UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 40-F

 

[Check one]

 

 

OR

 

 

For the fiscal year ended: December 31, 2014      Commission File Number:  1-34513

 

CENOVUS ENERGY INC.

(Exact name of Registrant as specified in its charter)

 

Not applicable

(Translation of Registrant’s name into English (if applicable))

 

Canada

(Province or other jurisdiction of incorporation or organization)

 

1311

(Primary Standard Industrial

Classification Code Number (if applicable))

 

Not applicable

(I.R.S. Employer

Identification Number (if applicable))

 

2600, 500 Centre Street S.E.
Calgary, Alberta, Canada T2G 1A6
(403) 766-2000

(Address and telephone number of Registrant’s principal executive offices)

 

CT Corporation System
111 8th Avenue
New York, New York 10011

(212) 894-8641

(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

(Title of Class)

 

For annual reports indicate by check mark the information filed with this Form:

 

x Annual information form      x Audited annual financial statements

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

757,103,201

 

Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days.

 

Yes x   No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

Yes o   No o

 

The annual report on Form 40-F shall be incorporated by reference into or as an exhibit to, as applicable, each of the Registrant’s Registration Statements under the Securities Act of 1933, as amended: Form S-8 (File No. 333-163397), Form F-3D (File No. 333-166419), and Form F-10 (File No. 333-196696).

 

 

 

Principal Documents

 

The following documents have been filed as part of this annual report on Form 40-F, beginning on the following page:

 

(a)		Annual Information Form of Cenovus Energy Inc. for the fiscal year ended December 31, 2014.
(b)		Management’s Discussion and Analysis of Cenovus Energy Inc. for the fiscal year ended December 31, 2014.
(c)		Consolidated Financial Statements of Cenovus Energy Inc. for the fiscal year ended December 31, 2014.
(d)		Supplementary Information — Oil and Gas Activities (unaudited) for the fiscal year ended December 31, 2014.

 

2

 

 

Cenovus Energy Inc.

 

Annual Information Form

 

For the Year Ended December 31, 2014

 

 

TABLE OF CONTENTS

 

FORWARD-LOOKING INFORMATION	2
CORPORATE STRUCTURE	3
GENERAL DEVELOPMENT OF CENOVUS’S BUSINESS	3
NARRATIVE DESCRIPTION OF CENOVUS’S BUSINESS	8
Oil Sands	9
Conventional	12
Refining and Marketing	14
RESERVES DATA AND OTHER OIL AND GAS INFORMATION	16
Disclosure of Reserves Data	17
Definitions	19
Reserves Reconciliation	21
Contingent and Prospective Resources	23
Other Oil and Gas Information	26
OTHER INFORMATION	37
Competitive Conditions	37
Environmental Considerations	37
Corporate Responsibility Practice	38
Employees	39
Foreign Operations	39
DIRECTORS AND EXECUTIVE OFFICERS	39
AUDIT COMMITTEE	43
DESCRIPTION OF CAPITAL STRUCTURE	44
DIVIDENDS	47
MARKET FOR SECURITIES	47
RISK FACTORS	47
LEGAL PROCEEDINGS AND REGULATORY ACTIONS	56
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS	56
MATERIAL CONTRACTS	57
TRANSFER AGENTS AND REGISTRARS	57
ADDITIONAL INFORMATION	57
ABBREVIATIONS AND CONVERSIONS	58

 

APPENDIX A - Report on Reserves Data by Independent Qualified Reserves Evaluators	A1
APPENDIX B - Report of Management and Directors on Reserves Data and Other Information	B1
APPENDIX C - Audit Committee Mandate	C1

 

Cenovus Energy Inc.

2014 Annual Information Form

 

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FORWARD-LOOKING INFORMATION

 

In this Annual Information Form (“AIF”), unless otherwise specified or the context otherwise requires, references to “we”, “us”, “our”, “its”, “the Company” 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 Company’s experience and perception of historical trends. This forward-looking information is identified by words such as “anticipate”, “believe”, “expect”, “plan”, “forecast”, “future”, “target”, “project”, “capacity”, “could”, “should”, “focus”, “proposed”, “scheduled”, “outlook”, “potential”, “may” or similar expressions and includes suggestions of future outcomes, including statements about Cenovus’s strategy and related milestones and schedules, projected future value or net asset value, projections for 2015 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 contingent and prospective resources estimates, broadening market access, improving cost structures, dividend plans and strategy, including with respect to the dividend reinvestment plan, anticipated timelines for future regulatory, partner or internal approvals, future impact of regulatory measures, forecasted commodity prices, future use and development of technology and projected shareholder return. Readers are cautioned not to place undue reliance on forward-looking information as the Company’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 Company’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 Company 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 Company’s risk management program, including the impact of derivative financial instruments, the success of Cenovus’s hedging strategies and the sufficiency of the Company’s liquidity position; the accuracy of cost estimates; fluctuations in commodity prices, currency and interest rates; fluctuations in product supply and demand; market competition, including from alternative energy sources; risks inherent in Cenovus’s marketing operations, including credit risks; maintaining desirable ratios of debt to adjusted earnings before interest, taxes, depreciation and amortization as well as debt to capitalization; the Company’s ability to access various sources of debt and equity capital, generally, and on terms acceptable to the Company; 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 estimates; the Company’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 heavy oil business; reliability of the Company’s assets; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; refining and marketing margins; 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 Company’s ability to secure adequate product transportation including sufficient crude-by-rail or alternate transportation to address any gaps caused by operational constraints in the pipeline system; 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 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 Company 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 Company’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 www.sedar.com, www.sec.gov and on the Company’s website at cenovus.com.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

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CORPORATE STRUCTURE

 

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.

 

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

 

INTERCORPORATE RELATIONSHIPS

 

Cenovus’s material subsidiaries and partnerships as at December 31, 2014 are as follows:

 

Subsidiaries & Partnerships		Percentage Owned (1)		Jurisdiction of Incorporation, Continuance, Formation or Organization
Cenovus FCCL Ltd.		100		Alberta
Cenovus Energy Marketing Services Ltd.		100		Alberta
Cenovus US Holdings Inc.		100		Delaware
FCCL Partnership (“FCCL”) (2)		50		Alberta
WRB Refining LP (“WRB”) (3)		50		Delaware

 

(1)         Reflects all voting securities of all subsidiaries and partnerships beneficially owned, or controlled, or directed; directly or indirectly by Cenovus.

(2)         Cenovus interest held through Cenovus FCCL Ltd., the operator and managing partner of FCCL.

(3)        Cenovus interest held through Cenovus American Holdings Ltd. and Cenovus US Holdings Inc.

 

The Company’s remaining subsidiaries and partnerships each account for (i) less than 10 percent of the Company’s consolidated assets as at December 31, 2014 and (ii) less than 10 percent of the Company’s consolidated revenues for the year ended December 31, 2014. In aggregate, Cenovus’s unidentified subsidiaries and partnerships did not exceed 20 percent of the Company’s total consolidated assets or total consolidated revenues as at and for the year ended December 31, 2014.

 

GENERAL DEVELOPMENT OF CENOVUS’S BUSINESS

 

Cenovus is a Canadian integrated oil company headquartered in Calgary, Alberta. The Company 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, NGLs and natural gas in Canada with refining operations in the United States.

 

Cenovus’s Strategy

 

Cenovus’s strategy is to create long-term value through the development of its vast oil sands resources, execution excellence, ability to innovate and financial strength. The Company is focused on continually building net asset value and paying a sustainable dividend. Inherent to this strategy is a focus on protecting the Company’s financial resilience by evaluating on a regular basis its capital investment plans, dividend plans and other relevant factors.

 

Cenovus’s integrated approach, which enables the Company to capture the full value chain from production to high-quality end products like transportation fuels, relies on its entire asset mix:

 

·                  Oil sands for growth;

 

·                  Conventional crude oil for near-term cash flow and diversification of revenue streams;

 

·                  Natural gas for the fuel used at the Company’s oil sands and refining facilities and for the cash flow it provides to help fund capital spending programs; and

 

·                  Refining to help reduce the impact of commodity price fluctuations.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

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Substantial Oil Sands Portfolio

 

Cenovus is focused on development of its two producing steam assisted gravity drainage (“SAGD”) projects, Foster Creek and Christina Lake. Foster Creek and Christina Lake have a combined production capacity of 288,000 gross barrels per day with future plans to increase combined production capacity to 620,000 gross barrels per day.

 

Cenovus’s future opportunities are currently based on the development of the land positions held in the oil sands in northern Alberta, including Narrows Lake, Grand Rapids and Telephone Lake. Cenovus is a 50 percent partner in the Narrows Lake oil sands project and owns 100 percent of the Grand Rapids and Telephone Lake oil sands projects. Cenovus’s normal development planning is to evaluate these resources through stratigraphic test well drilling programs.

 

In total, Cenovus has regulatory approval for production capacity of 955,000 gross barrels per day from its oil sands assets, including current production, with an additional 50,000 gross barrels per day in the approval process.

 

Established Conventional Assets

 

Cenovus’s conventional operations consist of crude oil and natural gas assets in Alberta and Saskatchewan, including a carbon dioxide (“CO2”) enhanced oil recovery project in Weyburn, heavy oil development at Pelican Lake and tight oil assets in Alberta. Cenovus’s conventional oil and natural gas production provides predictable cash flows that help fund future growth opportunities in the oil sands. In addition, the Company’s natural gas production acts as an economic hedge for its natural gas fuel consumption at both its upstream and refining operations.

 

Cenovus owns mineral rights on approximately 70 percent or 4.5 million acres of its conventional lands (fee lands). Production from fee lands accounts for approximately 50 percent of Cenovus’s total conventional production. Fee land production, where Cenovus maintains a working interest, is subject to mineral tax, which is generally lower than the royalties paid to governments or other mineral interest owners. In addition, a portion of the fee lands are leased to third parties which may give rise to royalty income.

 

Strong Project Execution & Innovation

 

Cenovus applies a manufacturing-like phased approach in developing its oil sands projects. This approach incorporates learnings from previous phases into future growth plans allowing the Company to minimize costs. In addition, by focusing on innovation, Cenovus continually looks for opportunities to improve both its economic and environmental performance.

 

Market Access

 

Accessing higher value markets and ensuring future market access for products is a key focus area for Cenovus. The Company’s continued support for proposed new pipeline projects will allow Cenovus to access new markets in the U.S. and globally. In addition, expanding rail capacity will offer an important near and mid-term transportation alternative. Shipping by rail will ease pipeline congestion and pricing pressure, while providing access to niche markets that have the potential to offer premium pricing.

 

Cenovus is also assessing options to maximize the value of its oil by offering a wider range of products, including existing dilbit blends, under blended bitumen or dry bitumen.

 

Financial Strength

 

Cenovus has strong producing assets, an integrated portfolio and a solid balance sheet all of which have positioned it well to face the challenges of a lower commodity price environment. The Company’s disciplined approach to capital allocation and focus on cost reduction will help support capital investment and a sustainable dividend. Cenovus’s capital planning process is flexible and spending can be reduced in response to commodity prices and other economic factors, which will allow the Company to maintain its financial strength while continuing to advance its strategy.

 

In response to the current low crude oil price environment, Cenovus’s total annual 2015 capital investment has been significantly reduced from 2014 levels. The Company will continue to assess its spending plans on a regular basis while closely monitoring crude oil prices. Cenovus expects that existing cash balances, internally generated cash flows, existing credit facilities, management of its asset portfolio, and access to capital markets will be sufficient to satisfy the Company’s cash requirements.

 

Environmental Stewardship

 

Cenovus lives up to its responsibility as a developer of one of Canada’s most valuable resources. Like any company, Cenovus has environmental challenges including minimizing the physical impacts to the lands, lakes and streams surrounding its operations, reducing the greenhouse gas (“GHG”), intensity from production, minimizing the amount of land needed to build each oil sands project and preventing impacts on wildlife in the areas Cenovus operates. Cenovus strives to integrate environmental considerations into its business model.

 

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2014 Annual Information Form

 

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Safety

 

Safety is a key part of Cenovus’s culture and the Company is committed to developing its resources safely and responsibly. In addition to the Company’s responsibility to create a safe workplace, Cenovus provides employees, suppliers, contractors and consultants the information, training and tools required to take responsibility for their own safety and that of their co-workers.

 

CENOVUS’S BUSINESS

 

The Company’s reportable segments are as follows:

 

·                       Oil Sands, which includes the development and production of Cenovus’s bitumen assets at Foster Creek, Christina Lake and Narrows Lake as well as projects in the early stages of development, such as Grand Rapids and Telephone Lake. The Athabasca natural gas assets also form part of this segment. Certain of the Company’s operated oil sands properties, notably Foster Creek, Christina Lake and Narrows Lake, are jointly owned with ConocoPhillips, an unrelated U.S. public company.

 

·                       Conventional, which includes the development and production of conventional crude oil, NGLs and natural gas in Alberta and Saskatchewan, including the heavy oil assets at Pelican Lake. This segment also includes the CO2 enhanced oil recovery (“EOR”) project at Weyburn and emerging tight oil opportunities.

 

·                       Refining and Marketing, which is responsible for transporting, selling and refining crude oil into petroleum and chemical products. Cenovus jointly owns two refineries in the U.S. with the operator Phillips 66, an unrelated U.S. public company. This segment coordinates Cenovus’s marketing and transportation initiatives to optimize product mix, delivery points, transportation commitments and customer diversification.

 

·                       Corporate and Eliminations, which primarily includes unrealized gains and losses recorded on derivative financial instruments, gains and losses on divestiture of assets, as well as other Cenovus-wide costs for general and administrative, financing activities and research costs. As financial instruments are settled, the realized gains and losses are recorded in the operating segment to which the derivative instrument relates. Eliminations relate to sales and operating revenues and purchased product between segments, recorded at transfer prices based on current market prices, and to unrealized intersegment profits in inventory.

 

THREE YEAR HISTORY

 

The following describes significant events of the last three fiscal years:

 

2012

 

·                  Christina Lake phase H update. In the second quarter, the expected gross production capacity for Christina Lake phase H was increased from 40,000 barrels per day to 50,000 barrels per day due to the addition of a fifth steam generator that incorporates blowdown boiler technology. This is expected to enhance efficiency by increasing steam capacity and the water recycle rate, leading to fuel savings and a reduction in water use. Cenovus commercialized blowdown boiler technology in 2011 after testing it at Foster Creek.

 

·                  Regulatory and partner approval at Narrows Lake. In the second quarter, Cenovus received regulatory approval for the Narrows Lake project, which includes the use of both traditional SAGD and SAGD with the SAP enhancement. In the fourth quarter, phase A, which has planned gross production capacity of 45,000 barrels per day, received partner approval. The Narrows Lake project is currently expected to have gross production capacity of 130,000 barrels per day when all three phases are complete.

 

·                  First production at Christina Lake phase D. In the third quarter, phase D of Christina Lake achieved first production, approximately three months ahead of schedule. Total gross production for phases A through D at Christina Lake averaged almost 64,000 barrels per day in 2012.

 

·                  Grand Rapids pilot update. In the third quarter, steam injection commenced on the second pilot well pair at Grand Rapids, with initial production achieved in the first quarter of 2013.

 

·                  Senior unsecured notes issued. In the third quarter, Cenovus completed a public offering in the U.S. of senior unsecured notes of US$500 million, with a coupon rate of 3.00 percent, due August 15, 2022 and US$750 million of senior unsecured notes with a coupon rate of 4.45 percent due September 15, 2042, for an aggregate amount of US$1.25 billion.

 

·                  Christina Lake regulatory approval. In the fourth quarter, Cenovus received regulatory approval to add cogeneration facilities at Christina Lake and increase expected total gross production capacity by 10,000 barrels per day at each of phase F and G.

 

·                  Telephone Lake dewatering pilot. In the fourth quarter, with the drilling and facility construction completed, operation of the Telephone Lake dewatering pilot commenced.

 

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2014 Annual Information Form

 

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2013

 

·                  Christina Lake 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 expected gross production capacity of 50,000 barrels per day from each phase.

 

·                  Production from Grand Rapids pilot. In the first quarter, Cenovus achieved first production from the second pilot well pair at Grand Rapids. The Company operated the pilot project at Grand Rapids throughout the year. The purpose of the pilot was to test reservoir performance.

 

·                  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.

 

·                  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. This program is expected to add up to 22,000 barrels per day of gross production capacity to the Christina Lake facility.

 

·                  Construction at Narrows Lake phase A initiated. In the third quarter, construction of the Narrows Lake phase A plant was initiated. Site construction, engineering and procurement at Narrows Lake are progressing as expected. Phase A has expected gross production capacity of 45,000 barrels per day.

 

·                  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 Company’s US$800 million senior unsecured notes due September 2014.

 

·                  Divesture 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.

 

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

 

·                  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 top water.

 

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

 

·                  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. Phases F, G and H are each expected to ramp-up to 30,000 barrels per day. Once these phases are complete, optimization work to lower steam to oil ratios, increase production and improve plant efficiency is expected to commence. Total projected gross production capacity from these three phases, including optimization, remains unchanged at up to 125,000 barrels per day.

 

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2014 Annual Information Form

 

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2014

 

·                  Regulatory approval received for Grand Rapids. In the first quarter, Cenovus received regulatory approval for its 100 percent owned Grand Rapids project. The project, which is located within the Greater Pelican Region, is expected to have production capacity up to 180,000 barrels per day.

 

·                  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.

 

·                  Divesture 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.

 

·                  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.

 

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

 

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

 

·                  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, which is located within the Company’s Borealis Region of northern Alberta, is expected to have production capacity in excess of 300,000 barrels per day.

 

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2014 Annual Information Form

 

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NARRATIVE DESCRIPTION OF CENOVUS’S BUSINESS

 

The following map outlines the location of Cenovus’s upstream and refining assets as at December 31, 2014:

 

 

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2014 Annual Information Form

 

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OVERVIEW

 

All of Cenovus’s reserves and production are located in Canada, primarily within the provinces of Alberta and Saskatchewan. As at December 31, 2014, Cenovus had a land base of approximately 6.7 million net acres. The estimated proved reserves life index based on working interest production as at December 31, 2014 was approximately 23 years.

 

OIL SANDS

 

Oil Sands includes Cenovus’s bitumen assets at Foster Creek, Christina Lake and Narrows Lake as well as projects in the early stages of development such as Grand Rapids and Telephone Lake. The Company’s Athabasca natural gas assets also form part of this segment. 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 and managing partner of FCCL, and owns 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.

 

As at December 31, 2014, Cenovus held bitumen rights of approximately 1.5 million gross acres (1.1 million net acres) within the Athabasca and Cold Lake areas, as well as the exclusive rights to lease an additional 478,000 net acres on Cenovus’s behalf and/or its assignee’s behalf on the Cold Lake Air Weapons Range.

 

Landholdings

 

The following table summarizes Cenovus’s landholdings as at December 31, 2014:

 

		Developed Acreage				Undeveloped Acreage				Total Acreage				Average Working
(thousands of acres)		Gross		Net		Gross		Net		Gross		Net		Interest
Foster Creek		16		8		135		67		151		75		50	%
Christina Lake		8		4		49		25		57		29		50	%
Narrows Lake		—		—		27		13		27		13		50	%
Grand Rapids (1)		—		—		61		61		61		61		100	%
Telephone Lake		16		16		142		142		158		158		100	%
Athabasca		417		345		454		380		871		725		83	%
Other		28		10		1,052		773		1,080		783		72	%
Total		485		383		1,920		1,461		2,405		1,844		77	%

 

(1)    Overlapping landholdings between Grand Rapids and Pelican Lake have been allocated to Grand Rapids based on the project’s approved development area.

 

Production

 

The following table summarizes Cenovus’s share of daily average production for the periods indicated:

 

		Crude Oil and NGLs (bbls/d)				Natural Gas (MMcf/d)				Total Production (BOE/d)
(annual average)		2014		2013		2014		2013		2014		2013
Foster Creek		59,172		53,190		—		—		59,172		53,190
Christina Lake		69,023		49,310		—		—		69,023		49,310
Athabasca (1)		—		—		22		21		3,667		3,500
Total		128,195		102,500		22		21		131,862		106,000

 

(1) Net of internal usage of natural gas used at Foster Creek to produce steam.

 

Producing Wells

 

The following table summarizes Cenovus’s interests in producing wells as at December 31, 2014. These figures exclude wells which were capable of producing, but that were not producing as at December 31, 2014:

 

		Producing Oil Wells				Producing Gas Wells				Total Producing Wells
(number of wells)		Gross		Net		Gross		Net		Gross		Net
Foster Creek		283		142		—		—		283		142
Christina Lake		119		60		—		—		119		60
Grand Rapids		2		2		—		—		2		2
Athabasca		—		—		286		274		286		274
Other		3		3		—		—		3		3
Total		407		207		286		274		693		481

 

Cenovus Energy Inc.

2014 Annual Information Form

 

9

 

Foster Creek

 

Cenovus has a 50 percent working interest in Foster Creek, Cenovus’s first commercial 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 Company 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 Company’s behalf and/or its assignee’s behalf.

 

Production from phases A through F at Foster Creek averaged 59,172 barrels per day in 2014. Phase F achieved first production in September 2014 with full ramp up expected to take approximately 18 months. Expansion work is underway at phase G, and is expected to add additional production capacity of 30,000 gross barrels per day. Expansion work on phase H, with initial design capacity of 30,000 gross barrels per day, has been deferred in response to the current economic environment. Spending will be deferred until crude oil prices recover.

 

In December 2014, Cenovus received regulatory approval from the Alberta Energy Regulator (“AER”) for Foster Creek phase J with expected gross production capacity of 50,000 barrels per day. Total gross production capacity for phases A through J, including optimization work, is expected to reach 310,000 barrels per day.

 

Cenovus has successfully piloted and implemented its Wedge WellTM technology at Foster Creek whereby an additional well is drilled between two producing well pairs to produce bitumen that is heated by proximity to a steam chamber, but is not recoverable by the adjacent production wells. This technology requires minimal additional steam, thus it helps reduce the overall steam to oil ratio. In 2014, 22 wells using the Company’s Wedge WellTM technology were drilled (2013 — 30 wells) at Foster Creek. As at December 31, 2014 there were 89 gross producing wells of this type.

 

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 uses SAGD technology and produces from the McMurray formation.

 

Production from phases A through E at Christina Lake averaged 69,023 barrels per day in 2014. An optimization program for phases C, D and E is expected to add up to 22,000 gross barrels per day of production capacity in late 2015. Expansion work is underway at phase F (including cogeneration), with production capacity of 50,000 gross barrels per day expected in the second half of 2016. Expansion work on phase G, with initial design capacity of 50,000 gross barrels per day, has been deferred in response to the current economic environment. Spending on phase G will be deferred until crude oil prices recover.

 

Cenovus expects to receive regulatory approval for phase H in the first half of 2015, a 50,000 gross barrel per day phase. With the addition of phases F, G and H, Cenovus believes Christina Lake has potential gross production capacity of 288,000 gross barrels per day, increasing to as much as 310,000 gross barrels per day with optimization.

 

In 2014, Cenovus drilled 24 gross wells (2013 — 11 wells) at Christina Lake using the Company’s Wedge WellTM technology and as at December 31, 2014 there were 19 gross wells of this type producing.

 

Several innovations to SAGD technology have been undertaken at Christina Lake over the past several years. One major innovation is SAP technology that is currently being piloted at Christina Lake. 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. Based on results from the SAP pilot, 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 barrel a 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 until crude oil prices recover. Cenovus has recently integrated Narrows Lake under the same management team as its nearby Christina Lake project. The future development of Narrows Lake will benefit from the existing infrastructure and resources at Christina Lake, which is expected to lower overall costs.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

10

 

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 November 2014, Cenovus received regulatory approval from the AER for a SAGD project at Telephone Lake with initial production capacity of 90,000 barrels per day. Telephone Lake is estimated to have a 40-year reserve life with total production capacity in excess of 300,000 barrels per day and is expected to be developed in multiple phases.

 

Telephone Lake is a unique oil sands project because there is a layer of groundwater directly above the oil that’s 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.

 

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 Company’s Pelican Lake heavy oil operations and existing facilities.

 

In December 2010, the Company drilled its first pilot SAGD well pair in the Cretaceous Grand Rapids formation. A second well pair was drilled in early 2012 and a third well pair is planned for the first quarter of 2015. Data from these well pairs will help determine the future pace of development at Grand Rapids.

 

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. Grand Rapids is estimated to have a 40-year reserve life and is expected to be developed in multiple phases.

 

Other Emerging Assets

 

Cenovus has a number of other emerging assets, including the Steepbank and East McMurray properties which are located in the Borealis Region, southwest of Telephone Lake. In 2014, 21 gross stratigraphic wells were drilled. Data from the stratigraphic wells will determine future development timing.

 

Cenovus completed a pilot program using a helicopter and an experimental lightweight drilling rig, referred to as SkyStratTM, to drill stratigraphic test wells. The SkyStratTM drilling rig is a new 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. In the second and third quarters of 2014, this rig was used to drill 14 stratigraphic wells. The Company completed construction on a second SkyStratTM drilling rig in the fourth quarter of 2014.

 

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 Company’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 2009 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 Company’s annualized natural gas production of approximately 15 million cubic feet per day in 2014 (2013 — 16 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 2014, the Company’s Oil Sands capital investment was $2.0 billion, primarily related to the expansion at Foster Creek and Christina Lake. The production capacity for these projects is expected to increase to approximately 288,000 gross barrels per day with completion of Foster Creek phase F. Ramp up to total production for phase F is expected to take approximately 18 months from September 2014.

 

·                  Capital at Foster Creek was focused on expansion of phases F, G and H, offsite facility work related to phases G and H, drilling of sustaining wells, and operational improvement projects.

 

·                  Capital at Christina Lake was focused on expansion of phases F and G, optimization of phases C, D, and E, phase E well pad and offsite facility construction, and sustaining well programs including the use of the Company’s Wedge WellTM technology.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

11

 

·                  Capital at Narrows Lake was focused on phase A engineering, procurement, and plant construction.

 

·                  Capital at Telephone Lake was focused on the preliminary engineering work on the central processing facility, costs related to the dewatering pilot project and the drilling of stratigraphic test wells.

 

·                  Capital at Grand Rapids was focused on costs related to the pilot project, the drilling of stratigraphic test wells and the dismantling and relocation of an existing SAGD facility to Grand Rapids.

 

Due to the lower crude oil price environment, 2015 capital spending will be focused on the continued expansion of Foster Creek phase G and Christina Lake phase F (including cogeneration) as well as optimization of phases C, D and E at Christina Lake. Funding will also be allocated to maintain current production levels from existing oil sands phases as well as meeting all maintenance, safety, regulatory and contractual obligations.

 

CONVENTIONAL

 

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

 

At December 31, 2014, Cenovus had an established land position of approximately 5.1 million gross acres (4.9 million net acres), of which approximately 3.3 million gross acres (3.2 million net acres) are developed. Cenovus owns the mineral rights on approximately 70 percent or 4.5 million net acres of the Company’s conventional lands (fee lands), of which 2.5 million acres are developed. Production from fee lands comprises approximately 50 percent of the Company’s total conventional production. Fee lands where Cenovus has maintained a working interest are subject to mineral tax, which is generally lower than the royalties paid to the government or other mineral interest owners. Of the 4.5 million net acres of fee land, Cenovus leases over 2.0 million acres to third parties, which may result in royalty income. In 2014, Cenovus had approximately 7,600 barrels of oil equivalent per day of royalty interest production from fee lands. Cenovus leases crown lands in Alberta, mainly in the Early Cretaceous geological formations, primarily in the Suffield area and in Saskatchewan.

 

Landholdings

 

		Developed Acreage (2)				Undeveloped Acreage (2)				Total Acreage (1)				Average Working
(thousands of acres)		Gross		Net		Gross		Net		Gross		Net		Interest
Alberta
Grassland (3)		976		961		49		47		1,025		1,008		98	%
Suffield		935		924		125		121		1,060		1,045		99	%
Langevin (4)		742		702		235		217		977		919		94	%
Pelican Lake (5)		126		125		224		210		350		335		96	%
Wainwright		343		322		190		186		533		508		95	%
Other		38		13		164		138		202		151		75	%
Saskatchewan
Weyburn		116		103		327		314		443		417		94	%
Bakken		14		13		183		182		197		195		99	%
Other		7		3		19		19		26		22		86	%
Manitoba		5		5		252		252		257		257		100	%
Total		3,302		3,171		1,768		1,686		5,070		4,857		96	%

 

(1)         Includes 2.1 million gross acres of fee land where Cenovus has a working interest, and 1.1 million gross acres of fee land partially leased to third parties. Excludes 1.3 million gross acres of fee land fully leased to third parties.

(2)         Developed acreage includes 2.1 million gross acres of fee land and undeveloped acreage includes 1.1 million gross acres of fee land.

(3)         Grassland is located in the Drumheller and Brooks areas.

(4)         Langevin is located north west of Medicine Hat.

(5)         Overlapping landholdings between Grand Rapids and Pelican Lake have been allocated to Grand Rapids based on the project’s approved development area.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

12

 

Production

 

The following table summarizes Cenovus’s Conventional share of daily average production for the periods indicated:

 

		Crude Oil and NGLs (bbls/d)				Natural Gas (MMcf/d)				Total Production (1) (BOE/d)
(annual average)		2014		2013		2014		2013		2014		2013
Alberta
Grassland (2)		8,923		7,720		232		252		47,590		49,720
Suffield		10,010		11,391		135		149		32,510		36,224
Langevin (3)		9,368		8,754		96		101		25,368		25,587
Pelican Lake		24,924		24,254		—		—		24,924		24,254
Wainwright (4)		4,687		4,668		2		3		5,020		5,168
Other		8		9		—		2		8		342
Saskatchewan
Weyburn		16,196		16,361		—		—		16,196		16,361
Shaunavon (5)		—		2,101		—		—		—		2,101
Bakken (4)		1,182		1,508		1		1		1,349		1,676
Other		—		9		—		—		—		9
Total		75,298		76,775		466		508		152,965		161,442

 

(1)         Includes production from fee lands in which Cenovus has a working interest and fee lands in which Cenovus has retained a royalty interest.

(2)         Grassland is located in the Drumheller and Brooks areas.

(3)         Langevin is located north west of Medicine Hat.

(4)         Cenovus sold certain interests in its Bakken and Wainwright crude oil assets in the second and third quarter of 2014, respectively. Cenovus retained royalty interests on fee lands in these areas.

(5)         In the third quarter of 2013, Cenovus sold its Lower Shaunavon tight oil asset in southern Saskatchewan.

 

Producing Wells

 

The following table summarizes Cenovus’s Conventional interests in producing wells as at December 31, 2014. These figures exclude wells which were capable of producing, but that were not producing, as at December 31, 2014:

 

		Producing Oil Wells				Producing Gas Wells				Total Producing Wells (1)
		Gross		Net		Gross		Net		Gross		Net
Alberta
Grassland (2)		410		403		8,832		8,683		9,242		9,086
Suffield		780		780		10,686		10,668		11,466		11,448
Langevin (3)		276		273		4,792		4,780		5,068		5,053
Pelican Lake		612		612		4		4		616		616
Wainwright		80		71		12		3		92		74
Other		11		5		2		1		13		6
Saskatchewan
Weyburn		656		414		—		—		656		414
Bakken		10		3		—		—		10		3
Other		1		1		—		—		1		1
Total		2,836		2,562		24,328		24,139		27,164		26,701

 

(1)         Includes wells on fee lands where Cenovus has a working interest. Excludes wells on fee lands where Cenovus only has a royalty interest.

(2)         Grassland is located in the Drumheller and Brooks areas.

(3)         Langevin is located north west of Medicine Hat.

 

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 Company’s oil assets including water flooding, CO2 miscible flooding and alkali surfactant polymer flooding.

 

Cenovus operates the world’s largest CO2 miscible flood project. The Weyburn unit produces light to medium sour crude oil from the Mississippian Midale formation and covers 78 sections of land in southeastern Saskatchewan. As at December 31, 2014, approximately 64 percent of the approved CO2 flood pattern development at the Weyburn unit was complete. Since the inception of the project, approximately 24 million tonnes of CO2 have been injected under the program. 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 Saskatchewan. In the unitized portion of the Weyburn field in southwestern Saskatchewan, Cenovus has a 62 percent working interest. However, after taking into consideration a net royalty interest obligation to a third party, Cenovus’s economic interest is 50 percent. Cenovus operates on behalf of the unit and owns 62 percent of the CO2 pipeline from the Boundary Dam to Weyburn.

 

Using a patterned, horizontal well polymer flood, Cenovus produces heavy crude oil from the Cretaceous Wabiskaw formation at its Pelican Lake property, within the Greater Pelican Region in northeastern Alberta. Cenovus holds a 38 percent non operated interest in a 110 kilometre, 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.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

13

 

Net Wells Drilled and Production

 

The following table summarizes net oil wells drilled and daily average oil production figures for the periods indicated:

 

						Average Production (2) (bbls/d)
		Net Wells Drilled (1)				Light/Medium				Heavy
		2014		2013		2014		2013		2014		2013
Alberta
Grassland (3)		42		44		8,224		7,004		—		—
Suffield		18		24		—		—		9,991		11,375
Langevin (4)		29		36		9,221		8,625		—		—
Wainwright (5)		4		39		42		40		4,631		4,616
Pelican Lake		25		49		—		—		24,924		24,254
Other		1		6		8		8		—		—
Saskatchewan
Weyburn		7		14		15,921		16,229		—		—
Shaunavon (6)		—		—		—		2,101		—		—
Bakken (5)		—		—		1,115		1,451		—		—
Other		—		—		—		9		—		—
Total		126		212		34,531		35,467		39,546		40,245

 

(1)         Excludes wells drilled by third parties on fee land.

(2)         Includes production from fee lands in which Cenovus has a working interest and fee lands in which Cenovus has retained a royalty interest.

(3)         Grassland landholdings are located in the Drumheller and Brooks areas.

(4)         Langevin landholdings are located north west of Medicine Hat.

(5)         Cenovus sold certain interests in its Bakken and Wainwright crude oil assets in the second and third quarter of 2014, respectively. Cenovus retained royalty interests on fee lands in these areas.

(6)         In the third quarter of 2013, Cenovus sold its Lower Shaunavon tight oil asset in southern Saskatchewan.

 

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 Company’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 Company’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 2014, Conventional gas production averaged 466 MMcf per day (2013 — 508 MMcf per day). Cenovus did not drill any gas wells in 2014 or 2013.

 

Capital Investment

 

In 2014, the Company’s Conventional capital investment was $840 million, primarily related to tight oil development, facilities work and expansion of the polymer flood at Pelican Lake. Spending on natural gas activities was allocated to a small number of higher return opportunities.

 

REFINING AND MARKETING

 

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

 

Refining

 

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. In 2015, the Company’s refineries have a combined stated processing capacity of approximately 460,000 gross barrels per day of crude oil (2014 — 460,000 gross bbls/d), including heavy crude oil processing capability of up to 255,000 gross barrels per day.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

14

 

The following table summarizes the key operational results for the refineries in the periods indicated:

 

Refinery Operations (1)		2014		2013
Crude Oil Capacity (Mbbls/d)		460		457
Crude Oil Runs (Mbbls/d)		423		442
Heavy Oil		199		222
Light/Medium		224		220
Crude Utilization (%)		92		97
Refined Products (Mbbls/d)
Gasoline		231		232
Distillates		137		144
Other		77		87
Total		445		463

 

(1)         Represents 100 percent of the Wood River and Borger Refinery operations.

 

Wood River Refinery

 

The Wood River Refinery ranks in the top 10 percent of 150 U.S. refineries 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.

 

Throughout 2014, the Wood River Refinery’s stated crude oil processing capacity 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 (“CORE”) project, the Wood River Refinery increased its total Canadian heavy crude oil processing capacity up to 220,000 gross barrels per day. In 2014, 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 (“TAN”) 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 crude 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 a capacity of 45,000 gross barrels per day. The stated processing capacity is unchanged for 2015.

 

Marketing

 

Cenovus’s Marketing group is focused on enhancing the netback price of the Company’s production. As part of these activities, the group carries out 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 also seeks to mitigate the market risk associated with future cash flows by entering into various risk management contracts relating to produced products. Details of these transactions are found in the notes to the Company’s audited Consolidated Financial Statements for the year ended December 31, 2014.

 

Crude Oil Marketing

 

Cenovus’s Crude Oil Marketing group manages the marketing of crude oil for the Company’s upstream operations. Their objective is to sell production to achieve the best price within the constraints of a diverse sales portfolio, as well as to obtain and manage condensate supply, inventory and storage to meet diluent requirements.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

15

 

Natural Gas Marketing

 

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.

 

Transportation

 

Cenovus’s Transportation group is committed to accessing higher value markets and ensuring future market access. Cenovus actively supports a variety of new pipeline projects that will facilitate access to new markets in the U.S. and overseas. As at December 31, 2014, Cenovus has entered into various firm transportation commitments totaling $28 billion, most of which relate to pipelines that are subject to regulatory approval. The Company’s portfolio of transportation commitments includes feeder pipelines from its production areas to the Edmonton and Hardisty 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 fourth quarter of 2014, Cenovus increased its takeaway rail capacity to 30,000 barrels per day. The Company’s longer term target is to commit to transportation solutions for up to 50 percent of marketable production, including growing rail capacity to between 10 and 20 percent of marketable production.

 

RESERVES DATA AND OTHER OIL AND GAS INFORMATION

 

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

 

The Company’s reserves are primarily located in Alberta and Saskatchewan, Canada. Cenovus retained two independent qualified reserves evaluators (“IQREs”), McDaniel and 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, NGLs, natural gas, and coal bed methane (“CBM”) reserves. McDaniel evaluated approximately 96 percent of Cenovus’s total proved reserves, located throughout Alberta, and GLJ evaluated approximately four percent of the Company’s total proved reserves, located throughout Saskatchewan and Manitoba. Cenovus also engaged McDaniel to evaluate 100 percent of the Company’s bitumen contingent and prospective resources.

 

The Reserves Committee of Cenovus’s Board of Directors (“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 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 and resources data and the report of the IQREs and provides a recommendation regarding approval of the reserves and resources disclosure to the Board.

 

The majority of 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 bitumen, oil and natural gas 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 11, 2015, with an effective date of December 31, 2014. McDaniel’s preparation date of the information is January 12, 2015, and GLJ’s preparation date is January 9, 2015.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

16

 

DISCLOSURE OF RESERVES DATA

 

The reserves data presented summarizes the Company’s bitumen, heavy oil, light and medium oil plus NGLs, and natural gas plus CBM reserves and the net present values of future net revenue for these reserves. The reserves data uses forecast prices and costs prior to provision for interest, general and administrative expenses, costs associated with environmental regulations, the impact of any hedging activities or the liability associated with certain abandonment and all well, pipeline and facilities reclamation costs. Future net revenues have been presented on a before and after income tax basis.

 

Cenovus holds significant fee title rights which generate production for the Company’s account from third parties leasing those lands (“Royalty Interest Production”). As at December 31, 2014, approximately 2.4 million acres throughout southeastern Alberta and southern Saskatchewan and Manitoba were leased out to third parties. In accordance with NI 51-101, only the After Royalties volumes presented herein include reserves associated with this Royalty Interest Production (“Royalty Interest Reserves”).

 

Summary of Company Interest Oil and Gas Reserves as at December 31, 2014

(Forecast Prices and Costs)

 

Before Royalties (1)		Bitumen (MMbbls)		Heavy Oil (MMbbls)		Light & Medium Oil & NGLs (MMbbls)		Natural Gas & CBM (Bcf)
Proved Reserves
Developed Producing		197		114		94		778
Developed Non-Producing		41		2		4		14
Undeveloped		1,732		40		22		4
Total Proved Reserves		1,970		156		120		796
Probable Reserves		1,330		123		46		260
Total Proved plus Probable Reserves		3,300		279		166		1,056

 

After Royalties (2)		Bitumen (MMbbls)		Heavy Oil (MMbbls)		Light & Medium Oil & NGLs (MMbbls)		Natural Gas & CBM (Bcf)
Proved Reserves
Developed Producing		159		97		84		793
Developed Non-Producing		31		1		3		14
Undeveloped		1,306		36		18		4
Total Proved Reserves		1,496		134		105		811
Probable Reserves		1,005		97		40		252
Total Proved plus Probable Reserves		2,501		231		145		1,063

 

Royalty Interest		Bitumen (MMbbls)		Heavy Oil (MMbbls)		Light & Medium Oil & NGLs (MMbbls)		Natural Gas & CBM (Bcf)
Proved Reserves
Developed Producing		—		1		6		40
Developed Non-Producing		—		—		—		—
Undeveloped		—		—		—		—
Total Proved Reserves		—		1		6		40
Probable Reserves		—		1		2		12
Total Proved plus Probable Reserves		—		2		8		52

 

(1)         Does not include Royalty Interest Reserves.

(2)         Includes Royalty Interest Reserves.

 

Cenovus Energy Inc.

2014 Annual Information Form

 

17

 

Summary of Net Present Value of Future Net Revenue as at December 31, 2014

(Forecast Prices and Costs)

 

		Discounted at %/year ($ millions)										Unit Value Discounted at 10% (1)
Before Income Taxes		0%		5%		10%		15%		20%		$/BOE
Proved Reserves
Developed Producing		13,715		10,972		9,135		7,845		6,894		19.31
Developed Non-Producing		1,471		1,096		848		678		556		22.33
Undeveloped		58,310		25,769		13,177		7,456		4,504		9.69
Total Proved Reserves		73,496		37,837		23,160		15,979		11,954		12.38
Probable Reserves		58,033		19,036		8,364		4,571		2,854		7.07
Total Proved plus Probable Reserves		131,529		56,873		31,524		20,550		14,808		10.32

 

(1)         Unit values have been calculated using Company Interest After Royalties reserves.

 

		Discounted at %/year ($ millions)
After Income Taxes (1)		0%		5%		10%		15%		20%
Proved Reserves
Developed Producing		10,984		8,815		7,347		6,313		5,549
Developed Non-Producing		1,088		822		642		518		428
Undeveloped		44,659		19,422		9,819		5,501		3,290
Total Proved Reserves		56,731		29,059		17,808		12,332		9,267
Probable Reserves		43,148		14,157		6,185		3,349		2,071
Total Proved plus Probable Reserves		99,879		43,216		23,993		15,681		11,338

 

(1)         Values are calculated by considering existing tax pools and tax circumstances for Cenovus and its subsidiaries in the consolidated evaluation of Cenovus’s oil and gas properties, and take into account current federal tax regulations. Values do not represent an estimate of the value at the business entity level, which may be significantly different. For information at the business entity level, please see the Company’s Consolidated Financial Statements and Management’s Discussion and Analysis for the year ended December 31, 2014.

 

Total Future Net Revenue (undiscounted) as at December 31, 2014

(Forecast Prices and Costs) ($ millions)

 

Reserves Category		Revenue		Royalties		Operating Costs		Development Costs		Abandonment Costs (1)		Future Net Revenue Before Future Income Taxes		Future Income Taxes		Future Net Revenue After Future Income Taxes
Proved Reserves		193,934		44,022		54,957		20,084		1,376		73,496		16,765		56,731
Proved plus Probable Reserves		349,344		81,047		96,545		38,476		1,747		131,529		31,650		99,879

 

(1)         The abandonment costs only include downhole abandonment costs for the wells considered in the IQREs’ evaluation of reserves. Abandonment of other wells, surface reclamation, asset recovery and facility site reclamation costs are not included.

 

Future Net Revenue by Production Group as at December 31, 2014

(Forecast Prices and Costs)

 

Reserves Category		Production Group		Future Net Revenue Before Income Taxes (discounted at 10%/year) ($ millions)		Unit Value (Company Interest After Royalties Reserves) ($/BOE)
Proved Reserves		Bitumen		17,745		11.86
		Heavy Oil		1,789		13.30
		Light & Medium Oil and NGLs		2,486		23.63
		Natural Gas		1,140		8.43
		Total		23,160		12.38
Proved plus Probable Reserves		Bitumen		23,560		9.42
		Heavy Oil		3,044		13.15
		Light & Medium Oil and NGLs		3,356		23.11
		Natural Gas		1,564		8.83
		Total		31,524		10.32

 

Cenovus Energy Inc.

2014 Annual Information Form

 

18