certain exposures to fluctuations

Derivative Financial Instrument ● Physical and financial contracts ○ manage certain exposures to fluctuations in interest rates, commodity prices and foreign exchange rates, as part of its overall risk management program. ● Physical commodity contracts ○ Derivative financial instruments for accounting purposes ● Other Derivatives ○ Separate derivatives when their risks and characteristics are not closely related to those of the host contracts.

Derivative Financial Management ● Energy Trading Derivative ○ ● The company’s Energy Trading group

Derivative Financial Management ● Energy Trading Derivative ○ ● The company’s Energy Trading group uses physical and financial energy derivative contracts, including swaps, forwards and options to earn trading revenues. Risk Management Derivatives ○ The company periodically enters into derivative contracts in order to manage exposure to interest rates, commodity price and foreign exchange movements and which are a component of the company’s overall risk management program.

Derivative Financial Management

Derivative Financial Management

Risk Factors ● ● ● ● Volatility of Commodity Prices Market access Interest rate

Risk Factors ● ● ● ● Volatility of Commodity Prices Market access Interest rate risk Exchange Rate Fluctuations Credit risk Issuance of Debt and Debt Covenants Liquidity risk Competition

Volatility of Commodity Price ● Performance linked to prices ● Supply and demand factors

Volatility of Commodity Price ● Performance linked to prices ● Supply and demand factors ● OPEC quota ● Production and international market

Market Access ● The markets for heavy crude oil are more limited than those

Market Access ● The markets for heavy crude oil are more limited than those for light crude. ○ Heavy crude oil receives lower market prices ● Insufficient pipeline capacity ○ Impact on profitability of the product sales ○ Transportation cost

Interest Rate Risk ● Fluctuations in short term US & Canadian interest rate ●

Interest Rate Risk ● Fluctuations in short term US & Canadian interest rate ● Debt instruments ● Derivative instruments ● Unfavourable changes in interest rates

Exchange Rate Fluctuation ● Revenue and sales ● U. S. debt ● International subsidiaries

Exchange Rate Fluctuation ● Revenue and sales ● U. S. debt ● International subsidiaries ● Foreign currency exposure

Credit risk ● Movement in commodity prices ● Counterparties risk ● Contract risk

Credit risk ● Movement in commodity prices ● Counterparties risk ● Contract risk

Issuance of Debt and Debt Covenants ● Cash balances and cash equivalent financing ●

Issuance of Debt and Debt Covenants ● Cash balances and cash equivalent financing ● Debt financing

Liquidity risk ● Unable to meet financial obligation

Liquidity risk ● Unable to meet financial obligation

Competition ● Global petroleum industry ● Competition from energy companies ● Fluctuation in demand

Competition ● Global petroleum industry ● Competition from energy companies ● Fluctuation in demand ● Rising Costs

Risk Management ● Market risk ○ Commodity price risk ■ Strategies include entering into

Risk Management ● Market risk ○ Commodity price risk ■ Strategies include entering into option contracts to limit exposure to changes in crude oil prices during transportation. ○ Foreign exchange risk ■ Offset through the issuance of U. S. dollar denominated debt. ○ interest rate risk ■ The company may periodically enter into interest rate swap contracts to fix the interest rate of future debt issuances.

Risk Management ● Liquidity risk ○ Forecast spending requirement and cash flow ○ Investment

Risk Management ● Liquidity risk ○ Forecast spending requirement and cash flow ○ Investment in short-dated money market securities

Risk Management ● Credit risk ○ Credit policy ○ Monitor counterparty; s financial position

Risk Management ● Credit risk ○ Credit policy ○ Monitor counterparty; s financial position ○ Limiting counterparties holding company’s derivative contracts.