RBC Dominion Securities Inc. RBC Capital Markets, LLC Greg Pardy, CFA (Co-Head Scott Hanold (Analyst) Global Energy Research) (512) 708-6354; (416) 842-7848; [email protected] [email protected] Robert Kwan, CFA (Analyst) (604) 257-7611; [email protected] Michael Harvey, P.Eng. (Analyst) (403) 299-6998; [email protected] September 24, 2020 Energy Insights Oil Sands—Bounce Back Canada’s oil sands are demonstrating their resilience as production recovers from extensive shut-ins, curtailments and accelerated maintenance amid dreadful oil market conditions this past spring. An

EQUITY RESEARCH EQUITY intensified focus on ESG—and mostly E—is also manifesting itself across the board as energy producers set emissions objectives and undertake steps to reduce their GHG footprints. Acquisition & Disposition activity involving the selective exit of supermajors from the oil sands remains a wildcard—but could serve up bargains for Canada’s leading energy players. Key Points:

• Stability Amid Chaos. The low-decline nature of oil sands production—which remains curtailment constrained—adds stability to Canada’s oil supply, which we expect to fall just 256,000 bbl/d (5%) year/year in 2020, largely rebounding in 2021. This contrasts with the US, where we peg entry-to-exit oil production will fall 2.0 million bbl/d (16%) in 2020, and not resume growth until second-half 2021. • Growth on Pause. Oil sands growth will almost certainly take a breather through 2021 pending improved oil market conditions, balance sheet deleveraging, adjustments to Alberta’s curtailment policy, and improved pipeline egress. Over the 2019-23 timeframe, we peg Canada’s oil sands production (two-thirds bitumen weighted) CAGR at just 2% (49,400 bbl/d per year)—reaching a plateau of 3.2 million bbl/d in 2023. Canada’s supply path mirrors this picture with a 2019-23 CAGR of only 0.5%, impacted by the West White Rose deferral and sagging streams elsewhere. • Curtailments—Time to Adjust Quotas? Alberta’s curtailment policy engineered a dramatic tightening in Canadian oil differentials across the complex with stable quotas of 3.81 million bbl/d since December 2019. Narrow WCS-Maya spreads have closed the crude-by-rail arbitrage to the US Gulf Coast—and at times have fallen below pipeline tolls of about US$8/bbl to the same destination. Curtailments may remain in place until the 270,000 bbl/d Line 3 Replacement—an intermediate egress bridge—reaches targeted completion in 2021. • Trans Mountain Expansion—Critical Linkage. The 590,000 bbl/d Trans Mountain Pipeline Expansion is taking shape, and could be a game changer for producers given the off-shore market diversification it affords. The line is approximately 13% complete, with targeted completion in late 2022. • Keystone XL—Democratic Uncertainty. In our minds, the Alberta government’s US$1.1 billion preferred equity investment in Keystone XL (and up to US$4.2 billion loan guarantee) was a strategically sound move that facilitated construction on the 830,000 bbl/d line. A Democratic Presidential win on November 3 would create uncertainty for the line’s Presidential Permit—despite completion of the border crossing in Northern Montana.

Priced as of prior trading day's market close, EST (unless otherwise noted). Disseminated: Sep 24, 2020 00:45ET; Produced: Sep 23, 2020 17:52ET All values in CAD unless otherwise noted. For Required Non-U.S. Analyst and Conflicts Disclosures, see page 5.

Energy Insights

Exhibit 1: Canada Oil Supply Outlook

million bbl/d Forecast 5.5 Canada’s oil supply may 5.0 drop by nearly 260,000 bbl/d in 2020—but largely 4.5 rebounds in 2021. 4.0 Hebron 3.5 Western Canada 3.0 Conventional

2.5

2.0 Synthetic Crude Oil 1.5 East Coast 1.0

0.5 Non-Upgraded Bitumen

0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Note: Western Canada Conventional includes condensate and pentanes, as outlined in Exhibit 2. Source: AER, CER, RBC Capital Markets estimates, Company reports

Exhibit 2: Canada Oil Supply Outlook – Breakdown

Millions of bbl/d 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2019-23E Oil Sands CAGR Synthetic 1.02 0.97 1.06 1.10 1.15 1.14 1.19 1.22 1.22 2% Bitumen 1.40 1.49 1.64 1.84 1.83 1.70 1.86 1.92 1.95 2% Canada’s oil supply growth 2.42 2.46 2.70 2.94 2.98 2.84 3.05 3.14 3.18 2% will likely pause through Year/Year Change 0.21 0.04 0.24 0.24 0.04 -0.14 0.22 0.09 0.04 Conventional Heavy 0.37 0.35 0.36 0.34 0.35 0.29 0.26 0.25 0.25 -8% 2021, pending improved oil Condensate & Pentanes 0.22 0.26 0.32 0.40 0.43 0.43 0.45 0.46 0.47 2% market conditions, balance Western Conventional Light & Medium 0.66 0.57 0.59 0.64 0.64 0.57 0.57 0.57 0.57 -3% 1.25 1.18 1.27 1.38 1.42 1.30 1.28 1.28 1.29 -2% sheet deleveraging and Year/Year Change -0.05 -0.07 0.09 0.11 0.04 -0.13 -0.01 0.00 0.01 improved egress. Western Canada: Oil Sands + Conv Oil 3.67 3.64 3.97 4.32 4.40 4.13 4.34 4.42 4.47 0% Year/Year Change 0.16 -0.03 0.33 0.35 0.08 -0.27 0.20 0.08 0.05 East Coast - Grand Banks Terra Nova 0.04 0.03 0.03 0.03 0.03 0.00 0.00 0.03 0.03 -2% Hibernia 0.09 0.14 0.14 0.11 0.10 0.12 0.12 0.11 0.10 0% White Rose 0.05 0.04 0.04 0.02 0.02 0.02 0.02 0.01 0.01 -12% Hebron 0.00 0.00 0.00 0.06 0.11 0.13 0.15 0.15 0.15 8% 0.17 0.21 0.22 0.23 0.26 0.27 0.29 0.31 0.29 3% (2) Canada Oil & Condensate & Pentanes Production 3.85 3.85 4.19 4.55 4.66 4.41 4.62 4.73 4.76 0% Year/Year Change 0.12 0.01 0.34 0.36 0.11 -0.26 0.22 0.10 0.03 NGLs (Ethane, Propane, Butane) 0.51 0.58 0.63 0.64 0.68 0.67 0.68 0.68 0.68 0% Canada Oil & NGLs (1) 4.36 4.43 4.82 5.20 5.35 5.08 5.30 5.41 5.44 0% Year/Year Change 0.12 0.08 0.39 0.37 0.15 -0.27 0.23 0.10 0.03 Notes: (1) Canada Oil & NGL production includes Ethane, Propane and Butane. (2) Refers to oil, condensate and pentanes production. Excludes ethane, propane and butane. (3)Condensate totals exclude plant/refinery volumes. Source: AER, CER, Canada – Newfoundland & Labrador Offshore Petroleum Board, IEA Oil Market Report, StatsCan, RBC Capital Markets estimates

September 24, 2020 2 Energy Insights

Exhibit 3: Canada Oil Sands Production Outlook – 2005-23

million bbl/d Forecast 3.4 Previous outlook Our freshened 2021 outlook 3.2 is down about 381,000 bbl/d, reflective of 2.9 turnarounds, likely Updated outlook 2.7 curtailment extension, and sagging streams elsewhere. 2.4

2.2

1.9

1.7

1.4

1.2

0.9 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: AER, CER, RBC Capital Markets estimates

Exhibit 4: Canada Oil Sands Production Outlook – 2021 Adjustments

'000 bbl/d 5,100

5,005 (12) 5,000 (35) (39) (41) 4,900 (23) (70) (381) 4,800 (45) (70)

4,700 (48) 4,624 4,600

4,500 Prev. Oil Sands Conv. SU CVE SU Oil Sands Conv. Light Condensate Offshore Updated Outlook Synthetic Heavy Ft. Hills Christina Firebag Bitumen & Medium & Pentanes East Coast Outlook Lake Bitumen Note: Adjustments are compared to our prior outlook as published in May 2019 Source: AER, CER, RBC Capital Markets estimates

September 24, 2020 3 Energy Insights

Exhibit 5: Canada Oil Sands Production Outlook – Select Projects (bbl/d)

Project Operator Recovery Capacity Product 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2019-23E CAGR Syncrude Syncrude Mining 350,000 SCO 266,840 257,369 247,868 270,404 248,296 245,243 293,286 279,975 304,200 315,000 315,000 2% Cold Lake Imperial Oil CSS 160,000 Bitumen 152,460 146,521 158,529 160,984 162,279 146,753 140,490 135,300 132,500 135,000 135,000 -1% Millennium/North Steepbank Suncor Energy Mining 350,000 SCO 209,581 213,480 239,110 186,439 238,803 201,058 223,378 194,976 200,207 221,142 221,142 0% Primrose/Wolf Lake Canadian Natural Resources CSS 120,000 Bitumen 96,000 92,602 99,588 70,706 78,668 67,313 75,900 78,000 78,000 85,000 90,000 4% Hangingstone JACOS SAGD 20,000 Bitumen 5,940 5,733 5,277 3,764 3,339 18,749 25,950 18,500 24,800 28,500 28,500 2% Foster Creek Cenovus Energy SAGD 180,000 Bitumen 106,380 118,344 130,690 140,488 153,369 161,979 159,598 164,963 165,000 165,000 165,000 1% MacKay River Suncor Energy SAGD 38,000 Bitumen 28,500 27,000 30,700 27,600 31,051 36,000 29,200 18,650 32,900 34,960 34,960 5% Christina Lake Cenovus Energy SAGD 260,000 Bitumen 98,620 138,046 149,950 158,897 205,502 201,017 194,659 210,065 213,767 225,000 234,000 5% Firebag - SCO Suncor Energy SAGD SCO 73,019 75,620 80,990 72,461 78,897 79,242 89,922 104,522 111,543 111,358 111,358 5% Firebag - Bitumen Suncor Energy SAGD 215,000 Bitumen 49,400 74,800 82,813 88,300 80,600 102,000 70,300 46,551 62,300 62,540 62,540 -3% Athabasca Oil Sands Project(a) Canadian Natural Resources (CNQ) Mining 320,000 SCO 237,206 246,843 240,424 259,736 276,950 285,700 286,400 270,000 292,400 292,400 292,400 1% Lloydminster Upgrader Husky Energy Upgrader 82,000 SCO 50,500 53,260 51,074 55,206 49,805 52,949 55,300 50,050 48,700 48,700 48,700 -3% Orion Osum Oil Sands SAGD 12,000 Bitumen 5,471 7,297 7,742 7,249 8,100 11,082 18,750 19,500 19,500 19,500 19,500 1% Jackfish Canadian Natural Resources (CNQ) SAGD 105,000 Bitumen 57,016 65,797 86,538 111,329 116,621 100,066 97,750 101,500 105,000 110,000 120,000 5% Surmont ConocoPhillips SAGD 148,000 Bitumen 26,000 24,000 27,561 69,316 120,069 137,670 125,300 95,900 117,400 121,200 121,200 -1% Long Lake Nexen (CNOOC) SAGD SCO 36,542 42,911 38,882 1,162 NM Long Lake Nexen (CNOOC) SAGD 72,000 Bitumen 21,713 40,742 44,410 46,300 32,000 45,000 45,000 45,000 -1% Great Divide Connacher Oil and Gas SAGD 20,000 Bitumen 11,857 14,139 14,542 8,578 12,556 11,097 10,930 10,500 11,000 11,000 11,000 0% Christina Lake MEG Energy SAGD 100,000 Bitumen 35,317 71,186 80,025 81,245 80,774 87,731 93,050 79,540 85,000 85,000 85,000 -2% Horizon Canadian Natural Resources Mining 250,000 SCO 100,284 110,571 122,911 123,265 170,089 230,950 202,600 236,400 233,650 233,650 233,650 4% Leismer Athabasca Oil SAGD 24,000 Bitumen 14,875 16,950 17,443 20,429 20,776 18,946 17,600 18,560 18,500 18,500 18,500 1% Kearl Imperial Oil Mining 220,000 Bitumen 22,705 71,835 152,136 169,337 177,461 205,834 204,357 210,600 240,000 240,000 240,000 4% Kirby (North & South) Canadian Natural Resources SAGD 80,000 Bitumen 350 15,130 29,467 37,674 36,112 34,542 32,850 63,350 72,000 72,000 72,000 22% Lindbergh Cona Resources SAGD 35,000 Bitumen 1,356 10,756 15,542 13,759 16,300 17,800 13,000 15,000 15,000 15,000 -4% Sunrise Husky Energy/BP SAGD 60,000 Bitumen 6,342 25,537 40,179 50,019 49,084 47,240 51,400 55,200 55,200 3% Hangingstone Athabasca Oil SAGD 12,000 Bitumen 3,358 7,386 8,942 8,570 8,500 3,348 6,011 7,000 7,000 -5% West Ells Sunshine SAGD 5,000 Bitumen 183 1,862 1,623 1,700 350 750 1,000 1,750 1% MacKay River (Phase 1) PetroChina SAGD 35,000 Bitumen 4,521 7,323 8,350 11,100 12,250 12,250 12,250 10% Fort Hills Suncor Energy Mining 194,000 Bitumen 122,100 157,645 115,100 145,100 159,100 170,720 2% BlackGold (Phase 1) Harvest Operations SAGD 10,000 Bitumen 1,719 7,590 7,400 8,500 8,500 8,500 3% Selected Oil Sands Production 1,684,862 1,890,791 2,114,715 2,194,931 2,460,120 2,687,986 2,744,539 2,636,941 2,852,378 2,938,500 2,974,870 2% Oil Sands Breakdown Mining 836,615 900,098 1,002,449 1,009,182 1,111,599 1,290,885 1,367,666 1,307,051 1,415,557 1,461,292 1,472,912 2% SAGD 549,286 698,309 803,075 898,854 1,057,769 1,130,085 1,105,183 1,066,540 1,177,621 1,208,508 1,228,258 3% CSS 248,460 239,123 258,116 231,689 240,948 214,066 216,390 213,300 210,500 220,000 225,000 1% Other 353,432 373,650 357,850 319,230 291,009 307,468 289,276 250,000 250,000 250,000 250,000 ` -4%

Total 1,987,794 2,211,180 2,421,491 2,458,955 2,701,324 2,942,505 2,978,515 2,836,891 3,053,678 3,139,800 3,176,170 2% Bitumen 1,013,823 1,211,125 1,400,232 1,490,282 1,638,484 1,847,362 1,827,629 1,700,968 1,862,978 1,917,550 1,953,920 2% Synthetic 973,971 1,000,055 1,021,259 968,673 1,062,840 1,095,143 1,150,886 1,135,924 1,190,700 1,222,250 1,222,250 2% Avg Year/Year Change (bbl/d) 2019-23 Bitumen 118,693 197,302 189,106 90,051 148,202 208,878 -19,733 -126,661 162,010 54,572 36,370 31,573 Synthetic (a) 19,292 26,084 21,205 -52,587 94,167 32,303 55,743 -14,963 54,776 31,550 0 17,841 Total 137,985 223,386 210,311 37,464 242,369 241,181 36,010 -141,624 216,786 86,122 36,370 49,414 (a) Athabasca Oil Sands Project is upgraded production as of 2012. Prior to 2012, a portion of volumes were non-upgraded bitumen. Figures above represent total production (bitumen + SCO) pre-2012. Note: SCO= Synthetic Crude Oil Source: Company reports, AER, CER, RBC Capital Markets estimate

September 24, 2020 4 Energy Insights

Required disclosures Non-U.S. analyst disclosure Greg Pardy, Robert Kwan and Michael Harvey (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Conflicts disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Distribution of ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis. Distribution of ratings RBC Capital Markets, Equity Research As of 30-Jun-2020 Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [Outperform] 776 51.63 238 30.67 HOLD [Sector Perform] 635 42.25 130 20.47 SELL [Underperform] 92 6.12 12 13.04

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