Highlights
• Preparations for full-scale commercial deployment of HTL(TM) were significantly accelerated in the first quarter of 2008
• On March 17, 2008, two major announcements were made:
- a corporate restructuring was initiated in preparation for multiple HTL opportunities in Canada, Latin America, Middle East and North Africa, and China, and
- Robert Friedland is proposed to become the new Executive Chairman and CEO of Ivanhoe Energy as of May 29 2008.
• Commercial discussions for HTL heavy oil projects were advanced in Canada, Latin America and the Middle East and North Africa.
• Cash flow from operating activities during the first quarter increased to just over US$3 million in the first quarter from US $923,000 in the fourth quarter of 2007, driven by higher oil prices and supported by stable oil production.
• Operating cash flow was dedicated primarily to supporting our HTL heavy oil development activities.
Corporate Restructuring & Leadership Changes
On March 17, 2008, it was announced that Robert Friedland would be assuming the leadership of Ivanhoe Energy Inc. after the company's Annual General Meeting on May 29, 2008, and will serve as Executive Chairman and Chief Executive Officer to guide the company through a major corporate and management restructuring in preparation for the implementation of multiple, full-scale, commercial HTL heavy-oil projects in Canada and internationally.
The restructuring is planned to enhance Ivanhoe Energy's pursuit of its central mission to develop heavy-oil assets using its proprietary, HTL (Heavy-to-Light) oil-upgrading technology.
Principal Entities
The restructuring will consolidate activities within the following principal entities:
• Ivanhoe Energy Inc. will focus on the Athabasca oil sands of Western Canada, as well as the United States and other areas not addressed by its subsidiaries. It will pursue joint ventures with heavy-oil asset owners and the outright acquisition of heavy-oil assets. This company will hold and manage the core HTL technology and intellectual property. The Company's HTL technology team, headed by Dr. Mike Silverman (formerly VP Petrochemicals at KBR Inc), will be based in Houston. Ivanhoe Energy also will include Ivanhoe's existing US conventional oil and gas activities. Management will be led by Mr. Friedland (Executive Chairman and CEO), Gord Lancaster (CFO), Mike Silverman (CTO and EVP), Ian Barnett (EVP, Corporate Development & Finance) and Ed Veith (EVP, Upstream).
• Sunwing Energy Ltd., Ivanhoe's wholly owned company with existing conventional oil and gas operations in China will continue to focus on opportunities in China and Southeast Asia. Sunwing's management will continue to be led by Co-Chairmen Robert Friedland and Patrick Chua, and President Gerry Moench.
• Ivanhoe Energy Latin America will focus on HTL heavy-oil opportunities in Latin America. Management will be led by David Martin as Chairman and CEO, and is expected to include selected Ivanhoe Energy personnel currently based in Bakersfield, California, who have extensive Latin American experience. Mr. Martin is currently Executive Co-Chairman of Ivanhoe Energy Inc. Mr. Martin and Leon Daniel, who is Deputy Chairman of Ivanhoe Energy Inc. and is expected to be on the Board of Directors of this subsidiary, have more than 50 years of combined experience in negotiating and executing major oil and gas projects in Latin America, primarily with Occidental Petroleum. This includes the 1.2-billion-barrel Cano Limon field in Colombia with the associated 500-km pipeline across the Andes, the 30,000-barrel-per-day Alturitas field in Venezuela, and various projects in Ecuador and Peru.
• Ivanhoe Energy Middle East and North Africa (MENA) will focus on HTL opportunities in those regions. In addition, this company will incorporate Ivanhoe Energy's Gas-to-Liquids (GTL) technology team and GTL intellectual property, and will continue to advance the GTL project in Egypt. Management will be led by Leon Daniel as Chairman and CEO and is expected to include existing Ivanhoe personnel based in London, England. Mr. Daniel is currently Deputy Chairman of Ivanhoe Energy. Mr. Daniel and Mr. Martin, who is expected to be on the Board of Directors of this company, have more than 50 years of combined experience in negotiating and executing oil and gas projects in the Middle East and North Africa, primarily while at Occidental Petroleum. This includes the 100,000-barrel-per-day Idd El Shargi North dome in Qatar, the giant 2.4-billion-barrel Intisar and Augila Nafoora fields in Libya, and the 200,000-barrel-per-day Masila field in Yemen.
Strategic discussions for Ivanhoe Energy Middle East and North Africa have been initiated with investors based in several Middle Eastern countries, and the company have identified project potential across the region including in Egypt, Libya, Iraq, Oman, Kuwait, Bahrain and Syria.
This structure will allow the development and financing of multiple HTL projects around the world, while minimizing dilution to Ivanhoe Energy's existing shareholders. In addition, the alignment with principal energy-producing regions will facilitate financing from region-specific strategic investors, some of which already have been identified, and also will enhance flexibility in accessing global capital markets.
Mr. Friedland will focus his efforts on corporate restructuring, finance and the closing of commercial transactions. Mr. Friedland was the founding Chairman of Ivanhoe Energy and most recently has been serving as Deputy Chairman of Ivanhoe Energy and Co-Chairman of its China-focused subsidiary, Sunwing Energy.
Ivanhoe Energy's management and Board of Directors also are being restructured to more closely align management experience with the goals of the various business units. As part of this process, a number of directors will retire from the Ivanhoe Energy Board to assume directorships in the subsidiary companies. The number of directors on the Ivanhoe Energy Board is expected to be reduced from 12 to 7 members.
HTL technology rights
Ivanhoe Energy's patents and other intellectual property related to HTL heavy-oil upgrading, and the core HTL technology team led by Dr. Silverman, will remain with Ivanhoe Energy Inc. Agreements will be established between Ivanhoe Energy and the subsidiary companies for site licenses for HTL projects identified outside Canada and the US, and for HTL technology support.
Restructuring Schedule
A new Board of Directors for Ivanhoe Energy will be elected at the Annual General Meeting on May 29, 2008. It is expected that Mr. Friedland will assume responsibilities as Executive Chairman and CEO immediately following the meeting. The new entities for Latin America and the Middle East and North Africa have been established, and the necessary inter-company agreements covering technology and inter-company finances are being put into place.
HTL Business Update
The conclusion of the HTL technical testing period in the last half of 2007, together with the technical and economic data generated from that process, allowed Ivanhoe Energy's development teams to accelerate commercial discussions in the first quarter with heavy oil asset owners and potential strategic partners in Canada and internationally.
In Canada, the market for smaller oil sands assets - the key target market for Ivanhoe Energy - has changed noticeably, and for Ivanhoe positively, over the past nine months. There has been a widely publicized shift in investor sentiment for junior Canadian oil sands away from a business model based on land acquisition and resource delineation (the "acquire-delineate-flip" business model), and toward the ability to demonstrate profitable and financeable production capability. This has led to significant declines in the asset values of many junior oil sands companies, and an elevated interest by asset owners in considering production of their assets integrated with HTL upgrading. Ivanhoe Energy is currently in various discussions related to these opportunities in Western Canada.
Internationally, significant advancement has been made in HTL commercial deployment discussions in Latin America and in the Middle East and North Africa. In South America, there is a very significant belt of heavy oil that arches from Peru through Ecuador into Colombia and Venezuela, and Ivanhoe believes there are multiple opportunities to develop HTL projects in those areas.
In the Middle East and North Africa, Ivanhoe Energy's business development teams have identified numerous potential projects, and are also in discussions with potential strategic partners related to financing those projects.