For Tim Hearn, it’s old hat. Imperial Oil’s relocation to Calgary from Toronto a month ago represents the 16th or 17th move he’s made in his career; he can’t remember which. Surprisingly for a Canadian who has spent that entire time in the oil and gas business, this represents his first stint in Calgary.
by Michael McCullough
But mentally Hearn has moved on, his mind occupied with the greater challenges beyond the northern horizon usually visible from the ultra-secure tower in Calgary’s Fifth Avenue Place that now houses the headquarters of Canada’s largest oil company.
ompared to the cowboys that have so long roamed Calgary’s corridors of power, Hearn, 61, sounds and acts like the establishment. His resume – born in Regina, educated at the University of Manitoba, an entire career spent rising up the ranks of Imperial and its parent, ExxonMobil Corp. bears a striking resemblance to that of his predecessor, Bob Peterson, and his predecessor before that, Arden Haynes. Only Imperial has the 125-year track record, the country’s finest reserve base and the $22 billion in revenues last year to show the conservatism and habitual prudence that all three men embodied. Hearn may not have the most swashbuckling story to tell around the campfire, but the young bucks would do well to sit up and pay attention.
Among Imperial’s long-term initiatives, two stand out: the ongoing development of its extensive oilsands properties and the development – and most crucially right now, transportation infrastructure — of natural gas from Canada’s arctic.
While Esso has no one oilsands project on the scale of Canadian Natural Resources Limited’s $10.8-billion Horizon facility, it already has two in operation and a third in the application stage. The company recently completed an expansion on its Cold Lake operation and has extensive experience as the No. 2 partner in the Syncrude syndicate based in Fort McMurray.
The experience of Syncrude, which went billions of dollars over budget in a startup period that coincided with depressed worldwide energy prices, in large part informs Esso’s current cautious approach to its new Kearl project, the subject of a development application filed in July. Located 70 kilometres north of Fort McMurray, Kearl is expected to cost $6.5 billion and produce 100,000 barrels of bitumen – the solid-state oil that can be upgraded to “synthetic crude” oil – per day when it begins production in 2010. A further two mine extensions are expected to raise output to 300,000 barrels by 2018. Owned 70-30 with ExxonMobil Canada, Kearl holds an estimated 4.4 billion barrels of bitumen, ensuring a mine life of more than 40 years.
Considering the project’s size, it is of note that Imperial has no firm plans to build an upgrading facility to handle bitumen from Kearl. To Hearn, building an upgrader in the short term carries unacceptable risk. With many more oilsands projects all competing for trades and materials at once, the latest generation of projects faces an even greater challenge to control costs than Syncrude did. Attracting workers to Fort McMurray, where housing costs are already among the highest in the country, will become more difficult and more expensive until construction activity peaks sometime between 2010 and 2015. Where other firms aim to fly workers in from distant cities or locate upgrading facilities outside the oilsands region altogether, Imperial plans to take it one step at a time.
“In terms of the Kearl project, our concept and approach has been to establish the mine only in phase one and use our existing refining network, both in Canada and the United States, to provide the first phase of upgrade. Phase two and phase three, I think we would look at potentially other upgrading alternatives that could be done within the province using various different methods, but we’re still studying that,” Hearn says.
Beyond localized building-cost issues, Imperial has two broader risk factors behind its go-slow approach: the potential for oil prices to fall and the possibility of upgrading overcapacity.
“I don’t think it’s helpful if there’s other upgraders being built in the same time frame that we just pile in and do another one,”
Hearn says. “I know everybody thinks that we’re into high energy prices forever. This thinking has occurred in the past. I don’t know where prices are going to go. There’s just as good a chance that they’re going to go down as up.”
Moreover, compared with other upgrading capacity being built around the world, the facilities planned or under construction in the oilsands region will likely have some of the highest capital and operating costs, he argues that could pinch profits.
“We need to be very thoughtful and very prudent about how we proceed instead of having a gold rush mentality — that it doesn’t matter, whatever we do, high prices are going to save us all.”
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