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Item 1A. Risk Factors

2022-02-23 compared with 2021-02-24 · 76 added, 49 removed, 169 unchanged (43% of the section changed)

Imperial’s financial and operating results are subject to a variety of risks inherent in oil, gas and petrochemical businesses.

Imperial’s financial and operating results are subject to a variety of risks inherent in oil, gas and petrochemical businesses, and the pursuit of lower-emission business opportunities.

Many of these risk factors are not within Imperial’s control and could adversely affect Imperial’s business, financial and operating results, or financial position.

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This means the company’s operations and earnings may be significantly affected by changes in oil, natural gas and petrochemical prices, and by changes in margins on refined products and petrochemicals.

Crude oil, natural gas, petrochemical and petroleum product prices and margins depend on local, regional, and global events or conditions that affect supply and demand for the relevant commodity.

Crude oil, natural gas, petrochemical and petroleum product prices and margins depend on local, regional, and global events or conditions that affect supply and demand for the relevant commodity or product.

Commodity prices have been volatile, and the company expects that volatility to continue.

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changes in consumer preferences for the company’s products, including consumer demand for alternative fueled or electric transportation or alternatives to plastic products;

broad-based changes in personal income levels;

broad-based changes in personal income levels, interest rates and inflation;

and security or public health issues and responses such as epidemics and pandemics.

Market factors may also result in losses from commodity derivatives and other instruments used to hedge price exposures or for trading purposes.

See also “Climate change, energy transition and greenhouse gas restrictions” below.

Commodity prices and margins also vary depending on a number of factors affecting supply.

For example, increased supply from the development of new oil and gas supply sources and technologies to enhance recovery from existing sources tend to reduce commodity prices to the extent such supply increases are not offset by commensurate growth in demand.

For example, increased supply from the development of new oil and gas supply sources and technologies to enhance recovery from existing sources tends to reduce commodity prices to the extent such supply increases are not offset by commensurate growth in demand.

Similarly, increases in industry refining or petrochemical manufacturing capacity relative to demand tend to reduce margins on affected products.

Crude oil, gas and petrochemical supply levels can also be affected by factors that reduce available supplies, such as adherence by member countries or others to Organization of the Petroleum Exporting Countries (OPEC) production quotas, government policies that restrict oil and gas production or increase associated costs, including the Government of Alberta curtailment regulations, the occurrence of wars, hostile actions, natural disasters, disruptions in competitors’ operations, or unexpected pipeline or rail constraints that may disrupt supplies.

Crude oil, gas and petrochemical supply levels can also be affected by factors that reduce available supplies, such as the level of and adherence by participating countries or others to production quotas established by OPEC or “OPEC+” and other agreements among sovereigns, government policies that restrict oil and gas production or increase associated costs, including actions intended to reduce greenhouse gas emissions and previous Government of Alberta curtailment regulations, the occurrence of wars, hostile actions, natural disasters, trade tariffs or broader breakdowns in global trade, disruptions in competitors’ operations, or unexpected pipeline or rail constraints that may disrupt supplies.

Technological change can also alter the relative costs for competitors to find, produce, and refine oil and gas and to manufacture petrochemicals.

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Increased differentials in 2018 also led the Government of Alberta to enact temporary mandatory production curtailment regulations in 2019.

These regulations enable the government to impose production limits on large producers in Alberta such as Imperial.

Although mandatory production curtailment decreased throughout 2019 and 2020, and was eliminated in December 2020, the regulatory authority to impose curtailments remains in place and there is the potential for curtailment to be re-imposed

and increased.

The duration of these regulations is uncertain, and could have an adverse effect on the company’s business.

These regulations enabled the government to impose production limits on large producers in Alberta such as Imperial.

Mandatory production curtailment was eliminated in December 2020 and the regulatory authority to impose curtailments was repealed at the end of 2021;

however, the use of similar curtailment regulations in the future could have an adverse effect on the company’s business.

A significant portion of the company’s production is bitumen, which is blended with diluent for transportation and marketability of heavy crude oil.

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Changes in government policy or regulations, changes in law or interpretation of settled law, third-party opposition to company or infrastructure projects, and duration of regulatory reviews could impact Imperial’s existing operations and planned projects.

This includes actions by regulators or other political actors to delay or deny necessary licenses and permits or restrict the operation of third-party infrastructure that the company relies on, such as pipelines to transport the company’s upstream production to market or that supply feedstock to the company’s refineries.

This includes actions by policy-makers, regulators or other actors to delay or deny necessary licences and permits, restrict the availability of oil and gas leases or the operation of third-party infrastructure that the company relies on, such as pipelines to transport the company’s upstream production to market or that supply feedstock to the company’s refineries.

Additionally, changes in environmental regulations, assessment processes or other laws and increasing and expanding stakeholder consultation (including Indigenous stakeholders), may increase the cost of compliance or reduce or delay available business opportunities and adversely impact the company’s results.

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Many governments are providing tax advantages and other subsidies to support alternative energy sources or are mandating the use of specific fuels or technologies.

Governments are also introducing bans on certain technologies that could impact demand for products, such as the Government of Canada’s intention to ban the sale of new internal combustion engine cars and light trucks beginning in 2035.

Governments and others are also promoting research into new technologies to reduce the cost and increase the scalability of alternative energy sources, and the success of these initiatives may decrease demand for the company’s products.

Governments may establish regulations with respect to the control of the company’s production, such as when increased price differentials in 2018 led the Government of Alberta to impose temporary mandatory production curtailment regulations effective 2019, as discussed in the Supply and demand section above.

Actions by policy makers, regulators or others may require changes in the company’s business or strategy that could result in reduced returns.

Governments may establish regulations with respect to the control of the company’s production, such as when increased price differentials in 2018 led the Government of Alberta to impose temporary mandatory production curtailment regulations in effect from 2019 through 2021, as discussed in the “Supply and demand” section above.

Government intervention in free markets may introduce unintended consequences such as market volatility and uncertainty, misallocation of resources, and erosion of investor confidence.

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Environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment.

As well, environmental regulations are imposed on the qualities and compositions of the products sold and imported.

As well, environmental regulations are imposed on the qualities and compositions of the products sold and imported, and include those aimed at reducing consumption or addressing environmental concerns with certain end products.

Changes to these requirements could adversely affect the company’s results by impacting commodity prices, increasing costs and reducing revenues.

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In 2019, the Government of Canada implemented a new environmental assessment framework under the Impact Assessment Act

, which expands assessment considerations beyond the environment to include social, health, economic, and gender-based impacts and the impact on Canada’s climate change commitments.

, which expands assessment considerations beyond the environment to include social, health, economic, and gender-based impacts and the impact on Canada’s climate change commitments (including a requirement under the Strategic Assessment for Climate Change to provide a credible plan for the project to deliver net-zero

greenhouse gas emissions by 2050).

It also includes a reliance on strategic and regional assessments and adjusted regulatory review timelines.

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The company anticipates that changes in environmental legislation may require, among other things, reductions in emissions from its operations to the air and water and may result in increased capital expenditures.

Changes in environmental legislation (including, but not limited to, application of regulations related to air, water, land, biodiversity and waste, including mine tailings) may increase the cost of compliance or reduce or delay available business opportunities.

Future changes in environmental legislation could occur and result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, which could have a material adverse effect on the company’s financial condition or results of operations.

Changes in environmental legislation (including, but not limited to, application of regulations related to air, water, land, biodiversity and waste, such as mine tailings and the use of new or recycled plastics) may increase the cost of compliance or reduce or delay available business opportunities.

Future changes in environmental legislation and the enforcement of regulations could occur and result in stricter standards and enforcement, larger fines, penalties and liability, and increased capital expenditures and operating costs, which could have a material adverse effect on the company’s financial condition or results of operations.

There are operational risks inherent in oil and gas exploration and production activities, as well as the potential to incur substantial financial liabilities, if the company does not manage those risks effectively.

The ability to insure such risks is limited by the capacity of the applicable insurance markets, which may not be sufficient to cover the likely cost of a major adverse operating event.

Environmental hazards including severe weather events may impact the company’s operational performance, such as extreme cold weather that makes mining operations more difficult.

The ability to insure risks is limited by the capacity of the applicable insurance markets, which may not be sufficient to cover the likely cost of a major adverse operating event.

Accordingly, the company’s primary focus is on prevention, including through its rigorous operations integrity management system.

The company’s future results will depend on the continued effectiveness of these efforts.

Climate change and greenhouse gas restrictions

Driven by concern over the risks of climate change, a number of provinces and the Government of Canada have adopted, are considering the adoption of, or have revised, regulatory frameworks to reduce greenhouse gas emissions or production and use of oil and gas.

These include adoption of carbon emissions pricing, cap and trade regimes, carbon taxes, emissions limits, increased efficiency standards, low carbon fuel standards and incentives or mandates for renewable energy.

The Government of Canada has adopted the Paris Agreement on climate change, and set a goal to reduce greenhouse gas emissions economy-wide by 30 percent below 2005 levels by 2030.

To implement these goals, the Government of Canada adopted the Greenhouse Gas Pollution Pricing Act

(GGPPA), which sets a federal backstop carbon price Canada-wide through a carbon levy applied to fossil fuels ($20 per tonne starting in 2019 and increasing by $10 per tonne annually to $50 per tonne in 2022), and an output-based pricing system for large industrial emitters.

Under the GGPPA, provinces are required to either adopt the GGPPA, or obtain equivalency by adopting a price-based system or cap and trade system.

In December 2020, the Government of Canada proposed to increase the carbon price by $15 per year starting in 2023, rising to $170 per tonne in 2030.

Further, in 2020 the Government of Canada proposed legislation to formalize Canada’s target to achieve net-zero

Climate change, energy transition and greenhouse gas restrictions

Net zero scenarios

Driven by concern over the risks of climate change, the provinces and the Government of Canada have adopted or have revised regulatory frameworks to reduce greenhouse gas emissions including emissions from the production and use of oil and gas, and their products.

These actions are being taken both independently by national and regional governments and within the framework of United Nations Conference of the Parties’ summits under which Canada has endorsed objectives to reduce the atmospheric concentration of CO2 over the coming decades, with an ambition ultimately to achieve “net zero.” Net zero means that emissions of greenhouse gases from human activities would be balanced by actions that remove such gases from the atmosphere.

Expectations for transition of the world’s energy system to lower emission sources, and ultimately net zero, derive from hypothetical scenarios that reflect many assumptions about the future and reflect substantial uncertainties.

The company’s actions with respect to the energy transition, including its announced ambition, ultimately, to achieve net zero with respect to emissions from its upstream oil sands operations, carries risks that the transition, including underlying technologies, policies, and markets as discussed in more detail below, will not develop at the pace or in the manner expected by current net-zero

Greenhouse gas restrictions

Government actions intended to reduce greenhouse gas emissions include adoption of carbon emissions pricing, cap and trade regimes, carbon taxes, emissions limits, increased mileage and other efficiency standards, low carbon fuels standards, mandates for sales of electrical vehicles and incentives or mandates for renewable energy.

The Government of Canada has updated its nationally determined contribution (NDC) under the Paris Agreement on climate change, to reduce greenhouse gas emissions economy-wide by 40 to 45 percent below 2005 levels by 2030, a substantial increase in ambition beyond its original NDC.

To implement these goals, the Government of Canada uses a number of policy tools including the Greenhouse Gas Pollution Pricing Act

(GGPPA), which sets a federal backstop carbon price Canada-wide through a carbon levy applied to fossil fuels ($50 per tonne CO2 equivalent emissions starting in 2022 and increasing by $15 per tonne annually to $170 per tonne in 2030), and an output-based pricing system for large industrial emitters.

Under the GGPPA, provinces are required to either adopt the GGPPA, or obtain equivalency by adopting a price-based system (with a minimum of the federal carbon pricing) or a cap and trade system.

Further, in 2021 the Government of Canada enacted legislation to formalize Canada’s target to achieve net-zero

emissions by 2050 and establish interim emissions reductions targets at five year intervals.

For 2022, under the Canadian Net-Zero

Emissions Accountability Act, the Government of Canada is required to develop an emissions reduction plan for 2030 consistent with achieving net-zero

emissions by 2050.

The Government of Alberta has obtained federal equivalency for its Technology Innovation and Emissions Reduction Regulation (TIER) that came into effect in 2020 and applies to facilities with CO2 emissions in excess of 100,000 tonnes per year.

TIER is designed to reduce emissions by putting a price on 10 percent of a facility’s emissions in 2020, increasing by 1 percent per year, with pricing for 2020 set at $30 per tonne.

TIER is designed to reduce emissions by putting a price on nominally 10 percent of a facility’s emissions in 2020, increasing by 1 percent per year.

Further, the Alberta Oil Sands Emissions Limit Act

sets a limit of 100 megatonnes of CO2 per year of emissions in the oil sands sector, but oil sands emissions remain below the limit and it is not yet possible to predict the impact of this act on the company’s future oil sands operations in Alberta.

With respect to other provinces, with Ontario cancelling the cap and trade program in 2018, the company’s operations in Ontario are subject to the federal carbon levy and output based pricing system.

British Columbia has carbon pricing in place for all emissions, with pricing currently at $40 per tonne and rising by $5 per tonne in April, 2021.

With respect to other provinces, with Ontario cancelling the cap and trade program in 2018, the company’s operations in Ontario were subject to the federal carbon levy and output based pricing system through 2021.

Starting in 2022, Ontario has received equivalency for its Emissions Performance System, which puts a price on 8 percent of a facility’s emissions.

British Columbia has carbon pricing in place for all emissions, with pricing expected to align with federal pricing in 2022.

Increases in carbon pricing could adversely impact the company’s operations and financial results unless the company can adapt its operations.

There are also various low carbon fuel standards being developed or applicable to the company’s products.

The Government of Canada is progressing draft regulations for the Clean Fuel Standard, which will require the reduction in carbon intensity of liquid fuels supplied in Canada starting in 2022.

The standard is expected to build upon the existing federal renewable fuels regulations that require fuel producers and importers to have a specified amount of renewable fuel in gasoline and diesel.

Similarly, British Columbia introduced a Low Carbon Fuel Standard in 2013, which increased to a 10 percent carbon intensity reduction requirement by 2020.

The British Columbia government has announced a draft policy to reduce the carbon intensity of fuels by a further 20 percent by 2030.

There are also various low carbon fuel standards being developed or already applicable to the company’s products.

The Government of Canada is finalizing draft regulations for the Clean Fuel Regulations, which will require the reduction in carbon intensity of liquid transportation fuels supplied in Canada starting in December 2022.

The regulations build upon the existing federal renewable fuels regulations that require fuel producers and importers to have a specified amount of renewable fuel in gasoline and diesel.

Similarly, British Columbia introduced a Low Carbon Fuel Standard in 2013, which increased to a 10 percent carbon intensity reduction requirement in 2020.

The British Columbia government has announced its intention to reduce the carbon intensity of fuels by a further 20 percent by 2030.

Compliance can be achieved by either blending renewable fuels with low carbon intensity or by purchasing credits.

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Such laws and policies could make Imperial’s products more expensive and less competitive, reduce or delay available business opportunities, reduce demand for hydrocarbons, and shift hydrocarbon demand toward lower greenhouse gas emission energy sources.

Current and pending greenhouse gas regulations or policies may also increase compliance and abatement costs including taxes and levies, increase abandonment and reclamation obligations, lengthen project evaluation and implementation times, impact reserves evaluations and affect operations.

Current and pending greenhouse gas regulations or policies may also increase compliance and abatement costs including taxes and levies, increase abandonment and reclamation obligations and impact decommissioning timelines, lengthen project evaluation and implementation times, impact reserves evaluations and affect operations.

Increased costs may not be recoverable in the market place, could negatively affect our returns and could reduce the global competitiveness of the company’s crude oil, natural gas and refined products.

Governments may also impose restrictions on production of oil and gas to the extent they view such measures as a viable approach for pursuing national and global energy and climate policies.

Governments may also impose restrictions on production of, or emissions from, oil and gas to the extent they view such measures as a viable approach for pursuing national and global energy and climate policies.

For example, the Government of Canada announced its intention to pursue a cap on greenhouse gas emission from oil and gas activities by 2030.

Concern over the risks of climate change may lead governments to make laws applicable to the energy industry progressively more stringent over time.

Political and other actors and their agents are also increasingly seeking to advance climate change objectives indirectly, such as by seeking to reduce the availability of or increase the cost for financing and investment in the oil and gas sector and taking actions intended to promote changes in business strategy for oil and gas companies.

Political and other actors and their agents are also increasingly seeking to advance climate change objectives indirectly, such as by seeking to reduce the availability or increase the cost of financing and investment in the oil and gas sector and taking actions intended to promote changes in business strategy for oil and gas companies.

Achieving societal ambitions to reduce greenhouse gas emissions and ultimately achieve net zero will require new technologies to reduce the cost and increase the scalability of alternative energy sources as well as technologies such as carbon capture and sequestration (CCS).

CCS technologies, focused initially capturing and sequestering CO2 emissions from high-intensity industrial activities, can assist in meeting society’s objective to mitigate atmospheric greenhouse gas levels while also helping ensure the availability of the reliable and affordable energy the world requires.

The company’s future results and ability to succeed through the energy transition will depend in part on the success of these research and collaboration efforts and on the company’s ability to adapt and apply the strengths of its current business model to providing the energy products of the future in a cost-competitive manner.

Policy and market development

The scale of the world’s energy system means that, in addition to developments in technology discussed above, a successful energy transition will require appropriate support from governments and private participants throughout the global economy.

The company’s ability to develop and deploy CCS and other lower emission energy technologies at commercial scale will depend in part on the continued development of supportive government policies and markets.

Failure or delay of these policies or markets to materialize or be maintained could adversely impact these investments.

Policy and other actions that result in restricting the availability of hydrocarbon products without commensurate reduction in demand may have unpredictable adverse effects, including increased commodity price volatility;

periods of significantly higher commodity prices and resulting inflationary pressures;

and local or regional energy shortages.

Such effects in turn may depress economic growth or lead to rapid or conflicting shifts in policy by different actors, with resulting adverse effects on the company’s business.

See also the discussion of “Supply and demand”, “Government and political factors”, and “Management effectiveness” in this Item 1A.

Prices for commodities produced by the company are commonly benchmarked in U.S.

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changes in regulations;

the ability to negotiate successfully with joint venturers, partners, governments, suppliers, customers and others;

the ability to model and optimize reservoir performance;

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Cybersecurity

Imperial is regularly subject to attempted cybersecurity disruptions from a variety of threat actors, including state-sponsored actors.

Imperial is regularly subject to attempted cybersecurity disruptions from a variety of sources, including state-sponsored actors.

Imperial’s defensive preparedness includes multi-layered technological capabilities for prevention and detection of cybersecurity disruptions:

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If the measures the company is taking to protect against cybersecurity disruptions prove to be insufficient or if the company’s proprietary data is otherwise not protected, the company as well as its customers, employees or third parties could be adversely affected.

The company is exposed to potential harm from cybersecurity events that may affect the operations of third parties, including our partners, suppliers, service providers (including providers of cloud-based services for our data or applications), and customers.

Cybersecurity disruptions could cause physical harm to people or the environment;

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Although there has been some movement toward pre-pandemic

activity levels, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time and continued or new restrictions could continue to impact the demand for petroleum products.

Imperial’s future business results, including cash flows and financing needs, will be affected by the extent and duration of these conditions and the effectiveness of responsive actions that the company and others take, including our actions to reduce capital and operating expenses and government actions to address the COVID-19

The impact of COVID-19

could also have an effect on the financial markets and result in an increase to the cost of capital due to risk.

The company’s results will also be affected by any resulting negative impacts on national and global economies and markets from a prolonged decrease of economic activity.

activity levels, the duration of the business disruptions and related financial impact cannot be reasonably estimated at this time and continued or new restrictions could continue to impact the demand for petroleum products.

Imperial’s future business results, including cash flows and financing needs, will be affected by the scope and severity of current and future COVID outbreaks;

actions taken by governments and others to address the pandemic and the effects of those actions on national and global economies and markets;

changes in consumer behavior that affect demand for our products;

and the effectiveness of the company’s own responsive actions to protect the safety and well-being of its people.

The company has had positive COVID-19

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pandemic continues to evolve, with changing case numbers and the potential for additional public health restrictions.

Although vaccines are being developed and approved for use, their availability and effectiveness is uncertain, especially in light of the emergence of new mutations of the virus.

The impact of the pandemic remains difficult to predict.

Imperial’s reputation is an important corporate asset.

An operating incident, significant cybersecurity disruption, change in consumer views concerning the company’s products, or other adverse events, such as those described in Item 1A, may have a negative impact on Imperial’s reputation, which in turn could make it more difficult for the company to compete successfully for new opportunities or obtain necessary regulatory approvals, or could reduce consumer demand for the company’s branded products.

Factors that could have an impact on the company’s reputation including an operating incident or significant cybersecurity disruption;

changes in consumer views concerning the company’s products;

a perception by investors or others that insufficient progress is being made with respect to the company’s ambition in the energy transition, or that pursuit of this ambition may result in allocation of capital to investments with reduced returns;

and other adverse events such as those described in this Item 1A.

Negative impacts on Imperial’s reputation could, in turn, make it more difficult for the company to compete successfully for new opportunities, obtain necessary regulatory approvals, obtain financing, or could reduce consumer demand for the company’s branded products.

Imperial’s reputation may also be harmed by events which negatively affect the image of the industry as a whole, including public and investor perception of Alberta oil sands in relation to greenhouse gas emissions and environmental impact.

The company’s future production and cash flows from bitumen, synthetic oil, liquids and natural gas reserves are highly dependent upon the company’s success in exploiting its current reserves.

To maintain production and cash flows, the company must continue to replace produced reserves as they are depleted, which can be accomplished through exploration discovery of new resources, appraisal and investments in developing discovered resources, or acquisition of reserves.

To maintain production and cash flows over the long term, the company must replace produced reserves, which can be accomplished through exploration discovery of new resources, appraisal and investments in developing discovered resources, or acquisition of reserves.

To the extent cash flows from operations are insufficient to fund capital expenditures and external sources of capital become limited or unavailable, the company’s ability to make the necessary capital investments to maintain and grow oil and natural gas reserves will be adversely impacted.

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Reference is made to Item 1 above.

Legal proceedings

Imperial has elected to use a $1 million threshold for disclosing environmental proceedings.

Mine safety disclosures

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors