Cenovus to Focus on Expanding Oil Sands Projects in 2011

Cenovus Energy Inc. is planning significant investments in its oil properties during 2011 with a focus on expanding current oil sands projects, assessing new opportunities and bolstering its conventional oil assets. The plan for next year is to lay the groundwork for future growth with only a quarter of the capital dedicated to projects that will be producing in 2011.

The company expects to invest about $1.8 billion of committed capital in the construction of approved expansions and current operational activities in 2011. Another $500 million, designated as capital for additional opportunities, will be invested in the development of conventional assets and emerging oil projects.

"We've established our 10-year strategy to develop our oil sands assets, to double net asset value in five years and to pay a strong and increasing dividend," said Brian Ferguson, President & Chief Executive Officer of Cenovus. "Our 2011 budget sets us on the path to achieving these goals. Investments made now and over the next few years will continue to unlock the value of the vast oil resource in Cenovus's portfolio.

"Cenovus has the financial strength that allows us to invest now for the future," Ferguson said. "A strong balance sheet and considerable cash flow from our conventional oil and natural gas assets enable us to meet current operational and approved expansion commitments, maintain a substantial dividend to shareholders and still have the financial resources to invest in future opportunities."

Cenovus is anticipating strong cash flow for 2011 of about $2.2 billion. The company is taking a cautious approach in this estimate by using oil and natural gas prices that are below what forward markets are currently indicating for 2011.

Focus on oil capital investment

Cenovus expects to invest about $2 billion in its oil assets and refinery operations in 2011, which is nearly 90% of the company's total capital investment for the year. Much of that capital, about $750 million, will be spent at Christina Lake and Foster Creek, mainly on continued expansion activity.

At Christina Lake, construction of phase C is nearing completion and construction of phase D is well underway. Engineering work for phase E and preliminary site preparation for phase F are expected to start next year. Each of these Christina Lake expansion phases is expected to add 40,000 barrels per day (bbls/d) of gross production capacity. Engineering, procurement and site preparation are expected to continue on the next three 30,000 bbls/d expansion phases at Foster Creek F, G and H and preliminary plant construction is also scheduled to begin in 2011. About 170 gross stratigraphic (strat) wells are planned for Foster Creek and Christina Lake in 2011 to assess new sections of the reservoir and lay the groundwork for potential future reserves additions and project expansions.

"As a result of receiving Alberta Energy Resources Conservation Board approval this fall for an expanded development area for our Foster Creek project, combined with an overall increased recovery factor in the area, we believe we will be in a position to add at least 200 million barrels of proved reserves for our Foster Creek lands at year end 2010," Ferguson said. "We expect additional reserves increases at our other oil properties as well and are looking forward to seeing the actual 2010 Cenovus-wide reserves evaluation in February, following its completion by independent qualified reserves evaluators."

The company anticipates corporate proved finding and development costs in 2010 to be in the range of $3.50 to $4.50 per barrel of oil equivalent, not including changes in future development costs. In addition to the properties that are already producing, Cenovus has allocated about $190 million in 2011 to its emerging oil sands assets such as Narrows Lake, Grand Rapids and Telephone Lake. About 225 gross strat wells are scheduled for drilling at emerging properties to further assess the quality of the resources and provide geological information required for regulatory applications.

Capital spending at Cenovus's conventional oil properties is expected to total about $485 million next year, split between assets in Alberta and Saskatchewan. The capital will be invested in established oil properties, such as Weyburn, that generate strong cash flow for the company, as well as new assets including the Bakken and Lower Shaunavon properties. In addition, the company's Pelican Lake operation will spend about $190 million in 2011, mainly on expansion of the polymer flood of the mobile Wabiskaw formation and technological studies for recovering oil from the immobile Wabiskaw.

Commodity prices led Cenovus to favor investment in oil properties over natural gas properties during the past year and oil remains the focus in the 2011 budget. About 6%, or $140 million of Cenovus's 2011 capital investment is designated for natural gas development. Despite restricted investment, these high performing, low cost assets are expected to provide about $790 million in operating cash flow - 28% of the company's expected overall 2011 operating cash flow. Cenovus views its natural gas operations as financial assets which provide the cash flow that enables the company to develop its oil sands properties.

Cenovus also benefits from a natural hedge with its gas production since the company's share of natural gas consumed at its oil sands and refinery operations is about 110 million cubic feet per day (MMcf/d).

New projects moving through regulatory process

In preparation for a five-fold increase in its oil sands production over the next decade, Cenovus continues to move projects through the regulatory process to help provide flexibility in its expansion planning. The company currently has regulatory approval for oil sands projects with a combined gross production capacity of 308,000 bbls/d. That includes phases at Foster Creek and Christina Lake that are already producing as well as those in various stages of construction.

The company has also submitted regulatory applications for additional oil sands projects with combined gross production capacity of 285,000 bbls/d. Cenovus has received final approval for a steam-assisted gravity drainage (SAGD) pilot project at Grand Rapids in the Greater Pelican Region, which is 100% owned, and expects to have steam in the formation by the end of 2010. If the pilot is successful, the company expects to submit a regulatory application for a commercial Grand Rapids SAGD project by the end of 2011. Cenovus is planning to submit an amended regulatory application for its 100% owned Telephone Lake project in the Borealis Region by the end of next year. Regulatory review is ongoing for the 130,000 bbls/d Narrows Lake project.

Oil production increases led by oil sands properties

Cenovus continues to deliver on its oil production targets while remaining an industry leader in cost efficiencies. Total average oil production in 2011 is expected to increase by about 2% compared to 2010.

Average annual production from the company's oil sands assets is expected to increase by about 6% in 2011, led by a 30% increase at Christina Lake due to the start up of phase C scheduled for the second half of next year. Foster Creek is expected to increase average annual production by about 2% in 2011 despite a three week turnaround scheduled for mid-year.

Strong commitment to technology investments

Cenovus is committing $65 million toward technology innovation and improving energy efficiency in 2011.

The company has about 50 research and development projects underway at all times and plans to introduce at least one new commercial technology at its operations every year. Cenovus views leadership in the creation, development and commercialization of new technologies as essential to the company's continued success. The majority of research and development projects are aimed at improving operational efficiency, increasing oil production and decreasing environmental impact.

Wood River Refinery expansion nearly complete

Capital investment in the company's refining operations will be significantly less in 2011 compared with 2010 due to the Coker and Refinery Expansion (CORE) project at the Wood River Refinery in Illinois reaching its final stages. Cenovus has budgeted about C$210 million dollars for the CORE project in 2011 and expects the company's overall share of the project expenditures by the end of next year will total about US$1.85 billion. CORE is approximately 90% complete with the coker startup scheduled for the fall of 2011 and the plant expected to be fully operational by year-end, resulting in an anticipated operating cash flow improvement of about US$200 million a year net to Cenovus. The Wood River Refinery and the Borger Refinery in Texas are jointly owned with ConocoPhillips, the operator.

Continued portfolio management strategy

Cenovus is targeting divestitures of between $300 million and $500 million of non-core assets in 2011 but properties will only be sold if reasonable values can be achieved. No acquisitions or divestitures are included in the 2011 budget.

Certain one-time costs for 2011

The 2011 budget includes about $110 million in non-recurring costs, mainly related to leasehold improvements for office space that will be amortized over the term of the lease.

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