125 years of energy leadership 125Annual report to shareholders 2004 The importance of energy • Energy is essential for world economic and social development. • Hydrocarbons will remain a dominant source of the world’s energy for a long time to come. • Energy demand is rising worldwide, and new supplies of petroleum are required to meet this demand. • Canada is uniquely positioned to participate in this growing market. The International Energy Agency (IEA) has stated that oil and gas currently account for about 60 percent of all the energy consumed worldwide and, given the projected growth in demand, that is not expected to change significantly over the next few decades. World energy demand grows 1.7 percent a year millions of oil-equivalent barrels a day 350 Other* 300 250 Coal 200 Gas 150 100 Oil 50 0 1971 20022010 2020 2030 *Other energy sources include solar, wind, nuclear, hydro, biomass and waste Source: International Energy Agency Contents 2 Letter to shareholders 19 Financial section This report contains forward-looking information 4 Year in review 20 Management’s discussion and analysis on future production, project start-ups and future 6 Natural resources 32 Frequently used financial terms capital spending. Actual results could differ 10 Petroleum products 36 Management and auditors’ reports materially as a result of market conditions or 13 Chemicals 37 Financial statements, accounting policies and notes changes in law, government policy, operating conditions, costs, project schedules, operating 14 Principled people and practices 57 Natural resources segment – supplemental information performance, demand for oil and natural gas, 16 Caring for our communities 60 Share ownership, trading and performance commercial negotiations or other technical and 61 Quarterly financial and stock-trading data economic factors. 62 Information for investors Directors, senior management and officers Annual report 2004 The Imperial Oil advantage • The leading resource position in Canada with a diverse asset base • A consistent management approach and a disciplined investment strategy • A record of continually improving base operations • Financial strength unparalleled in the industry • A leader in the development and use of technology • High-performing, principled employees • Industry-leading return on capital employed • Imperial has provided superior returns to shareholders – in 2004, the total return was more than 25 percent and has averaged almost 20 percent a year for the past 10 years. Sustained increase in shareholder value Resource base an enabler for growth 10-year cumulative total returns billions of oil-equivalent barrels – 2004 12 Imperial Oil 2004 increase 600 10 500 • Significant resource base S&P/TSX Energy 8 • Long-life reserves 400 • Non-proved resource of 11.5 billion 6 oil-equivalent barrels • 300 2004 net increase in oil-sands resource S&P/TSX Composite 4 200 2 100 0 0 Production Proved Non- 94 95 96 97 98 99 00 01 02 03 04 reserves* proved resources Value of $100 invested on December 31, 1993 * Before year-end price/cost revisions Source: Bloomberg Financial highlights 2004 2003 2002 2001 2000 Net income (millions of dollars) 2 052 1 705 1 214 1 223 1 408 Net income per share (dollars) (a) – diluted 5.74 4.58 3.20 3.11 3.37 Return on average shareholders’ equity (percent) (b) 34.6 32.6 26.5 28.8 32.7 Return on average capital employed (percent) (c) 27.7 25.3 20.0 22.3 26.5 Annual shareholders’ return (percent) (d) 25.3 30.5 3.2 14.5 30.2 (a) Calculated by reference to the average number of shares outstanding, weighted monthly (page 60). (b) Net income divided by average shareholders’ equity (page 39). (c) A definition of return on average capital employed can be found on page 33. (d) Includes share appreciation and dividends. Imperial Oil Limited 1 Tim J. Hearn, chairman, president and chief executive officer Letter to shareholders Imperial’s ongoing strategy The company had another excellent prudent to expect 2004 prices is to increase long-term year in 2004. A new record was set and margins to be sustained over a for earnings at $2,052 million or long period. For this reason, Imperial’s shareholder value by $5.74 a share, return on average business model remains focused continually improving base capital employed was 28 percent and on sound financial management, operations while investing return on shareholders’ equity was a disciplined investment strategy in attractive growth 35 percent. Regular per-share dividend and improving those things we payments increased for the 10th year can control. opportunities. in a row, and almost $1.2 billion was returned to shareholders through The company maintained its strong dividend payments and the share- financial position while making capital buyback program. The total return and exploration expenditures of to shareholders including dividends more than $1.4 billion. Major natural paid and share-price appreciation resources opportunities were was 25 percent. advanced. A significant development drilling program was undertaken at Higher commodity prices and strong our oil-sands operations at Cold Lake, refining and petrochemical margins Alberta; work on the major upgrader were major factors in Imperial’s expansion at Syncrude was advanced; improved earnings. The company’s the main regulatory applications for operations were also solid. Safety the Mackenzie gas project were filed; performance was the best on record, and delineation drilling proceeded at operating reliability improved and the Kearl oil-sands site in northeastern record volumes were achieved in Alberta. In petroleum products, work several areas. Looking ahead, began on modifying refineries to because of the cyclical nature of the produce low-sulphur diesel fuel to business, which is strongly influenced meet future regulatory requirements by the changing fundamentals of and further reduce smog-forming supply and demand, it would not be emissions. 2 Annual report 2004 Overall, Imperial is well positioned We are determined to continue to reason, in 2004 Imperial committed to for long-term earnings growth. The meet the evolving energy needs of contribute $10 million over five years company’s diverse base of oil and gas Canadians while remaining committed to the University of Alberta to support resources in Canada, which exceeds to safety, environmental responsibility oil-sands research. 13 billion oil-equivalent barrels, is the and the highest standards of ethics largest in this country, and we have and integrity. This year marks the Another major cornerstone of the access to world-leading research, 125th anniversary of Imperial’s company’s success over its long technology and project expertise. founding, and those commitments history has been the collective talents, With these advantages, together have remained constant throughout capability, dedication and extraordinary with excellent financial strength, a the company’s history. performance of our employees. For consistent management approach their steadfast willingness to meet and a disciplined investment strategy, Ensuring that nobody gets hurt the challenges of a difficult and I believe Imperial will remain an governs all operations. And the competitive industry, they deserve industry leader in both downstream company is committed to delivering the gratitude of shareholders for a and upstream operations for many superior environmental performance – job well done, every year. years to come. Moving our head to drive environmental incidents with office to Calgary in 2005 will further real impact to zero, through the I would also note that one of the strengthen the company’s strategic continuous raising of standards and longest-standing nonemployee focus, while improving organizational improvements to our operations. members of Imperial’s board of effectiveness and productivity. directors will not stand for re-election Imperial is also committed to this spring. Pierre Des Marais II joined Imperial’s resources and capabilities maintaining the long-standing tradition the board in April 1977. On behalf of will be key in producing new Canadian of ethical business behaviour, his fellow directors, shareholders and supplies of oil and gas. In the coming including clear and straightforward employees, I want to express our decades, economic and population reporting of operating and financial appreciation for his many years of growth are projected to increase results. In particular, we remain fully outstanding service to the company significantly both global and Canadian confident in the integrity of our and wish him well for the future. demand for all forms of energy. process for assessing and reporting Hydrocarbons will remain the dominant oil and gas reserves. We will continue For the last 125 years, Imperial has source of energy as well as the main to make operating and investment grown and prospered by pursuing feedstock for countless chemical decisions based on internal excellence in all operations, while products that are vital to modern life. assessments of resources and their meeting both the needs of Canadians Canada has abundant oil and gas potential to provide future growth in for secure energy supplies and their resources, but developing them at production and earnings. expectations for good corporate acceptable costs and with minimal citizenship. These considerations impact on the environment present The company remains deeply remain in the forefront as we move challenges that must be addressed. committed to Canada and Canadians, into a future of long-term