In this Annual Information Form (“AIF”), unless otherwise specified or the context otherwise requires, references to “we”, “us”, “our”, “its”, “the Corporation” or “Cenovus” mean Cenovus Energy Inc., the subsidiaries of, and partnership interests held by, Cenovus Energy Inc. and its subsidiaries.

This AIF contains forward-looking statements and other information (collectively “forward-looking information”) about Cenovus’s current expectations, estimates and projections, made in light of the Corporation’s experience and perception of historical trends. This forward-looking information is identified by words such as “anticipate”, “believe”, “expect”, “estimate”, “plan”, “forecast” or “F”, “future”, “target”, “position”, “project”, “capacity”, “could”, “should”, “focus”, “goal”, “outlook”, “proposed”, “potential”, “may”, “strategy”, “forward”, “opportunity”, “schedule”, “on track” or similar expressions and includes suggestions of future outcomes, including statements about Cenovus’s strategy and related milestones and schedules including with respect to the development and growth of our business; projected future value; projections for 2016 and future years; forecast operating and financial results; planned capital expenditures, including the timing and financing thereof; expected future production, including the timing, stability or growth thereof; expected reserves and related information, including future net revenue and future development costs; broadening market access; expected capacities, including for projects, transportation and refining; improving cost structures, forecast cost savings and the sustainability thereof; dividend plans and strategy; anticipated timelines for future regulatory, partner or internal approvals; future impact of regulatory measures; forecast commodity prices and expected impacts to Cenovus; future use and development of technology, including expected effects on environmental impact; and projected shareholder return. Readers are cautioned not to place undue reliance on forward-looking information as the Corporation’s actual results may differ materially from those expressed or implied.

Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus and others that apply to the industry in general. The factors or assumptions on which the forward-looking information is based include: assumptions inherent in the Corporation’s current guidance, available at cenovus.com; projected capital investment levels, the flexibility of capital spending plans and the associated source of funding; estimates of quantities of oil, bitumen, natural gas and natural gas liquids (“NGLs”) from properties and other sources not currently classified as proved; Cenovus’s ability to obtain necessary regulatory and partner approvals; the successful and timely implementation of capital projects or stages thereof; Cenovus’s ability to generate sufficient cash flow from operations to meet its current and future obligations; and other risks and uncertainties described from time to time in the filings the Corporation makes with securities regulatory authorities.

The risk factors and uncertainties that could cause Cenovus’s actual results to differ materially, include:

volatility of and assumptions regarding oil and gas prices; the effectiveness of the Corporation’s risk management program, including the impact of derivative financial instruments, the success of Cenovus’s hedging strategies and the sufficiency of the Corporation’s liquidity position; the accuracy of cost estimates; commodity prices, currency and interest rates; product supply and demand; market competition, including from alternative energy sources; risks inherent in Cenovus’s marketing operations, including credit risks; exposure to counterparties and partners, including ability and willingness of such parties to satisfy contractual obligations in a timely manner; risks inherent in operation of our crude-by-rail terminal, including health, safety and environmental risks; maintaining desirable ratios of debt (and net debt) to adjusted earnings before interest, taxes, depreciation and amortization as well as debt (and net debt) to capitalization; the Corporation’s ability to access various sources of debt and equity capital, generally, and on terms acceptable to the Corporation; Cenovus’s ability to finance growth and sustaining capital expenditures; changes in credit ratings applicable to Cenovus or any of Cenovus’s securities; changes to Cenovus’s dividend plans or strategy, including the dividend reinvestment plan; accuracy of Cenovus’s reserves, resources and future production expense and future net revenue estimates; the Corporation’s ability to replace and expand oil and gas reserves; Cenovus’s ability to maintain its relationship with its partners and to successfully manage and operate its integrated business; reliability of the Corporation’s assets including in order to meet production targets; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; the occurrence of unexpected events such as fires, severe weather conditions, explosions, blow-outs, equipment failures, transportation incidents and other accidents or similar events; refining and marketing margins; inflationary pressures on operating costs, including labour, natural gas and other energy sources used in oil sands processes; potential failure of new products to achieve acceptance in the market; unexpected cost increases or technical difficulties in constructing or modifying manufacturing or refining facilities; unexpected difficulties in producing, transporting or refining of crude oil into petroleum and chemical products; risks associated with technology and its application to Cenovus’s business; the timing and the costs of well and pipeline construction; the Corporation’s ability to secure adequate and cost-effective product transportation including sufficient pipeline, crude-by-rail, marine or alternate transportation, including to address any gaps caused by constraints in the pipeline system; availability of, and Cenovus’s ability

 

to attract and retain, critical talent; changes in the regulatory framework in any of the locations in which Cenovus operates, including changes to the regulatory approval process and land-use designations, royalty, tax, environmental, greenhouse gas (“GHG”), carbon, climate change and other laws or regulations, or changes to the interpretation of such laws and regulations, as adopted or proposed, the impact thereof and the costs associated with compliance; the expected impact and timing of various accounting pronouncements, rule changes and standards on Cenovus’s business, its financial results and its consolidated financial statements; changes in the general economic, market and business conditions; the political and economic conditions in the countries in which the Corporation operates; the occurrence of unexpected events such as war, terrorist threats and the instability resulting therefrom; and

risks associated with existing and potential future lawsuits and regulatory actions against Cenovus.

Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. For a full discussion of Cenovus’s material risk factors, see “Risk Factors” in this AIF. Readers should also refer to “Risk Management” in the Corporation’s current Management’s Discussion and Analysis (“MD&A”) and to the risk factors described in other documents Cenovus files from time to time with securities regulatory authorities, available at sedar.com, sec.gov and on the Corporation’s website at cenovus.com.

Information on or connected to our website cenovus.com does not form part of this AIF.

 

Cenovus Energy Inc. was formed under the Canada Business Corporations Act (“CBCA”) by amalgamation of 7050372 Canada Inc. (“7050372”) and Cenovus Energy Inc. (formerly Encana Finance Ltd. and referred to as “Subco”) on November 30, 2009 pursuant to an arrangement under the CBCA (the “Arrangement”) involving, among others, 7050372, Subco and Encana Corporation (“Encana”). On January 1, 2011, Cenovus amalgamated with its wholly owned subsidiary, Cenovus Marketing Holdings Ltd., through a plan of arrangement approved by the Alberta Court of Queen’s Bench. On July 31, 2015 Cenovus amalgamated with its wholly owned subsidiary,

9281584 Canada Limited (formerly 1528419 Alberta Ltd.), by way of a vertical short-form amalgamation.

Pursuant to a special resolution of the shareholders of the Corporation passed at the annual and special meeting of the Corporation’s shareholders on April 29, 2015, the Corporation’s articles were amended to provide that the aggregate number of preferred shares issued by the Corporation may not exceed 20 percent of the aggregate number of common shares then outstanding.

The Corporation’s head and registered office is located at 2600, 500 Centre Street S.E., Calgary, Alberta, Canada T2G 1A6.

 

Cenovus is a Canadian integrated oil company headquartered in Calgary, Alberta. The Corporation began independent operations on December 1, 2009 following the split of Encana into two independent publicly traded energy companies. Cenovus is in the business of developing, producing and marketing crude oil, natural gas liquids (“NGLs”) and natural gas in Canada with marketing activities and refining operations in the United States (“U.S.”).

All of Cenovus’s oil and natural gas reserves and production are located in Canada, within the provinces of Alberta and Saskatchewan. As at December 31, 2015, Cenovus had a land base of approximately 5.6 million net acres. The estimated proved reserves life index based on working interest production as at December 31, 2015 was approximately 25 years.

 

The following describes significant events that have influenced the development of the business during the last three financial years and year to date in 2016:

2013

 

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Oil Sands regulatory applications. In the first quarter, Cenovus submitted regulatory applications and environmental impact assessments (“EIAs”) for Christina Lake phase H and Foster Creek phase J, with approved gross production capacity of 50,000 barrels per day from each phase.

 

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First production at Christina Lake phase E. In the third quarter, phase E of Christina Lake achieved first production, with gross production capacity of 40,000 barrels per day.

 

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Regulatory approval for Christina Lake optimization. In the third quarter, Cenovus received regulatory approval for the optimization program at Christina Lake phases C, D and E, with approved incremental gross production capacity of 22,000 barrels per day.

 

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Construction at Narrows Lake phase A initiated. In the third quarter, construction of the Narrows Lake phase A plant was initiated with expected gross production capacity of 45,000 barrels per day.

 

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Public debt offering completed. In the third quarter, Cenovus completed a public offering in the U.S. of senior unsecured notes of US$450 million with a coupon rate of 3.8 percent due September 15, 2023 and US$350 million senior unsecured notes with a coupon rate of 5.2 percent due September 15, 2043, for an aggregate amount of US$800 million. The net proceeds of the offering were used to partially fund the early redemption of the Corporation’s US$800 million senior unsecured notes due September 2014.

 

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Divestiture of non-core asset. In the third quarter, Cenovus sold its Lower Shaunavon asset to an unrelated third party for net proceeds of approximately $241 million.

 

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Increased rail takeaway capacity. In the fourth quarter, Cenovus increased its rail takeaway capacity to 10,000 barrels per day.

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Telephone Lake dewatering pilot completed. In the fourth quarter, the Telephone Lake dewatering pilot was successfully completed. Cenovus effectively displaced water with compressed air, removing approximately 70 percent of below-ground non-potable top water.

 

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Receipt of Partnership contribution receivable. In the fourth quarter, Cenovus received US$1.4 billion from ConocoPhillips, the Corporation’s partner in FCCL, representing the remaining principal and interest due under the Partnership Contribution Receivable through the Corporation’s interest in FCCL.

 

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Foster Creek optimization update. Timing of optimization work for Foster Creek phases F, G and H was reassessed as part of Cenovus’s long-term reservoir management plan. Expected total gross production capacity from these three phases, including optimization, remained up to 125,000 barrels per day.

2014

 

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Regulatory approval received for Grand Rapids. In the first quarter, Cenovus received regulatory approval for its Grand Rapids project with an approved gross production capacity of up to 180,000 barrels per day.

 

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Prepayment of Partnership contribution payable. In the first quarter, Cenovus prepaid its US$2.7 billion partnership contribution payable to WRB Refining LP, of which Cenovus is a 50 percent owner. This resulted in a net cash payment of approximately US$1.35 billion from Cenovus.

 

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Divestiture of non-core assets. In the second quarter, Cenovus completed the sale of certain of its Bakken assets to an unrelated third party for net proceeds of $35 million. In the third quarter, Cenovus completed the sale of certain Wainwright properties to an unrelated third party for net proceeds of $234 million.

 

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First production from Foster Creek phase F. In the third quarter, Foster Creek phase F achieved first oil production. Phase F is expected to add 30,000 barrels per day of gross production capacity.

 

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Increased rail takeaway capacity. In the fourth quarter, Cenovus increased its rail takeaway capacity to 30,000 barrels per day.

 

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Regulatory approval received for Foster Creek phase J. In the fourth quarter, Cenovus received regulatory approval for Foster Creek phase J with approved gross production capacity of 50,000 barrels per day.

 

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Regulatory approval received for Telephone Lake. In the fourth quarter, Cenovus received regulatory approval for its 100 percent owned Telephone Lake thermal oil sands project with initial production capacity of 90,000 barrels per day. The project is expected to have gross production capacity in excess of 300,000 barrels per day.

 

2015

 

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Reduced capital spending. Due to the low commodity price environment, Cenovus reduced its 2015 capital spending, including suspension of the bulk of its conventional drilling program in southern Alberta and Saskatchewan and deferral of further construction work on Foster Creek phase H, Christina Lake phase G and Narrows Lake phase A.

 

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Common share issuance. In the first quarter, Cenovus issued 67.5 million common shares at a price of $22.25 per share for net proceeds of approximately $1.4 billion, a portion of which contributed to funding the Corporation’s capital investment in 2015.

 

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Permit approval received at Wood River Refinery. In the first quarter, Cenovus received permit approval for the Wood River Refinery debottlenecking project. Start-up of the project is anticipated in the third quarter of 2016.

 

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Sale of royalty interest and mineral fee title lands business. In the third quarter, Cenovus sold its wholly owned subsidiary, Heritage Royalty Limited Partnership (“HRP”), which held approximately 4.8 million gross acres of royalty interest and mineral fee title lands in Alberta, Saskatchewan and Manitoba along with a Gross Overriding Royalty (“GORR”) on Cenovus’s Pelican Lake heavy oil property in northern Alberta and its EOR project located near Weyburn, Saskatchewan, to an unrelated third party for gross cash proceeds of $3.3 billion, a portion of which was used to help fund the Corporation’s capital investment in 2015. Associated third-party royalty interest volumes prior to the divestiture were approximately 6,580 barrels of oil equivalent per day.

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Rail terminal purchase. In the third quarter, Cenovus purchased a crude-by-rail terminal located in Bruderheim, Alberta, for $75 million, plus closing adjustments.

 

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Cost reductions. Cenovus achieved total 2015 cost savings of approximately $540 million, including operating, capital and general and administrative costs. The cost reductions apply across the Corporation and include savings related to improved drilling efficiency, optimized scheduling and prioritization of repair and maintenance activities, lower chemical costs and improved oil sands waste disposal and handling processes. Additional savings resulted from the deferral of certain capital expenditure projects.

 

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Workforce reductions. Cenovus reduced its workforce by approximately 1,500 positions, including full- and part-time employees as well as contract workers. As at December 31, 2015 the Company had approximately 24 percent fewer employee and contractor workforce positions than it had at December 31, 2014.

 

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Completed Christina Lake optimization. In the fourth quarter, the Christina Lake optimization program began steam circulation, and is expected to add up to 22,000 barrels per day gross incremental production capacity and ramp up over the next 12 months, taking total gross production capacity to 160,000 barrels per day.

 

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Regulatory approval received for Christina Lake phase H. In the fourth quarter, Cenovus received regulatory approval for Christina Lake phase H with approved gross production capacity of 50,000 barrels per day.

2016

 

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Capital spending. Cenovus expects that the commodity price environment will continue to influence the general development of its business in 2016. The Corporation will continue to assess its plans in light of the commodity price environment and other relevant factors and will make adjustments to its capital spending and other business activities as appropriate.

 

Oil Sands includes Cenovus’s bitumen assets at Foster Creek, Christina Lake and Narrows Lake as well as emerging projects such as Grand Rapids and Telephone Lake. The Corporation’s Athabasca natural gas assets also form part of this segment.

Joint Operations

Foster Creek, Christina Lake and Narrows Lake are jointly owned through FCCL with ConocoPhillips, an unrelated U.S. public company. Cenovus FCCL Ltd., Cenovus’s wholly owned subsidiary, is the operator, managing partner and owner of 50 percent of FCCL. FCCL has a management committee, which is composed of three Cenovus representatives and three ConocoPhillips representatives, with each company holding equal voting rights.

Development Approach

Cenovus applies a manufacturing-like, phased approach to developing our oil sands assets. This approach incorporates learnings from previous phases into future growth plans, helping the Corporation to minimize costs.

New Technology

Focused technology development, research activities and understanding environmental impact play increasingly larger roles in all aspects of Cenovus’s business. Cenovus continues to seek new technologies and is actively developing its own technologies with the goal of increasing recoveries from its reservoirs, while reducing the amount of water, natural gas and electricity consumed in its operations, potentially reducing costs and minimizing the Corporation’s environmental footprint.

 

Foster Creek

Cenovus has a 50 percent working interest in Foster Creek, Cenovus’s first commercial steam-assisted gravity drainage (“SAGD”) operation. It is located on the Cold Lake Air Weapons Range, an active military base, and has a reservoir depth up to 500 meters below the surface. Foster Creek produces from the McMurray formation using SAGD technology.

The Corporation holds surface access rights from the governments of Canada and Alberta and bitumen rights from the Government of Alberta for exploration, development and transportation from areas within the Cold Lake Air Weapons Range. In addition, Cenovus holds exclusive rights to lease several hundred thousand acres of bitumen rights in other areas on the Cold Lake Air Weapons Range on the Corporation’s and/or its assignee’s behalf.

Production from phases A through F at Foster Creek averaged 65,345 barrels per day in 2015. Plant construction at phase G is nearing completion with first production anticipated in the third quarter of 2016. Phase G is expected to add additional production capacity of 30,000 gross barrels per day. Expansion work on phase H has been deferred in response to the current low commodity price environment.

Cenovus operates an 80 megawatt natural gas-fired cogeneration facility in conjunction with the SAGD operation at Foster Creek. The steam and power generated by the facility is presently being used within the SAGD operation and any excess power generated is being sold into the Alberta Power Pool.

Christina Lake

Cenovus has a 50 percent working interest in Christina Lake. Christina Lake is located approximately 120 kilometers south of Fort McMurray and has a reservoir depth up to 350 meters below the surface. Christina Lake produces from the McMurray formation using SAGD technology.

Production from phases A through E at Christina Lake averaged 74,975 barrels per day in 2015. Optimization was completed in the fourth quarter of 2015, and is expected to add approximately 22,000 barrels per day gross production once fully ramped up in 12 months. Expansion work at phase F

(including cogeneration) is nearing completion, with first oil expected in the third quarter of 2016. Phase F is anticipated to add production capacity of 50,000 gross barrels per day. Expansion work on phase G has been deferred in response to the current low commodity price environment.

Cenovus received regulatory approval for phase H in the fourth quarter of 2015, a 50,000 gross barrel per day phase.

Several innovations to SAGD technology have been undertaken at Christina Lake over the past several years. One major innovation is solvent aided process technology (“SAP”). SAP is a new enhancement to SAGD expected to reduce environmental impact. SAP involves injecting a solvent together with the steam. SAP is expected to require less steam, which will reduce greenhouse gas emissions and water usage per barrel of oil and increase oil production and oil recovery rates. Various embodiments of SAP related technology are currently being piloted at Christina Lake. Based on results from the various SAP related pilots, Cenovus plans to commercialize the SAP technology with phase A of its Narrows Lake project.

Narrows Lake

Cenovus has a 50 percent working interest in Narrows Lake. Narrows Lake is located adjacent to Christina Lake and has a reservoir depth up to 375 meters below the surface. Narrows Lake will be Cenovus’s first commercial application of SAP in conjunction with SAGD. The solvent to be used at Narrows Lake is expected to be butane, which is already present in the reservoir in small amounts.

In 2012, Cenovus received regulatory approval for phases A, B and C for 130,000 gross barrels per day of production capacity and partner approval for phase A, a 45,000 gross barrels per day phase. Initial work on phase A commenced in the third quarter of 2013. Due to the current low commodity price environment, Cenovus has suspended new construction spending on phase A. The future development of Narrows Lake should benefit from the existing infrastructure and resources at Christina Lake, which is expected to lower overall costs.

 

Telephone Lake

Cenovus’s 100 percent-owned Telephone Lake property is located in the Borealis Region in northeastern Alberta, approximately 90 kilometers northeast of Fort McMurray.

In 2015, Cenovus continued to advance development plans for Telephone Lake after receiving approval from the Alberta Energy Regulator (“AER”) in late 2014 for an initial SAGD project with initial production capacity of 90,000 barrels per day.

Telephone Lake is a unique oil sands project because directly above the oil there is a layer of groundwater that is not suitable for human consumption without treatment (referred to as top water). The top water layer is between 150 and 175 meters below the surface. In 2013, Cenovus completed a dewatering pilot project at Telephone Lake displacing approximately 70 percent of the top water. Although dewatering is not essential to the development of Telephone Lake, Cenovus believes this method will make oil recovery more efficient and help reduce its impact on the environment by reducing the steam to oil ratio.

Grand Rapids

Cenovus’s 100 percent owned Grand Rapids property is located in the Greater Pelican Region, about 300 kilometers north of Edmonton, Alberta. The project is adjacent to the Corporation’s Pelican Lake heavy oil operations and existing facilities.

In December 2010, the Corporation drilled its first pilot SAGD well pair at Grand Rapids. A second well pair was drilled in early 2012 and a third well pair commenced steam circulation in 2015.

In March 2014, Cenovus received regulatory approval from the AER for its Grand Rapids SAGD project with total production capacity of 180,000 barrels per day. As of February 2016, further activity in respect of the SAGD pilot at Grand Rapids has been deferred in response to the current low commodity price environment.

Other Emerging Assets

Cenovus has a number of emerging assets, including the Steepbank and East McMurray properties located in the Borealis Region in Alberta, which it continues to evaluate, manage and work to decrease risk associated with potential future development of these assets. Cenovus continues to believe in the long-term potential of its emerging projects as a future resource base.

Cenovus completed a pilot program using a helicopter and an experimental lightweight drilling rig, referred to as SkyStrat^TM, to drill stratigraphic test wells. The SkyStrat^TM drilling rig is a rig that was developed to improve stratigraphic drilling programs in the oil sands. Transporting the rig by helicopter allows Cenovus to access remote exploratory drilling locations year-round and eliminates the need for temporary roads, significantly reducing the surface footprint and potentially reducing water use for the drilling operations by over 50 percent. The Corporation

completed construction on a second SkyStrat^TM drilling rig in the fourth quarter of 2014. A total of seven stratigraphic wells were drilled using SkyStrat^TM drilling technology in 2015.

Athabasca Gas

Cenovus produces natural gas from the Cold Lake Air Weapons Range and several surrounding landholdings located in northeastern Alberta. Cenovus holds surface access and natural gas rights for exploration, development and transportation from areas within the Cold Lake Air Weapons Range that were granted by the governments of Canada and Alberta. The majority of the Corporation’s natural gas production in the area is processed through compression facilities, wholly-owned and operated by Cenovus.

Natural gas production continues to be impacted by the AER’s decisions made between 2003 and 2015 to shut-in natural gas production from the McMurray, Wabiskaw and Clearwater formations that may put the recovery of bitumen resources in the area at risk. This resulted in a decrease in the Corporation’s annualized natural gas production of approximately 14 million cubic feet per day in 2015 (2014 - 15 million cubic feet per day). The Alberta Department of Energy has provided a ten year royalty credit which can equal up to 50 percent of lost cash flow to help offset the impact of the shut-in wells. This royalty credit fluctuates with the price of natural gas.

Capital Investment

In 2015, the Corporation’s Oil Sands capital investment was $1.2 billion, primarily related to the expansions at Foster Creek and Christina Lake. The production capacity for these projects is expected to increase to approximately 390,000 gross barrels per day with completion of Foster Creek phase G and Christina Lake phase F. Ramp up to total production for these phases is expected to extend into 2017.

 

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Capital at Foster Creek was focused on sustaining capital related to existing production, expansion phase G and the drilling of stratigraphic test wells to determine pad placement for sustaining well pads and near-term phase expansions.

 

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Capital at Christina Lake was focused on sustaining capital related to existing production, expansion phases F and G, and the optimization project. The optimization project has been completed and is expected to add approximately 22,000 barrels per day of gross production capacity, with incremental oil production expected to ramp up over a period of twelve months.

 

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Capital at Narrows Lake was focused on detailed engineering and construction wind-down.

 

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Capital at Telephone Lake was focused on front end engineering work on the central processing facility and preliminary infrastructure development.

 

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Capital at Grand Rapids was focused on continued operation of the SAGD pilot project and a third well pair commenced steam circulation.

Due to the lower crude oil price environment, 2016 capital spending is planned to be focused on

completion of the Foster Creek phase G and Christina Lake phase F (including cogeneration) expansions. Funding is also planned to maintain current production levels from existing oil sands phases as well as meeting all maintenance, safety, regulatory and contractual obligations.

 

Conventional operations include the development and production of conventional crude oil, NGLs and natural gas from assets in Alberta and Saskatchewan, including the heavy oil assets at Pelican Lake, the CO₂ EOR project near Weyburn, Saskatchewan and emerging tight oil assets in Alberta. The established assets in this segment are strategically important due to their long life reserves, stable operations and diversity of crude oil produced.

In July 2015, Cenovus sold HRP, the holder of Cenovus’s royalty interest and mineral fee title lands business in Alberta, Saskatchewan and Manitoba to an unrelated third party for gross cash proceeds of approximately $3.3 billion. Production from fee lands had comprised approximately 50 percent of the Corporation’s total conventional production in 2014. Associated third-party royalty interest

volumes prior to the divestiture were approximately 6,580 barrels of oil equivalent per day. Where Cenovus had current working interest production on these fee lands, the Corporation entered into lease agreements with HRP. A GORR on Cenovus’s production from its Pelican Lake and Weyburn assets was included as part of the sale. Cenovus also retained an option to acquire from HRP leases at pre-determined rates and lease terms for up to five years on more than 800,000 acres in zones of the fee lands currently being developed by Cenovus, with an option for a further five years to select leases on half of the remaining undeveloped acreage.

Conventional operations also include leases of Crown lands primarily in the Suffield area and in Saskatchewan.

 

Conventional Crude Oil Assets

Cenovus’s extensive conventional crude oil assets are located in Alberta and Saskatchewan. Cenovus holds interests in multiple zones in the Suffield, Grassland and Langevin areas in Alberta with a mix of medium and heavy crude oil production. Cenovus uses a number of EOR techniques to increase production of the Corporation’s oil assets including waterflooding, CO₂ miscible flooding and alkaline surfactant polymer flooding.

Cenovus operates one of the world’s largest CO₂ miscible flood projects. The Weyburn unit produces medium sour crude oil and covers approximately 50,000 acres of land in southeastern Saskatchewan. As at December 31, 2015, approximately 64 percent of the approved CO₂ flood pattern development at the Weyburn unit was complete. Since the inception of the project, approximately 27 million tonnes of CO₂ have been injected. The CO₂ is delivered by pipeline directly to the Weyburn facility from a coal

gasification project in North Dakota, U.S. and from the Boundary Dam Power Station in southeast Saskatchewan. In the unitized portion of the Weyburn field in southwestern Saskatchewan, Cenovus has a 62.1 percent working interest. However, after taking into consideration a net royalty interest obligation to a third party, Cenovus’s economic interest is 50.4 percent. Cenovus is the unit operator and owns 62.1 percent of the CO₂ pipeline from the Boundary Dam to Weyburn.

Using a patterned, horizontal well polymer flood and waterflood, Cenovus produces heavy crude oil from the Wabiskaw formation at its Pelican Lake property. The property is located within the Greater Pelican Region in northeastern Alberta. Cenovus holds a 38 percent non-operated interest in a 110 kilometer, 20 inch diameter crude oil pipeline which connects the Pelican Lake area to major pipelines that transport crude oil from northern Alberta to crude oil markets.

 

Conventional Gas Assets

Cenovus holds natural gas interests in multiple zones in the Suffield, Grassland and Langevin areas in Alberta. Development in these areas focuses on recompletions and optimization of existing wells.

Suffield is one of the core areas of the Corporation’s crude oil and natural gas production in Alberta. The Suffield area is largely made up of the Suffield Block, where operations are carried out pursuant to an agreement among Cenovus, the government of Canada and the Province of Alberta governing surface access to Canadian Forces Base (“CFB”) Suffield. In 1999, the parties agreed to permit access to the Suffield military training area to additional operators. Cenovus’s predecessor companies, Alberta Energy Company Ltd. and Encana, have operated at CFB Suffield for over 30 years.

The Corporation’s natural gas production acts as an economic hedge for the natural gas required as a fuel source at both its oil sands and refining operations.

In 2015, Conventional natural gas production averaged 422 MMcf per day (2014 – 466 MMcf per day). Cenovus did not drill any gas wells in 2015 or 2014.

Capital Investment

In 2015, the Corporation’s Conventional capital investment was $244 million, primarily related to modest drilling activity at our tight oil projects in southeast Alberta and at our CO₂ EOR project at Weyburn. Spending on natural gas activities was allocated to a small number of higher return opportunities.

 

The Refining and Marketing segment is responsible for refining crude oil into petroleum and chemical products and coordinates Cenovus’s marketing and transportation initiatives to optimize the value received for its products.

Refining

Cenovus’s refining operations allow it to capture the value from crude oil production through to refined products, such as diesel, gasoline and jet fuel, to partially mitigate volatility associated with regional North American crude oil differential fluctuations.

Through WRB, Cenovus has a 50 percent ownership interest in both the Wood River and Borger

refineries located in Roxana, Illinois and Borger, Texas respectively. Phillips 66 is the operator and managing partner of WRB. WRB has a management committee, which is composed of three Cenovus representatives and three Phillips 66 representatives, with each company holding equal voting rights. The Corporation’s refineries have a combined stated processing capacity of approximately 460,000 gross barrels per day of crude oil, including heavy crude oil processing capability of up to 255,000 gross barrels per day. In addition, the Borger Refinery has an NGL fractionation facility with a capacity of 45,000 gross barrels per day.

 

Wood River Refinery

The Wood River Refinery ranks in the top 10 percent of the approximately 150 refineries in the U.S., based on total crude oil capacity. It is located in Roxana, Illinois, approximately 25 kilometers northeast of St. Louis, Missouri. The Wood River Refinery processes light low-sulphur and heavy high-sulphur crude oil that it receives from North American crude oil pipelines to produce gasoline, diesel and jet fuel, petrochemical feedstock as well as coke and asphalt. The gasoline and diesel are transported via pipelines to markets in the upper U.S. Midwest. Other products are transported via pipeline, truck, barge and railcar to markets in the U.S. Midwest. The Wood River Refinery is a major supplier of jet fuel to Lambert International Airport in St. Louis and O’Hare International Airport in Chicago.

The Wood River Refinery’s stated crude oil processing capacity for 2014 was 314,000 gross barrels per day, and is unchanged for 2015. Since the completed coker construction and start-up of the coker and refinery expansion project, the Wood River Refinery increased its total Canadian heavy crude oil processing capacity up to 220,000 gross barrels per day. Heavy crude oil processing capacity is planned to increase approximately another 18,000 gross barrels per day in 2016 with the completion of the debottlenecking project; anticipated to start up in the third quarter of 2016. In 2015, almost two thirds of the crude oil processed at the Wood River Refinery consisted of Canadian heavy crude oil,

including a significant proportion of high total acid number crudes.

Borger Refinery

The Borger Refinery is located in Borger, Texas, approximately 80 kilometers north of Amarillo, Texas. The Borger Refinery processes mainly medium and heavy high-sulphur crude oil, and NGLs that it receives from North American pipeline systems to produce gasoline, diesel and jet fuel along with NGLs and solvents. The refined products are transported via pipelines to markets in Texas, New Mexico, Colorado and the U.S. Mid-Continent.

The Borger Refinery’s stated oil processing capacity for 2014 was 146,000 gross barrels per day, including 35,000 gross barrels per day of heavy crude oil. The Borger Refinery also has an NGL fractionation facility with stated capacity of 45,000 gross barrels per day. The stated processing capacity is unchanged for 2015.

Marketing

Cenovus’s marketing activities are focused on enhancing the netback price of the Corporation’s production, including third-party purchases and sales of crude oil and natural gas to provide operational flexibility for transportation commitments, product quality, delivery points and customer diversification. Cenovus’s crude oil marketing activities are focused on sale of production and management of condensate supply,

 

inventory and storage to meet diluent requirements. Cenovus also manages the marketing of its natural gas, which is primarily sold to industrials, other producers and energy marketing companies. Prices Cenovus receives are based primarily on prevailing index prices for natural gas. Prices are impacted by competing fuels and by North American regional supply and demand for natural gas.

Cenovus’s marketing activities also include entering into various risk management contracts aimed at mitigating the impact of commodity price swings. Details of these transactions are provided in the notes to the Corporation’s audited Consolidated Financial Statements for the year ended December 31, 2015.

Transportation

We continue to focus on near and mid-term strategies to broaden market access for our crude oil production. As at December 31, 2015, Cenovus

has entered into various firm transportation and storage commitments totaling $27 billion, most of which relate to pipelines that are subject to regulatory approval. We continue to support proposed new pipeline projects that would connect us to new markets in the U.S. and globally. The Corporation’s portfolio of transportation commitments includes feeder pipelines from its production areas to the Edmonton and Hardisty, Alberta trade centres and major pipeline alternatives to markets downstream of these hubs. Other transportation commitments are primarily related to the reliable supply of diluent, railcar transportation as well as tankage and terminalling of both crude oil blend and condensate volumes. In the third quarter of 2015, we acquired a crude-by-rail terminal for $75 million, plus adjustments, located at Bruderheim, Alberta as part of our transportation strategy. The terminal has takeaway capacity of 77,000 barrels per day and is operated for Cenovus by a third party contractor.

 

As a Canadian issuer, Cenovus is subject to the reporting requirements of Canadian securities regulatory authorities, including the reporting of the Corporation’s reserves in accordance with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).

The Corporation’s reserves are located in Alberta and Saskatchewan, Canada. Cenovus retained two independent qualified reserves evaluators (“IQREs”), McDaniel & Associates Consultants Ltd. (“McDaniel”) and GLJ Petroleum Consultants Ltd. (“GLJ”), to evaluate and prepare reports on 100 percent of its bitumen, heavy oil, light and medium oil ⁽¹⁾, NGLs, natural gas, and coal bed methane (“CBM”) reserves. McDaniel evaluated approximately 97 percent of Cenovus’s proved reserves, located in Alberta, and GLJ evaluated approximately three percent of the Corporation’s proved reserves, located in Saskatchewan.

The reserves committee (the “Reserves Committee”) of Cenovus’s board of directors (the “Board”), composed of independent directors, reviews the qualifications and appointment of the IQREs, the procedures relating to the disclosure of information with respect to oil and gas activities and the procedures for providing information to the IQREs. The Reserves Committee meets independently with management of Cenovus (“Management”) and each IQRE to determine whether any restrictions affect the ability of the IQREs to report on the reserves data without reservation. In addition, the Reserves Committee reviews the reserves data and the report of the IQREs and provides a recommendation regarding approval of the reserves disclosure to the Board.

Cenovus’s bitumen reserves will be recovered and produced using SAGD technology. SAGD involves injecting steam into horizontal wells drilled into the bitumen formation and recovering heated bitumen and water from producing wells located below the injection wells. This technique has a surface footprint comparable to conventional oil production. Cenovus has no bitumen reserves that require mining techniques to recover the bitumen.

Classifications of reserves as proved or probable are only attempts to define the degree of certainty associated with the estimates. There are numerous uncertainties inherent in estimating quantities of petroleum reserves. It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. Readers should review the definitions and information contained in “Additional Notes to Reserves Data Tables”, “Definitions” and “Pricing Assumptions” in conjunction with the disclosure. The reserves estimates provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates disclosed. See “Risk Factors – Operational Risks – Uncertainty of Reserves and Future Net Revenue Estimates” in this AIF for additional information.

The reserves data and other oil and gas information contained in this AIF is dated February 10, 2016, with an effective date of December 31, 2015. McDaniel’s preparation date of the information is January 11, 2016, and GLJ’s preparation date is January 4, 2016.

 

The reserves data presented summarizes the Corporation’s bitumen, heavy oil, light and medium oil and NGLs, and natural gas and CBM reserves and the net present values (“NPV”) and future net revenue (“FNR”) for these reserves. The reserves data uses forecast prices and costs prior to provision for interest,

general and administrative expenses or the impact of any hedging activities. Future net revenues have been presented on a before and after income tax basis.

 

Additional Notes to Reserves Data Tables

 

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The estimates of FNR presented do not represent fair market value.

 

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FNR from reserves excludes cash flows related to Cenovus’s risk management activities.

 

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For disclosure purposes, Cenovus has included NGLs with light and medium oil, and CBM gas with natural gas, as the reserves of each are not material relative to the other reported product types.

 

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Numbers presented may be rounded and tables may not add correctly due to rounding.

 

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Due to amendments to NI 51-101 effective July 1, 2015 (the “2015 Amendments”), abandonment and reclamation costs included in the calculation of the NPV and FNR for 2015 are different than abandonment and reclamation costs included in Cenovus’s 2014 disclosure of NPV and FNR. In accordance with the 2015 Amendments, NPV and FNR amounts presented include all of Cenovus’s existing estimated abandonment and reclamation costs, plus all forecast estimates of abandonment and reclamation costs attributable to future development activity associated with the reserves.

Definitions

 

1.	After Royalties means volumes after deduction of royalties and includes Royalty Interest reserves.

 

2.	Before Royalties means volumes before deduction of royalties and excludes Royalty Interest reserves.

 

3.	Company Interest means, in relation to production, reserves, resources and property, the interest (operating or non-operating) held by Cenovus.

 

4.	Gross means: (a) in relation to wells, the total number of wells in which Cenovus has an interest; and (b) in relation to properties, the total acreage of properties in which the Corporation has an interest.

 

5.	Net means: (a) in relation to wells, the number of wells obtained by aggregating Cenovus’s working interest in each of its gross wells; and (b) in relation to the Corporation’s interest in a property, the total acreage in which it has an interest multiplied by its working interest.

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Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, as of a given date, based on analysis of drilling, geological, geophysical and engineering data, the use of established technology and specified economic conditions, which are generally accepted as being reasonable, and shall be disclosed.

Reserves are classified according to the degree of certainty associated with the estimates:

 

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Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.

 

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Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.

Each of the reserves categories may be divided into developed and undeveloped categories:

 

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Developed reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been installed, that would involve a low expenditure (e.g., when compared to the cost of drilling a well) to put the reserves on production. The developed category may be subdivided as follows:

 

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Developed producing reserves are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.

 

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Developed non-producing reserves are those reserves that either have not been on production, or have previously been on production, but are shut-in, and the date of resumption of production is unknown.

 

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Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (e.g., when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned.