Imperial Oil Ltd

TSX:IMO

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Imperial 2018 Midyear Update Conference Call. [Operator Instructions] I would now like to turn the conference over to Manager of Investor Relations, Dave Hughes. Sir, you may begin.

[Dave Hughes, Manager of Investor Relations]

Thank you. Good morning, everybody. Thank you for joining us today on this midyear update call. Just before we start, I'd like to introduce you to the Imperial Management Committee who are in the room today, we have Rich Kruger, Chairman, President and CEO; Dan Lyons, Chief Financial Officer; Theresa Redburn, Senior Vice President Commercial and Corporate Development; and John Whalen, Senior Vice President of Upstream. I'll start today by noting that today's comments may contain forward-looking information. Any forward-looking information is not a guarantee of future performance, and actual future financial and operating results could differ materially depending on the number of factors and assumptions. Forward-looking information in the risks factors and assumptions are described in further detail on our second quarter earnings release that was issued earlier today as well as our most recent Form 10-K and these documents are available on SEDAR, EDGAR, and imperialoil.ca. And I would encourage you to refer to them. At the conclusion of Rich's remarks, we're going to begin the Q&A. We're trying something a little different, maybe a little bit out of the ordinary and we provided the analysts the opportunities to submit questions in advance. We have a lot of questions submitted. So at the conclusion of Rich's remarks, we're going to go and address some of those questions first and then move to the more traditional live Q&A and probably we'll maybe bounce back and forth a little bit between the 2. So now, without further ado, I'll turn it over to Rich.

[Richard M. Kruger, Chairman, President & CEO]

Good morning. What my objective or intent is this morning is to give you a bit more color, commentary and clarity on our second quarter results but in addition, to give you a bit of a sense of what we expect as we look forward over the rest of the year. You've seen the results. Net income are just shy of $200 million for the quarter, $0.24 a share, well below consensus. I'll talk about the factors or the drivers as to why that result. From a cash generated, from an operating activities, we were a bit over $800-and-some million, significant increase over the last year. If I look at the first half of the year, that $200 million in the second quarter is a bit of our $700 million in earnings for the first half, and our cash generated from operating activities is a bit over $1.8 billion. That is up about $1 billion year-on-year. If I step back broadly from an operating environment standpoint, we've seen over the course of the year a significant growth in WTI. We've also seen that growth from the first quarter to the second quarter. Year-on-year, we're up about $15 a barrel at WTI and then the second quarter is about $5 a barrel higher than first quarter. Similarly, we've seen increases in the heavies as measured by WCS in the -- to the point where the light oil prices have went up on the year about $15 a barrel but heavy oil prices, if I represented by bitumen realizations, have only risen by about $5 a barrel. Market access, considerations, constraints are behind those differentials. On the downstream at chemical side of the business, both market conditions and margins have remained strong throughout the first half of the year, and I'll comment more there on performance. The bottom line result to both the operating and the market conditions, we've had strong cash generated in each of our upstream, downstream and chemicals business lines. Continuing on, I'll make a couple of comments on capital and exploration expenditures. In the first half of the year, we spent $558 million, a run rate for the full year with .2 billion to something in the $1.1 billion to $1.2 billion range. However, in the second half, we expect higher spend than the first half. However, we think we'll end the year at the low end of our earlier guidance. Earlier guidance was about $1.5 billion to $1.7 billion on the year. We think it'll be something on the lower end, around or closer to that $1.5 billion. The drivers in the second half, why a bit higher spend? We continue to execute the Strathcona refinery cogeneration project. We're continuing to invest in the Kearl supplemental crusher and flow interconnect projects. I'll talk more about Kearl here shortly. And then we are advancing at a measured pace, our Aspen in-situ oil sands project while we still await the final regulatory approval. On dividends, share repurchases, we've detailed in our release a fair bit about both our -- on a program timing basis and then within each of the quarters. But I'll step back broadly and from a capital allocation strategy, what we seek to do is maintain a strong balance sheet, pay a reliable and growing dividend, invest in attractive growth opportunities, attractive, define that as globally competitive. I can comment more on that if you'd like in the Q&A. And then ultimately, return surplus cash to shareholders via buybacks. If you look at where we are at midyear balance sheet, we have about $5.2 billion in debt at midyear, debt-to-capital ratio of 18%. We're quite comfortable with that strength. From a dividend, we declared a $0.03 per share increase earlier in the year. So we're currently at $0.19 per share per quarter, or about $600 million at the current rate in aggregate. And you're well aware of our 100-plus years of consecutive payments in 23 years of consecutive year-on-year growth. Attractive projects, I've commented on those, where we're spending money on projects that we believe are attractive, globally competitive, Strathcona cogen, Kearl supplemental crusher and potentially an Aspen in-situ projects. And then lastly, relative to that capital allocation, over the last year in the 12-month program that ended here a few days ago, or excuse me, a month ago, in June, we bought back about $1.6 billion over that 12-month period. Production. Upstream production. 336,000 barrels a day in the quarter, characterized by a lot of maintenance activity. I will talk specifically to each of our core assets and that activity here in a moment. If you look at the first half, we're at about 353,000 barrels -- gross oil-equivalent barrels a day, essentially flat from -- with where we were a year ago. This is a bit below where we had expected to be at the end of the first half. It was really largely due to Syncrude performance and to a little bit lesser extent Cold Lake, and I'll talk about both of those. With the majority of our scheduled maintenance complete for the year and Syncrude recovery from its recent power outage ongoing, we are positioned for what we expect to be very strong volumes performance in the second half of the year. Points specifically to the assets. I'll start with Cold Lake. We completed a large turnaround at our Maskwa facility 38 days, it was split between May and June. Work included required regulatory inspections on our steam, flare and fuel gas systems and then periodic steam and water system cleanings and repairs. Quite typical of maintenance turnarounds at a steam injection facilities. Cold Lake, for context, we have essentially 5 separate steam plants that require periodic maintenance of this sort. We have worked very well over time on equipment strategies, maintenance practices. And these improvements have allowed us to extend each plant's major turnaround cycle to roughly a 6-year interval. So on average, we'll have about 1 turnaround a year. Now the plants vary in size. Maskwa was the second-largest of the Cold Lake plants. But -- and then on the odd -- on the sixth year, we'll go a year without it. Post turnaround, Cold Lake has averaged -- has increased to about 150,000 barrels a day. We expect continued ramp up in the second year and expect that it will be at or approaching 160,000 barrels a day by the end of this year. Kearl. For -- gross production in the quarter averaged 180,000 barrels a day. That followed on 182,000 barrel a day first quarter, leaving us at 181,000 gross. These are gross numbers. Our share, of course, is 71%. In the second quarter, we had a 32-day maintenance turnaround at 1 of the facilities' 2 plants and this included a number of vessel inspections and continued enhancements to reliability with both piping and/or prep equipment. Throughout the rest of the year, we have one more turnaround at the second plant. We think it's going to be a bit shorter, 20 to 25 days. We are finalizing the details right now. That's scheduled to start in mid-September and then overlap into October. Let's talk about the second half. We have, in the last 4 weeks since the start of the third quarter, we've achieved several best evers at Kearl. We've had the highest week ever at 297,000 barrels a day. We've had the highest day ever at 340,000 barrels a day. We've had the highest days ever at each of the 2 facilities at essentially -- at or above 170,000 barrels a day each. And we've had 7 of the 10 highest days since start-up. The daily rate for June as of 6 a.m. this morning was about 255,000 barrels a day gross. And with June's performance alone, in 3.5 weeks, we've taken the annual average at Kearl from the 181,000 through the first half to as of 6 a.m. this morning, we were at 190,000 barrels a day for essentially the first 7 months of the year. It's -- this performance and these expectations which were in our plan, both the maintenance, the reliability and enhancements, we knew our first half of the year would be lower than the second half but it's this performance that we're seeing now and expect to continue that gives us confidence in averaging 200,000 barrels a day for the full year. Longer term, in addition, we have the construction of our supplemental crushing capacity at each of the 2 plants ongoing, as well as the flow interconnections further downstream that will give us flexibility for directing fluid flows to maximize reliability and equipment utilization. Our objective is that when these projects are complete by the end of next year, that we'll achieve an annual average production of 240,000 barrels a day starting in 2020. The cost, timing and plans with this work are unchanged from any of our earlier conversations or commitments on Kearl. Going to Syncrude. The -- we averaged our share of 50,000 barrels a day in the quarter, it was up a bit from the disappointing quarter of last year and this quarter was disappointing. Although the biggest deviation in the quarter versus -- or excuse me, versus kind of capacity was a 25,000 barrels a day impact our share associated with planned turnaround activities. Specifically, a 71-day turnaround occurred on Coker 8-3 during the fully -- during there are essentially, it started at the end of the first quarter and wrapped up in the second quarter. But the other event in the quarter was the major power outage that occurred on June 20. Specifically, a high-voltage transformer failed. Backup systems also then failed to respond. It resulted in a hard shutdown of the full facility, caused some damage to steam systems and fouled select processing units. A complete investigation by Suncor with Imperial, ExxonMobil and Suncor support is ongoing. We have resumed production from Coker 8-3. It's now at its roughly at 140,000 barrels a day capacity. Coker 8 through, 8-2, excuse me, is going through its restart procedures and we anticipate full rates will be achieved sometime in September following the decoking of unit 8 1, an activity that was originally planned for next year. In the downstream, refinery throughput averaged 363,000 barrels a day, up a bit from the second quarter of last year. The biggest news in the quarter is we completed a 72-day scheduled turnaround at our Strathcona refinery. And this was the largest such event in the refinery's history. The work included major maintenance on the fluid cat cracker, or the FCC, and this is the gasoline engine or machine of the facility. And for reference, the FCC fundamentally converts heavier molecules into lighter gasoline and distillate products. And as a rough rule of thumb, about 70% of Strathcona is gasoline, is derived from the FCC. This is the moneymaking unit. Consequently, the earnings impact of the event in the quarter were relative to the first quarter was about $250 million. That's based on the incremental OpEx and the volume and margin impact of the overall event. $250 million equates to roughly $0.31 a share -- earnings per share in the quarter. Very fortunately, the FCC only goes through maintenance of this magnitude about once every 10 years or so. So it'll be a long time before we talk about an impact such as this again. More broadly, we continue to improve our overall competitiveness in the downstream by optimizing feedstocks and taking advantage of discounted heavy crudes. A statistic for you, over the last 4 years, about 17% of our refining feedstocks, or roughly 64,000, 65,000 barrels a day on average, were heavy crudes. We're primarily a light crude refiner. However, through the first half of '18, we've increased our heavy crudes to a full 25% of our feedstocks, approaching nearly 100,000 barrel a day average in the first half. We've achieved this through our utilization of our Coker at Sarnia, through asphalt -- our asphalt plants at both Strathcona and Nanticoke and increasing heavy crudes in our overall raw material mix. Actions like this are where we're continuing to strengthen our overall downstream performance. On petroleum product sales. We sold 510,000 barrels a day in the quarter, up from 486,000 a year ago. The last time we had quarterly sales at 510,000 or above was 1990, immediately after our Canada Texaco acquisition. We achieved this result despite the Strathcona turnaround by leveraging our own refinery network, building pre-turnaround product inventories and securing third-party product purchases in advance. And as a result, we were able to reliably supply our customers throughout the entire period. Fundamentally, if you step back, our strategy in the fuel side is to profitably grow via branded sales, longer-term strategic partnerships and superior product offerings. And as a, just kind of a statement of fact, if you include our aviation sales in our overall -- or in our overall branded business, 3 out of every 4 barrels that we sell are sold under the Esso or Mobil brands. And we drive added value through branded sales. Earlier this year, we announced that Esso in Mobil, our branded network, exceeded 2,000 sites nationwide. Since we shared that, the branded count has now grown by some 150 to 2,150 sites nationwide, largely driven by the introduction of the Mobil brand in Canada and the conversion of existing Loblaw's retail fuel sites. Quickly on the chemicals business. We matched our best ever quarterly chemicals earnings of $78 million. The second quarter performance matched the previous quarterly high of $78 million achieved in the third quarter of 2015. For the first half of the year, earnings of $151 million are a record first half. Polyethylene leads the way for us. It's about 40% of our sales but more than 70% of our chemical earnings. Fundamental to our chemical performance are our feedstocks, largely Sarnia refinery offgas in Marcellus ethane that provide us sustainable cost advantage feedstocks supporting the overall profitability of the chemicals business. So just in wrap up before we go to your questions, the second quarter can be characterized by a uniquely heavy planned maintenance schedule to safely and reliably operate our facilities over time. And with this work successfully completed in both the upstream and the downstream, we're positioned for what we expect to be a strong second half of the year performance. With that, I'm going to turn it back to Dave and Dave will get us kicked off in the process for addressing your questions.

[Dave Hughes, Manager of Investor Relations]

Okay. So as I mentioned at the onset, we're trying something a little differently with the new technology. We do have a number of questions that were pre-submitted by the analysts. We're going to go through 2 or 3 right now and then move over to the live Q&A and then probably come back to some of the pre-submitted questions as we move through.

[Dave Hughes, Manager of Investor Relations]

So the first question comes from Mike Dunn at GMP First Energy.

[Michael Paul Dunn, Director of Institutional Research]

Regarding Aspen, can you provide any more color on what's holding up regulatory approval? If the current price environment holds, if you received Aspen approval tomorrow, do you think you would fully utilize your current 5% NCIB?

[Richard M. Kruger, Chairman, President & CEO]

Sure. Aspen -- for those of you who have not been familiar, Aspen is -- we've submitted a regulatory approval for 2 phases, 75,000 barrels a day of bitumen per phase on a solvent-assisted SAGD project. A project with this technology that would result in about a 25% improvement in capital efficiency and a 25% improvement in greenhouse gas reductions versus set industry SAGD. So, economic and environmental benefits. We anticipate it would be about a $2.5 billion to $2.6 billion investment. And we've said all along that our investments need to be globally competitive and we would define that as delivering a 10% return in a $40 a barrel of WTI world, and we believe Aspen will meet that criteria. We initially submitted our first application back in December of 2013. We amended it or updated it in October of 2015 to the SA-SAGD. We responded to 3 rounds of supplemental questioning. Our environmental impact assessment was deemed complete by the Alberta Energy Regulator in April 2016. And we have engaged for 4.5 years, extensively, with stakeholders and indigenous groups on this project in all regards. There were delays in determining the adequacy of the consultation. That has now occurred. And what we're waiting on is a decision from the AER regarding closure of any further statements of concern and ultimately, the decision that the project is in its public best interest. I will tell you, I'm quite disappointed in the time line on this. I think this is a extremely attractive project, both economically and environmentally. And it should be the type of project that we should, as a province, as an industry, we should be striving to pursue asap. The inordinately long timelines and uncertainty are quite disappointing. Now that said, if we get the approval, we will -- we'll look and see what, if any, conditions come with it to make a final investment decision. And as it relates to any impact on our NCIB, we -- when we expanded our NCIB program here recently, we had Aspen clearly in the viewscreen then. So our thought is, just like my comments back on the capital allocation strategy, that we have -- we'll have both the capacity to pursue an Aspen as well as pursue a continued NCIB program at or near the level here that we have applied for.

[Dave Hughes, Manager of Investor Relations]

Okay. The next question came from Justin Bouchard of Dejardins.

[Justin Bouchard, Co]

Are there any specific details, examples you can share that can help us understand your confidence that Syncrude is on the right path?

[Richard M. Kruger, Chairman, President & CEO]

Yes. I mean, there's no question about it. As we look back over time, that Syncrude's performance has been disappointing. It's an asset that has tremendous potential to generate cash but the issue is the reliability. And yet again, we here, with the power outage we had yet another event. If we look at the steps we're doing both as under the management services agreement that Imperial and ExxonMobil have had with the venture and now with the expanded ownership and support of Suncor in it, as the owner step back around the table, we look at and we continue to believe all the things we're doing to enhance ultimate reliability at this facility remain the right things, equipment strategies, maintenance procedures, operator training on and on. We need to eliminate the so called one-offs that occur. So the frustration is there with the overall performance but the confidence and clarity in the steps we're taking remains high. And the belief that we are on -- that we continue to be on the right path. It's difficult to make promises and commitments and then continually disappoint on them. But we do think something on the order of a 90% reliability, which would lead to something in our share of a 75,000 to 80,000 barrels a day is the ultimate target, the objective that we will achieve at Syncrude over time.

[Dave Hughes, Manager of Investor Relations]

Next question from Jennifer Rowland at Edward Jones.

[Jennifer Alison Carta Rowland, Senior Analyst of Equity Research]

How's the new solvent-based recovery technology impacting Cold Lake's volumes?

[Richard M. Kruger, Chairman, President & CEO]

Yes. Specifically, right now, Cold Lake, it has always been identified as a cyclic steam operation. But in actual operation, Cold Lake is a bit of a patchwork quilt. It has cyclic steam. We have a large part of the field under steam put. And we've used it and continue to use it to test and pilot new technologies, solvent-based technologies. The project that we're expanding or the application we're expanding, we call LASER, so Liquid Addition to Steam to Enhance Recovery (sic) [ Liquid Addition to Steam for Enhancing Recovery ]. It's a high-pressure process that puts a mixture, 5%, 6%, 7% of solvent in the steam. You inject it and then you let it soak like you do a cyclic steam and then you turn around and produce it back. We had -- last year, we communicated that this was a part of our plan. We've had some delays in starting it up with -- we completed some casing integrity work. Some of the kind of the steam strategy used in the other areas. So we're a bit behind, probably on the order of that kind of a current rate, somewhere about 5,000 to 6,000 barrels a day behind where we had thought late last year we would be. That is timing. The confidence in the technology and the confidence in the economic remains high. And that's part of the ramp up we'll see at the second half of the year as now that as LASER, as we've implemented it and it kicks in, in a production performance, we'll see that growth continue in the second half of '18 and then on into '19. And it is a technology that we are looking at and we anticipate further expanding in its application at Cold Lake as the field continues to transform from a pure cyclic steam operation to other enhanced forms of recovery.

[Dave Hughes, Manager of Investor Relations]

Okay. Operator, I think we're going to turn over to the phone line now for the next couple of questions.

[Operator]

[Operator Instructions] And our first question comes from Dennis Fong from Canaccord Genuity.

[Dennis Fong, Exploration and Production Analyst]

So the first question that I just have is around Kearl. So I really appreciate the color as to some of the operating conditions and levels that you guys are currently at right now. I think just out of curiosity, in terms of, I think it's more of like a consistency situation in terms of being operated at such a high level for an extended period of time. What kind of additional level of confidence do you guys have for the interim, call it, the next 6 to 12 months versus after you complete some of the redundancies that you're installing at Kearl in terms of being able to achieve a stronger rate of production? And then secondarily, how much further from the, about 240,000 barrel a day capacity that you guys are indicating, do you think you may be able to achieve with some form of consistent operation?

[Richard M. Kruger, Chairman, President & CEO]

Yes. I think if I start at kind of the back end of that question and come back. When we have the supplemental crushing capacity in the flow interconnect, it will give us a lot of operational flexibility, 4 crushers instead of 2 crushers that each one of them or any 1 of them at a point in time can provide essentially half or 150,000 barrels a day of ore feed. So when we have that work completed, the confidence and the reliability, I would say, would be quite high. In the meantime, what it takes is with the 2 crushers, we still have a bit of that vulnerability to any downtime on any 1 of the 2. So the regular maintenance, the ongoing inspections we do, we took a number of steps last year to lessen the load on the crushers to enhance bearing life, chains strength in life. So we've done a number of things that we think have made a material difference to bump up the current reliability. But there's no question that we'll have a -- continue to have a bit more vulnerability until the supplemental crusher's in place. That said, that eyes wide open awareness has been factored into our expectation of achieving 200,000 barrels a day gross this year and next year, and then the bump up to 240,000 beyond that. I -- at personal level, when we have that work in place, we will be testing it certainly to see, is there any magic about the 240,000 or can we do better than that. But I think that will be a conversation on the day once we've completed the work in progress.

[Dennis Fong, Exploration and Production Analyst]

Okay. Perfect. And then just secondarily on egress and your current exposure to rail, I was hoping to find out a little bit more about -- it seems like a number of your peers are looking at potentially ramping up production to some degree. And how you guys are managing around, we'll call it, potential tightness in egress out of Western Canada?

[Richard M. Kruger, Chairman, President & CEO]

Sure. If you step back fundamentally kind of a strategy, we seek to -- first and foremost, we seek to take and put as much heavy oil into our own refineries as we can and there's a little bit of a left pocket, right pocket kind of a natural hedge within that. And I talked about, I made comments on the refining, how we've significantly increased the heavy feeds to about 25% or roughly 100,000 barrels a day of [ deal bit ] our heavy crude into our refineries. That's kind of priority one. Secondly, we strive to get as many barrels to the Texas Louisiana Gulf Coast via contract pipe commitments as possibly can. It's the highest-valued market. It's the largest concentration of heavy oil processing facilities in the world. And from a feedstock reliability with declines in places like Venezuela and things, that continues to be the market that offers the highest value. So that's kind of priority two. Priority three then would be to use rail capacity to fundamentally achieve the same thing. To get the barrels to the highest-valued markets which that could be, Baton Rouge, Louisiana, Beaumont, Texas, the Gulf Coast. We decided in 2013 to build a rail terminal. A joint venture, 50-50 at Kinder Morgan adjacent to our Strathcona refinery. At the time, we said it would be a bit of an insurance policy if market access i.e. new pipelines didn't come about in the needed time frame. We -- like any insurance policy, our intent or our hope was that we didn't have to use it too much. Well over time, we have used it. We've increased volumes at it. Earlier in the year, we were in the 50,000 to 60,000 barrels a day capacity, are using 50,000 to 60,000 barrels a day of the capacity. We've ramped that up to closer to about 100,000 barrels a day of its capacity now. And I look to the second half of the year, I expect that we'll be using more of it, mostly targeting something in the 125,000 barrels a day of the roughly 210,000 barrel a day capacity of the facility. And here again, it's allowing us to cost-effectively, through the use of unit trains and our existing ownership in this facility, compete on a netback basis with pipe alternatives to get to markets, again primarily Texas, Louisiana, Gulf Coast, and get the highest realization for our production. Last but not least, our volumes that go into the mainline system, which would largely be exposed to kind of a head of pipe differential or discount and the bulk of that will go -- if it doesn't go to our own refineries, it will go into the U.S., Midwest, places like Joliet and widening things like this to large refineries in that area. So we continue to reduce our overall exposure to differentials and through our own refineries, contract pipes to Gulf Coast and continue to expand its use of rail.

[Operator]

And our next question comes from Travis Wood from National Bank of Canada.

[Travis Wood, Analyst]

You touched on -- in the release this morning, you touched on autonomous haul vehicles and the success that you're having, at least, early on here. Could you walk us through how you guys are thinking through kind of the short-, mid-, long-term plans around rolling that out in a larger scale? And then what that could mean on cost savings both on an absolute cost per barrel or just even more of the higher-level efficiency conversation?

[Richard M. Kruger, Chairman, President & CEO]

Sure. And I think if I step back before I dive into the question. For all of our operations, it's all about achieving the lowest long-term reliable cost of supply to enhance or maintain our competitiveness in good times and in bad. And Kearl is no different than that. On the mining side, the economy of scale is key to it. Hence, the supplemental crushing capacity, et cetera. But then it's looking at what other opportunities do we have in our business to continue to improve performance. We do think autonomous trucks offers a significant potential. And for example, we commented in the release about the current pilot and the expansion of that pilot. These are existing trucks that are in our service today that we've retrofitted with the equipment, the sensors and the controls that are required for autonomous operation. So ramping it up here to the 7 trucks by the end of the year will be to just continue to see how this pilot -- how would you have more and more trucks that are autonomous, how you can direct their movements and their ultimate performance relative to a driver fleet. Very key to this is our workforce where we have worked very closely to ensure people don't view this as a threat, a threat to jobs and so that they are embracing and helping support this for its ultimate success. Now in terms of what kind of value might it provide? If we just do straight up math and think of autonomous trucks, the incremental costs to make them autonomous, the money you might save on having fewer drivers as our truck fleet would grow in the future, you can come up with something in the $0.50, $0.60 a barrel. That doesn't include, necessarily, productivity improvements, which we believe there are. So we don't have a absolute number yet but something in -- and I saw there was a question asked on the expectations, can it be in the $1 a barrel range? I don't see any reason why it could not be in that type of range. And so continuing to expand this pilot, we'll see where it goes. But I would say, we are optimistic and have a level of confidence that a form of autonomous operation in the future will be an economic enhancement to the operation.

[Travis Wood, Analyst]

Okay. And then just an extension on this. If, along the supply and value chain through the integrated business, are there any technologies that you're thinking about today? Whether it's autonomous vehicles or something else where we could see some step function where the sustaining capital continue to be grinded down or headed lower? What other types of kind of disruptions can we see or some improvements on the technology side to -- as we look out?

[Richard M. Kruger, Chairman, President & CEO]

You're well aware -- our commitment to fundamental science, technology and innovation, we would hold that up to anyone in terms of what we spent. We spent about $150 million to $200 million a year in good times and bad on this because of the type of assets and the long-life nature of our assets. We can do that and it pays out over the long term. I think the areas I'm kind of most excited about now, we talked a little bit about it at Cold Lake are solvent-based technologies because for a given amount of steam, you can get a material production uplift and an incremental resource recovery over time. That's largely been the story of Cold Lake over its 33 years commercial life is applying new technologies, operational innovations to continue to enhance recovery. I think solvent-based technologies will give a bit of a step function improvement. And it will do that consistent with the societal aspirations of lower greenhouse gas emissions and performance. So I think that is key. Another area, we haven't talked a lot about this yet, is the overall digital aspect of things. We think there are several hundred million dollars of potential that we are scoping now in process optimizations at places like Kearl, again at steam flood optimization at Cold Lake. And with 5,000 wells at Cold Lake and the complexity and size of the operation at Kearl, small things can make big differences. And so I'm really, I'm focused on the upstream right now. But I think a lot of the same things kind of the digital enhancements can apply in the downstream as well. You call those breakthrough step function. I think, largely, they can have big, big material impacts to our competitiveness. And we are aggressively pursuing those types of things.

[Operator]

And our next question comes from Greg Pardy from RBC Capital Markets.

[Greg M. Pardy, Managing Director and Co]

Rich, just a couple of quick ones for you. You may want to not give precise numbers on the first question which is really just trying to get a sense as to where is the OpEx running at Kearl? And maybe, where do you expect it to go as you go through the year and your volumes ramp up?

[Richard M. Kruger, Chairman, President & CEO]

You know, Greg, I think on kind of our earlier conversations and guidance on Kearl remains the same. The first half of the year, we're kind of in the mid-20s or so, U.S. dollar basis, but that is because of the volume performance at the 180. And a major turnaround, we spent a fair bit of money on the turnaround itself. And as you and I have talked before, the incremental barrel in a mining operation comes at a fraction of the cost, 25% to 30% of the cost of the full barrel. So as we increase volumes in the second half of the year, we expect that to drop down. And then in particular, as with the supplemental pressure comes on at the end of '19 and into '20, then we get to the 240. That's where we're really start to seeing that $20 a barrel or below kind of cost. You always have competing offsets as we mine further distances out and the call distances and needs for truck increase. But that's where things like the autonomous truck or other opportunities we're pursuing are aimed at more than offsetting any natural increase you might have just by the nature of your operations. So I think, Greg, fundamentally, the guidance and conversations we've had on Kearl and cost will really remain unchanged. There's not anything -- if anything, I think with digital and some of these other things, I probably would see more opportunities to further drive down unit costs now than we might have been talking about a year or 2 years ago.

[Greg M. Pardy, Managing Director and Co]

Okay. Great. And I know there's been some questions asked around Syncrude and I'm not sticking out of school here when I say, on Syncrude's call yesterday, they did talk about the necessity, I think, for perhaps, just more cohesion amongst the owners in terms of accelerating that reliability game plan. But is -- in your view, is everybody kind of on the same page at Syncrude or is it a situation where actually fewer owners would be better?

[Richard M. Kruger, Chairman, President & CEO]

Yes. I did hear there was a lot of interest there and quite a few questions on that yesterday during their call. What I would say is we are all about anything that can add or enhance value to any asset we own. And Syncrude, clearly, fits in that. With a fewer number of owners in the past few years, we focused a lot on like a LASER, on further kind of dismantling the corporate structure of Syncrude and making it more and more an operating organization through the economies of scale and synergies of support services, whether that's IT, procurement, et cetera. For example, each and every day right now, there are 120 Imperial and ExxonMobil people that are assigned to and working on Syncrude from a seconded standpoint, management, technical, IT, procurement, financial services. And we think that gets -- lowers the overall cost of Syncrude. In recent months, years with Suncor, the operating efficiencies, looking at logistics and warehousing because the adjacent operations have been high priorities. Now we're looking at things about are there commercial arrangements that can be constructed that can help on both sides of the fence on that. And I think like all commercial arrangements, they need to make sense for all parties in the deal. And we are working on and believe there are commercial enhancements that can be achieved here at Syncrude and there is no reason -- well, say go back to where I started, if it can enhance value at Syncrude, we are 100% behind it. And that hasn't -- that hasn't -- hasn't and doesn't change with the ownership.

[Operator]

And our next question comes from Mike Dunn from GMP First Energy.

[Michael Paul Dunn, Director of Institutional Research]

Rich, I wanted to ask about the interlinking of your Strathcona refinery profitability to Syncrude given that light synthetic is a big part of the feedstocks there. Maybe, could you frame for us, how, I guess, if you have unexpected downtime at Syncrude, can you kind of provide some sort of numbers around how that impacts your Strathcona profitability? I mean, obviously, we would see probably spikes in the price of, let's say, a benchmark synthetic crude if there's unplanned outages at Syncrude or Suncor or Horizon, for example. But just wondering if you can frame for that, how much maybe that's impacted your downstream or your Strathcona profitability over the last several years relative to if Syncrude was running at 90%.

[Richard M. Kruger, Chairman, President & CEO]

Yes. Mike, you're correct in connecting the importance of Syncrude to Strathcona. It's a feedstock that is right up Strathcona's ally in terms of what it needs. And it's -- at our share when it's up and running at roughly 70,000 barrels a day or so, essentially all those barrels do go to Strathcona. And that can be 1/3 of the refinery's feedstocks. So when Syncrude has unexpected, unplanned upsets, it's important. It has an impact on Strathcona. Now when we have planned events, we're able to work ahead of time, get alternate supplies and things. But when Suncor has -- or Syncrude has that unplanned event of the supply focus for Strathcona do need to scramble. And unfortunately, they've had to scramble more than they, over the last few years, more than they would have liked. Some of the things we're doing, we are testing and looking at alternate crudes, whether they'd be synthetics or other lights. We're looking at -- does it make sense to direct every barrel of Syncrude there every day or should we have a plan that maybe takes a part of it, directs it to Strathcona, secures supply agreements with other synthetics and then use the remainder of Syncrude a little bit as a swing because the vulnerability, the exposure to Strathcona and Strathcona's a very high-performing facility. I -- the Syncrude events are more troubling than Syncrude because of their impact on Strathcona. On a numbers standpoint, the -- you can kind of do math on it. I don't have explicit numbers necessarily to share. But it's -- when we find alternate supplies, it can be in the -- it's in the millions of dollars over a course of a quarter on the upset. It's not gigantic. The impact of a loss of Syncrude of the upstream and the Syncrude alone is bigger. But it does affect the ability to run that refinery at the highest level of reliability without disruptions. And we keep looking at what we can do to not only benefit from the synthetic crudes, [indiscernible] lines but maybe lessen the absolute reliance on it on a day-to-day basis.

[Dave Hughes, Manager of Investor Relations]

Okay. Rich, we're going to go to some more of the pre-submitted questions now. So I've got one here from Jason Frew, Crédit Suisse.

[Jason Frew, Research Analyst]

I'm interested in the relative attractiveness of upstream versus downstream investment in the current and projected environment. Do you see more balanced investment going forward? Or does upstream still dominate the opportunities set?

[Richard M. Kruger, Chairman, President & CEO]

You know I think, Jason, it's -- our view of course is less of an upstream or downstream, it's where do we see the greatest value. In the upstream, we tend to talk about big bites, an Aspen-like project, maybe problematic drilling at Cold Lake, things like this. Whereas the downstream it tends to be, generally, smaller incremental investments. Cogen at Strathcona, terminals, logistics in the greater Toronto area, things that either strengthen the competitive position we have or work to further enhance it. And I would say and you've seen this over the last 5 years or so, when you look at our downstream performance and the cash generated there, the integration and balance we have there is a very -- is a strong financial performer that we want to continue to strengthen. I've talked about efforts to expand our branded network. Some of the relationship, the long-term strategic partnerships we have, whether that's with aviation service providers, whether that's with rail. We have recently now, our supply in aviation fuel into the Vancouver Airport that we hadn't been able to do. We -- on an asphalt standpoint, we've figured out how to run our facilities year round even in winter and store asphalt for sales and use in the warmer weather months. So there are opportunities in the downstream. On an absolute dollar basis, they may not compete kind of a year in year out with where some of the upstream growth is. But we are certainly looking at and pursuing opportunities to strengthen our performance, our cash gen in the downstream. And it's like the old saying, "you need to spend money to make money." And increasingly, we are doing that with and around many of our downstream assets. I don't see big -- for example, you didn't ask it this way, but if you said a big new refinery or something like that, that's certainly less likely. You look at where a relatively North America, relatively flat to declining petroleum demand market. There are surplus capacities in some areas. So it wouldn't be necessarily in that kind of an investment. But really investments to further add on or strengthen what we have. The one exception could be the chemicals business. We're looking at -- we continue to look at both our Sarnia facility as well as opportunities in the West that can take advantage of cost or price advantage feedstocks. We're a bit early in that. I'd say, that would be an area that over time, we may talk more about as we look at the overall -- the business environment and the relative attractiveness. But it's not an upstream versus downstream more than the other. It's where do we think we have the highest value opportunities in whatever business line they happen to be in.

[Dave Hughes, Manager of Investor Relations]

Okay. We have a question from Benny Wong, Morgan Stanley.

[Benny Wong, Vice President]

Can you give us an update on the 5-year CapEx plan you've provided in your business update in November? How was your outlook evolved since and where are the main levers to pull up their changes?

[Richard M. Kruger, Chairman, President & CEO]

Yes. I think, Benny, we haven't announced this yet, I guess I'm announcing it right now. We're going to have an Investor Day in kind of late October, early November. We're landing on the date right now. And we'll go through and give some pretty comprehensive updates on all of these. But if I sit here today, relative to the capital plan that we outlined in last November, I think the component parts are still quite similar. We've talked about Kearl, we've talked about Strathcona. We had some moderate growth opportunities in there, including Aspen in that outlook. So I think noticeably, it will be similar to what we've talked about but we will -- we're going through our planning process as we do every year. Right now, we'll update and dust all that off and we'll put both sources and uses of funds in our -- as we see them out there in front of the investment community here later this year.

[Dave Hughes, Manager of Investor Relations]

Okay. And question from Matt Murphy, Tudor, Pickering, Holt.

[Matthew Murphy]

How has the mainline apportionment affected IMO's ability to move barrels on committed pipeline space?

[Richard M. Kruger, Chairman, President & CEO]

I think it gets back to some of the market access comments I had earlier when we look at our priorities, getting heavier crudes into our refineries, using contract pipe capacity to get to the Gulf Coast rail. And we move a lot of volumes on the mainline. We had some limitations on market access in the first quarter, I think we talked about 12,000 barrels a day impacted. In the second quarter, we really haven't. It is tight. But because of our integrated nature, our refineries and the way the nomination system works with both confidence in the production we can provide to the pipe and in the purchasers or the refinery's commitments to run the pipe, we have advantage in that mainline system because of the integrated and balanced nature of it. And so, it's tight. I will sleep better when there are new pipes in the ground and expanded market access. And so it's kind of -- it's a month-to-month challenge that keeps our production folks and our supply folks on their toes to ensure we have full assurance for our equity production and to ensure we get the most cost advantage feedstocks to our refineries.

[Dave Hughes, Manager of Investor Relations]

Okay, we're going to go to a couple of questions on the phone again now.

[Operator]

We have a question from Neil Mehta from Goldman Sachs.

[Emily Christine Chieng, Associate]

This is Emily on behalf of Neil. I was just interested in seeing how Imperial is positioned in an IMO 2020 world? Are there any sort of project that the company's taking out that could help position it better?

[Richard M. Kruger, Chairman, President & CEO]

Yes. Emily, I think, first of all, let's take compliance out of the equation. There's a lot of discussion and debate about what the level of compliance will be. But from a planning standpoint, we're starting with, okay, the industry complies. We think and when this topic first came up a while back, we saw it and were a bit concerned about kind of from the brand standpoint, what might this mean. But over time as we've continued to analyze it, understand and look at our opportunities, we feel less threatened by it. We do have a level of heavy crude conversion capacity that gives us advantage. Our access to the WCS link crudes and the ability to create differentiated high-value kind of marine fuel offers. If you'll look at our distillates, which we think will benefit it a post-IMO 2020 world. We had, I think, about 180,000 barrels a day, round numbers of distillate sales. Our heavy sales are less than 5%. So we're -- these are things that we're looking at. We're working on how can we operate in that world. But I would say it's not a topic that gives us a great deal of anxiety in terms of what impact it may have on the company. Now if you talked about what it might do more broadly to heavy crude prices, here again, we've got the refinery network that works to give us a bit of an offset and a hedge. And you've got that massive complex that I've mentioned a couple of times now in the Texas, Louisiana Gulf Coast that has all the facilities to maximize value from heavy crudes. And our ability to get our crudes there will remain a priority. And we expect that, that will continue to be -- there'll be a strong, high demand for those heavy crudes.

[Emily Christine Chieng, Associate]

Okay. And I've got a second question, just on the chemical segment. Chemicals performed really well for Imperial this quarter. Just wondering if what you guys can comment on with respect to margins, particularly as you're seeing crackers come online in the Gulf Coast?

[Richard M. Kruger, Chairman, President & CEO]

Yes. You know, I think there's a couple of things. We have, over the last few years, we've taken a number of steps to continue to reduce our feedstock cost. I mentioned Marcellus ethane. Of course, all the Sarnia offgas. So that keeps our cost quite low. And we're a -- where we make the bulk of our money is in the polyethylene, particularly the rotation and injection molding. I think I forget, I forget the exact number but the majority of our customers are within a day's drive for our polyethylene. So when you start looking at -- we got a feedstock cost advantage and then a location advantage relative to our customers. So as you look at other facilities that would strive to compete in those markets, they may have scale and they may or may not have the feedstock situation. But they have a greater logistical cost to get into those markets. So our strategy here is we put in a new furnace over the last couple of years. It gave us a more cost effective operation. It gave us an incremental 7% to 8% increased crude capacity. It's take what is a strong, not a niche business, I don't mean to minimize it that way, but it's not massive in its size or scale but continue to do all the things to keep it fit, in shape and profitable that we're able to weather any competition wherever it may come from.Okay. Dave has given me a signal that we have time for maybe 1 or 2 more questions. Why don't we go ahead and keep taking it up from the phone.

[Dave Hughes, Manager of Investor Relations]

We'll take the next one off the phone line. Yes.

[Richard M. Kruger, Chairman, President & CEO]

Okay.

[Operator]

Our next question comes from Phil Skolnick from Eight Capital.

[Philip Ross Skolnick, Managing Director of Energy Research]

Rich, you had mentioned that because you own the railcars in the facility that you have a competitiveness relative to the pipe in the U.S. Gulf Coast. Can you help us to, just to quantify those individual pieces kind of and how competitive it is to the pipe economics?

[Richard M. Kruger, Chairman, President & CEO]

Sure. And a lot's been written on there so I'll give you, I'll kind of reference some of the industry numbers but also ours. And these are -- Phil, these are round numbers but generally, if we look at moving a barrel on contract pipe from Alberta to the Gulf Coast and these are out there, you can see it. But you kind of talk in plus or minus $8 a barrel or thereabouts. On the rail terminal, our variable cost on rail gives something a couple of dollars a barrel perhaps higher than that, $9 or $10 a barrel. Of course, we've got the fixed cost, the investment in the terminal things. We look at it from earnings, you'll certainly see the fuller fixed cost which for us is in the kind of a $15 a barrel range. You've seen industry talking about $17 to $20 full cost, whether that's a unit train or a manifest rail. We're a bit lower than that because the ownership of the facility. And then when it comes time to literally optimize week to week, month to month, yes, we look at that full cost but the optimization can come on that variable cost. And so, our traders are looking at, with that contract pipe, with the head of market -- excuse me, head of pipe price in Edmonton, where do we get the highest net back, the highest value? And as I said earlier that continuing to increase volumes via rail is providing and we think for the foreseeable future, will continue to provide a higher value than a head of pipe sale at -- in Edmonton or [ harvesting ].

[Philip Ross Skolnick, Managing Director of Energy Research]

And just a follow-up on the rail side. You mentioned you think it's going to get to 125,000 in the second half of the 210,000. What -- is that going to be third-party or is that your own volumes? And also, so what gives you the confidence on the 125,000 in the second half? And then, are you on the look at all the new third-party rail to get to the full 210,000 or would you just continue to maybe do more all of your own internal volumes?

[Richard M. Kruger, Chairman, President & CEO]

I think from our standpoint, our own -- the terminal we own 50% of, our view is, again for the foreseeable future, that would meet our needs as we continue to ramp up and optimize the overall disposition of our crude. The, kind of the determinate on the rate of the increase in the capacity and utilization has largely been on the rail service providers, getting necessary power, locomotives and trained people on it. So it's probably been a bit slower than we would have hoped over the course of this year. But that's something that we keep working. We've entered into arrangements where, and that supports the growth that I've commented from the 50,000, 60,000 barrel a day utilization early in the year to the more 80,000, 90,000, 100,000 of late and then growing to the 125,000-ish range over the course of the year. So I think our terminal will meet our needs and will continue to look at it if it is attractive to expand that utilization either for our own needs or third-party needs and take advantage of it. It's not just a market access mechanism but it's ability to make money by providing service to others.

[Dave Hughes, Manager of Investor Relations]

Okay. So I think that brings us to the end. So Rich, I turn it to you for any summary remarks.

[Richard M. Kruger, Chairman, President & CEO]

Yes, I just -- first of all, I'd like to thank you for your time and your questions today. I do appreciate Dave and your use of the -- this technology to allow us some questions ahead of time so we can see where our -- where do folks' interests lie. I hope you feel you have a better explanation not only of the second quarter results, but also our outlook for the rest of the year. And our commitment continues to be to provide greater clarity, transparency on our performance and our results. And we will -- we'll look at how we do this going forward but as I mentioned, we will have a full-fledged Investor Day around the time of our third quarter release. We're locking it down now. But I look forward to your continued engagement as the year goes on. So thank you for your time and attention today, and I hope you found this of value.

[Dave Hughes, Manager of Investor Relations]

Okay. I'd just like to repeat my thanks for everybody joining us this morning. I recognize, we didn't get to all of the pre-submitted questions, but we did make an effort to try to cover a wide range of topics. So as always, please don't hesitate to reach out to Jeff or myself if you have any further questions. I think everybody has our contact information, if not, it is on our -- on the Imperial website under the Investor's tab. So thank you very much, everybody. Have a safe weekend.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.