IMO · Read the filing

Item 1A. Risk factors

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

Supply and demand

The oil, gas, fuels and petrochemical businesses are fundamentally commodity businesses. 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. Commodity prices have been volatile, and the company expects that volatility to continue. Any material decline in crude oil prices could have a material adverse effect on Imperial’s Upstream operations, financial position, proved reserves and the amount spent to develop reserves. On the other hand, a material increase in crude oil prices could have a material adverse effect on Imperial’s Downstream margins, depending on the market conditions for refined products.

The demand for energy and petrochemicals is generally linked closely with broad-based economic activities and levels of prosperity. The occurrence of recessions or other periods of low or negative economic growth will typically have a direct adverse impact on the company’s results. Other factors that may affect the demand for crude oil, gas, fuels and petrochemicals, and therefore could impact Imperial’s results include technological improvements in energy efficiency; seasonal weather patterns, which affect the demand for our products, including lower demand for gasoline, impacting Downstream results in the winter; increased competitiveness of, or government policy support for, alternative energy sources; new product quality regulations; technological changes or consumer preferences that alter fuel choices, such as technological advances in energy storage that make wind and solar more competitive for power generation; 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; and security or public health issues and responses such as epidemics and pandemics.

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

The market price for western Canadian heavy crude oil is typically lower than light and medium grades of oil, principally due to the higher transportation and refining costs. Western Canadian crude oil may also be subject to limits on transportation capacity to markets. Future crude price differentials between western Canadian crude oil relative to prices in the U.S. Gulf Coast are uncertain and changes in the heavy or light crude oil differentials could have a material adverse effect on the company’s business. 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. A significant portion of the company’s production is bitumen, which is blended with diluent for transportation and marketability of heavy crude oil. Increases to diluent prices, relative to heavy crude oil prices, could also have an adverse effect on the company’s business.

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Government and political factors

Imperial’s results can be adversely impacted by political, legal or regulatory developments affecting operations and markets. 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. 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.

Other government and political factors that could adversely affect the company’s financial results include increases in taxes or government royalty rates (including retroactive claims) and changes in trade policies and agreements. Further, the adoption of regulations mandating efficiency standards, and the use of alternative fuels or uncompetitive fuel components could affect the company’s operations. 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 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. Government intervention in free markets may introduce unintended consequences such as market volatility and uncertainty, misallocation of resources, and erosion of investor confidence.

Environmental risks

All phases of the Upstream, Downstream and Chemical businesses are subject to environmental regulation pursuant to a variety of Canadian federal, provincial, territorial and municipal laws and regulations, as well as international conventions (collectively, “environmental legislation”).

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

Environmental legislation also requires that wells, facility sites and other properties associated with the company’s operations be operated, maintained, monitored, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. This includes the requirement for specific approvals for many areas of interaction with the environment, such as land use, air quality, water use, biodiversity protection and waste, including mine tailings management. The failure to operate as anticipated and adhere to conditions, the delay or denial of approvals and changes to conditions or regulations could impact the company’s ability to operate its projects and facilities and adversely affect the company’s results.

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The implementation of, and compliance with, policies and regulations related to air, water and land, such as Alberta’s Lower Athabasca Regional Plan and Wetland Policy applicable to the company’s oil sands assets, could restrict development in current and future areas of operation. The company also depends on water obtained under licences for withdrawal, storage, reuse and discharge in both its Upstream and Downstream businesses, including future projects and expansions. Water use may be limited by regulatory requirements, seasonal fluctuations, competing demands, environmental sensitivities, increasingly stringent water management standards, and changes to conditions or availability of licences, which may restrict and adversely affect the company’s operations. Additionally, a number of air quality regulations and frameworks are being developed at the federal and provincial levels, and when implemented could impact existing and planned projects through increased capital and operating expenses including retrofits to existing equipment, and could adversely impact the company’s operations and financial results.

Federal and provincial legislation aimed at protecting sensitive, threatened or endangered wildlife, such as woodland caribou and species of migratory birds, may also increase restoration and offset costs and impact the company’s projects. If it is determined that such wildlife and their habitat are not sufficiently protected, governments or other parties may take actions to limit the pace or ability to develop in areas of Imperial’s current and future projects.

The company’s mining operations are subject to tailings management regulations that establish approval, monitoring, reporting and performance criteria for tailings ponds and management plans. Further, the absence or evolving nature of policies and regulations for the timing and closure of tailings ponds, including the approved technologies and methods for closure (such as the use of end pit lakes and water capped tailings), and dam safety directives, regulations, guides and abandonment requirements could have a material impact on conditions for approvals and ultimate mine closure costs. Additionally, successful management and closure requires the release of water to the environment, and although an Alberta water release policy and federal oil sands effluent regulations are being developed, the timing and impact of these regulations is uncertain and the absence of effective regulation could negatively impact the company’s operations and financial results.

In addition, certain types of operations, including exploration and development projects and significant changes to certain existing projects, may require the submission and approval of environmental impact assessments. 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. It also includes a reliance on strategic and regional assessments and adjusted regulatory review timelines. The impact of this legislation is not fully apparent, but it may impact the cost, manner, duration and ability to advance large energy projects.

Compliance with environmental legislation can require significant expenditures and failure to comply with environmental legislation may result in the cessation of operations, imposition of fines and penalties and liability for

clean-up

costs and damages.

The costs of complying with environmental legislation in the future could have a material adverse effect on the company’s financial condition or results of operations. 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.

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. 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.

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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

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

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

In 2019, the Government of Canada enacted the

Impact Assessment Act

, which links environmental assessment approvals to climate change-related goals, and has also discussed a goal of establishing legally-binding policies for being carbon-neutral by 2050. Changes and policies related to this act could adversely impact the company’s ability to progress new oil sands projects.

International accords and underlying regional and national regulations covering climate change and greenhouse gas emissions continue to evolve with uncertain timing and outcome, making it difficult to predict their business impact. 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. 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. Concern over the risks of climate change may lead governments to make laws applicable to the energy industry progressively more stringent over time.

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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.

Currency

Prices for commodities produced by the company are commonly benchmarked in U.S. dollars. The majority of Imperial’s sales and purchases are related to these industry U.S. dollar benchmarks. As the company records and reports its financial results in Canadian dollars, to the extent that the value of the Canadian dollar strengthens, the company’s reported earnings will be negatively affected. The company does not currently make use of derivative instruments to offset exposures associated with foreign currency.

Other business risks

Imperial is reliant on a number of key chemicals, catalysts and third-party service providers, including input and output commodity transportation (pipelines, rail, trucking, marine) and utilities providing services, including electricity and water, to various company operations. The lack of availability, capacity or proximity with respect to pipeline facilities and railcars could negatively impact Imperial’s ability to produce at capacity levels. Transportation disruptions, including those caused by events unrelated to the company’s operations, could adversely affect the company’s price realizations, refining operations and sales volumes. This includes outages of key third-party infrastructure, such as pipelines servicing the company’s oil sands assets or pipelines supplying feedstock to its refineries, which could impact the company’s ability to operate its assets or limit the ability to deliver production and products to market. A third-party utilities outage could have an adverse impact on the company’s operations and ability to produce.

The company also enters into contractual relationships with suppliers, partners and other counterparties to procure and sell goods and services, and the company’s operations, market position and financial condition may be adversely impacted if these counterparties do not fulfil their obligations. Imperial may also be adversely affected by the outcome of litigation resulting from its operations or by government enforcement proceedings alleging

non-compliance

with applicable laws or regulations. Litigation is subject to uncertainty and success is not guaranteed, and the company may incur significant expenses and devote significant resources in defending litigation.

Management effectiveness

In addition to external economic and political factors, Imperial’s future business results also depend on the company’s ability to manage successfully those factors that are at least in part within its control. The extent to which Imperial manages these factors will impact its performance relative to competition. For projects in which the company is not the operator, Imperial depends on the management effectiveness of one or more co-venturers whom the company does not control.

Project management

The nature of the company’s Upstream, Downstream and Chemical businesses depend on complex, long-term, and capital intensive projects that require a high degree of project management expertise to maximize efficiency. This includes development, engineering, construction, commissioning and ongoing operational activities and expertise. The company’s results are affected by its ability to develop and operate projects and facilities as planned and by events or conditions that affect the advancement, operation, cost or results of such projects or facilities. These risks include the company’s ability to obtain the necessary environmental and other regulatory approvals; changes in regulations; the ability to model and optimize reservoir performance; changes in resources and operating costs including the availability and cost of materials, equipment and qualified personnel; the impact of general economic, business and market conditions; and the company’s ability to respond effectively to unforeseen technical difficulties that could delay project

start-up

or cause unscheduled downtime.

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Operational efficiency

An important component of Imperial’s competitive performance, especially given the commodity based nature of Imperial’s business, is the ability to operate efficiently, including the company’s ability to manage expenses and improve production yields on an ongoing basis. This requires continuous management focus, including technological improvements, cost control, productivity enhancements and regular reappraisal of the company’s asset portfolio. The company’s operations and results also depend on key personnel and subject matter expertise, the recruitment, development and retention of high caliber employees, and the availability of skilled labour.

Research and development and technical change

Imperial relies upon the research and development organizations of the company and ExxonMobil, with whom the company conducts shared research. Innovation and technology are important to maintain the company’s competitive position, especially in light of the technological nature of Imperial’s business and the need for continuous efficiency improvement. The company’s research and development organizations must be able to adapt to a changing market and policy environment, including developing technologies to help reduce greenhouse gas emissions intensity. To remain competitive, the company must also continuously adapt and capture the benefits of new technologies including growing the company’s capabilities to utilize digital data technologies to gain new business insights. There are risks associated with projects that rely on new technology, including that the results of implementing the new technology may differ from simulated, piloted or expected results. The failure to develop and adopt new technology may have an adverse impact on the company’s operations, ability to meet regulatory requirements and operational commitments and targets (including environmental sustainability and reduction of greenhouse gas emissions), and financial results.

Safety, business controls and environmental risk management

The scope and nature of the company’s operations present a variety of significant hazards and risks, including operational hazards and risks such as explosions, fires, pipeline ruptures and crude oil spills. Imperial’s operations are also subject to the additional hazards of pollution, releases of toxic gas and environmental hazards and risks, such as severe weather, and geological events. The company’s results depend on management’s ability to minimize these inherent risks, to effectively control business activities and to minimize the potential for human error. Imperial applies rigorous management systems, including a combined program of effective operations integrity management, ongoing upgrades, key equipment replacements, and comprehensive inspection and surveillance. The company also maintains a disciplined framework of internal controls and applies a controls management system for monitoring compliance with this framework. The company’s upstream and downstream operations may experience loss of production, slowdowns or shutdowns and increased costs due to the failure of interdependent systems, and substantial liabilities and other adverse impacts could result if the company’s management systems and controls do not function as intended.

Cybersecurity

Imperial is regularly subject to attempted cybersecurity disruptions from a variety of threat actors, including state-sponsored actors. Imperial’s defensive preparedness includes multi-layered technological capabilities for prevention and detection of cybersecurity disruptions;

non-technological

measures such as threat information sharing with governmental and industry groups; internal training and awareness campaigns including routine testing of employee awareness via mock threats; and an emphasis on resiliency including business response and recovery.

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. Cybersecurity disruptions could cause physical harm to people or the environment; damage or destroy assets; compromise business systems; result in proprietary information being altered, lost or stolen; result in employee, customer or third-party information being compromised; or otherwise disrupt the company’s business operations. Imperial could incur significant costs to remedy the effects of a major cybersecurity disruption, in addition to costs in connection with resulting regulatory actions, litigation or reputational harm.

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Preparedness

The company’s operations may be disrupted by severe weather events, natural disasters, human error, and similar events. Imperial’s ability to mitigate the adverse impacts of these events depends in part upon the effectiveness of its rigorous disaster preparedness and response planning, as well as business continuity planning.

COVID-19

As a result of

COVID-19,

governments in many countries, including Canada, have mandated quarantines, closures,

stay-at-home

orders and travel restrictions that have had a significant impact on demand for the company’s products. While these effects are expected to be temporary, the resurgence of cases of

COVID-19

has led to a highly uncertain business environment. 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

pandemic. 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.

The company has had positive

COVID-19

cases, but these cases have not had a material impact on its operations or business. The company has initiated numerous emergency response and business continuity plans, and a substantial portion of the company’s workforce has implemented remote working arrangements. However, if the company’s mitigation and response efforts prove insufficient, then large outbreaks of epidemics, pandemics or other health crises such as

COVID-19

at operating sites, particularly in remote locations and where work camps are utilized, could materially impact the company’s personnel and its operations, reducing productivity and increasing costs.

The company could also be impacted by disruption to supply chains, methods of distribution and key third-party service providers, which could impact the ability to produce or sell its products, as well as increase the costs associated with its operations and decrease revenues and margins.

The

COVID-19

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.

Reputation

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. 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.

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Reserves

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 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. In addition, the company may be unable to find and develop or acquire additional reserves to replace oil and natural gas production at acceptable costs.

Estimates of economically recoverable oil and natural gas reserves and future net cash flows involve many uncertainties, including factors beyond the company’s control. Key factors with uncertainty include: geological and engineering estimates, including that additional information obtained through seismic and drilling programs, reservoir analysis and production and operational history may result in revisions to reserves; the assumed effects of regulation or changes to regulation by government agencies, including royalty frameworks and environmental regulations (such as the regulation of greenhouse gas emissions, which could impose significant compliance costs on the company, require new technology, or impact the economic viability of certain projects); future commodity prices, where low commodity prices may affect reserves development; abandonment and reclamation costs, including reclamation and tailings requirements for mining operations; and operating costs. Actual production, revenues, taxes and royalties, development costs, abandonment and reclamation costs, and operating expenditures with respect to reserves will likely vary from such estimates, and such variances could be material.

Item 1B. Unresolved staff comments

None.

Item 2. Properties

Reference is made to Item 1 above.

Item 3. Legal proceedings

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

Item 4. Mine safety disclosures

Not applicable.

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PART II

Market information

The company’s common shares are listed and trade on the Toronto Stock Exchange in Canada, and have unlisted trading privileges and trade on the NYSE American LLC in the United States. The symbol for the company’s common shares on these exchanges is IMO.

As of February 16, 2021 there were 10,094 holders of record of common shares of the company.

Information for security holders outside Canada

Cash dividends paid to shareholders resident in countries with which Canada has an income tax convention are usually subject to a Canadian

non-resident

withholding tax of 15 percent, but may vary from one tax convention to another.

The withholding tax is reduced to 5 percent on dividends paid to a corporation resident in the U.S. that owns at least 10 percent of the voting shares of the company.

The company is a qualified foreign corporation for purposes of the reduced U.S. capital gains tax rates, which are applicable to dividends paid by U.S. domestic corporations and qualified foreign corporations.

There is no Canadian tax on gains from selling shares or debt instruments owned by

non-residents

not carrying on business in Canada, as long as the shareholder does not, in any given 60 month period, own 25 percent or more of the shares of the company.

Canada has approved several positions with respect to the

Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”)

, which may impact the taxability of dividends and capital gains in Canada if the shareholder’s country of residence has also approved these same positions of the MLI.

Between October 1, 2020 and December 31, 2020, pursuant to the company’s restricted stock unit plan, 6,975 shares were issued to employees or former employees outside the U.S. in reliance on Regulation S under the Securities Act.

Securities authorized for issuance under equity compensation plans

Sections of the company’s management proxy circular are contained in the “Proxy information section”, starting on page 113. The company’s management proxy circular is prepared in accordance with Canadian securities regulations.

Reference is made to the section under the “Company executives and executive compensation”:

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Issuer purchases of equity securities

The company will continue to evaluate its share purchase program in the context of its overall capital activities.

Item 6. Selected financial data

Canadian dollars

Reference is made to the table setting forth exchange rates for the Canadian dollar, expressed in U.S. dollars, on page 2 of this report.

Reference is made to the section entitled “Management’s discussion and analysis of financial condition and results of operations” in the “Financial section”, starting on page 45 of this report.

Item 7A. Quantitative and qualitative disclosures about market risk

Reference is made to the section entitled “Market risks and other uncertainties” in the “Financial section”, starting on page 61 of this report. All statements other than historical information incorporated in this Item 7A are forward-looking statements. The actual impact of future market changes could differ materially due to, among other things, factors discussed in this report.

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Item 8. Financial statements and supplementary data

Reference is made to the table of contents in the “Financial section” on page 41 of this report:

● “Quarterly financial data” on page 112.

None.

Item 9A. Controls and procedures

As indicated in the certifications in Exhibit 31 of this report, the company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of December 31, 2020. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Reference is made to page 69 of this report for “Management’s report on internal control over financial reporting” and page 70 for the “Report of independent registered public accounting firm” on the company’s internal control over financial reporting as of December 31, 2020.

There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

Item 9B. Other information

None.

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PART III

Item 10. Directors, executive officers and corporate governance

The company currently has seven directors. The articles of the company require that the board have between five and fifteen directors. Each director is elected to hold office until the close of the next annual meeting. Each of the seven individuals listed in the section entitled “Nominees for director” on pages 114 to 117 of this report have been nominated for election at the annual meeting of shareholders to be held May 4, 2021. All of the nominees, with the exception of M.R. Crocker, are now directors and have been since the dates indicated. D.C. Brownell is a current director and has chosen not to stand for re-election.

Reference is made to the section under “Nominees for director”:

● “Director nominee tables”, on pages 114 to 117 of this report;

Reference is made to the sections under “Corporate governance disclosure”:

● “Ethical business conduct”, starting on page 144 of this report; and

● “Largest shareholder”, on page 148 of this report.

Reference is made to the sections under “Company executives and executive compensation”:

Item 11. Executive compensation

Reference is made to the sections under “Corporate governance disclosure”:

● “Director compensation”, on pages 136 to 142 of this report; and

Reference is made to the following sections under “Company executives and executive compensation”:

● “Compensation discussion and analysis”, on pages 156 to 180 of this report.

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Reference is made to the section under “Company executives and executive compensation” entitled “Equity compensation plan information”, within the “Compensation discussion and analysis” section, on page 178 of this report.

Reference is made to the section under “Corporate governance disclosure” entitled “Largest shareholder”, on page 148 of this report.

Reference is also made to the security ownership information for directors and executive officers of the company under the preceding Items 10 and 11. The compensation of the directors and executive officers of the company for the year-ended December 31, 2020 is described in the sections under “Nominees for director” starting on page 114, “Director compensation” starting on page 136 and “Company executives and executive compensation” starting on page 150. The following table shows the number of Imperial Oil Limited and Exxon Mobil Corporation common shares owned and restricted stock units held by each named executive officer, and the incumbent directors and executive officers as a group, as of February 16, 2021.

Imperial Oil Limited Exxon Mobil Corporation

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Reference is made to the section under “Corporate governance disclosure” entitled “Independence of our board members and nominees”, on page 122 of this report.

Reference is made to the section under “Corporate governance disclosure” entitled “Transactions with Exxon Mobil Corporation”, on page 148 of this report.

D.C. Brownell is deemed a

non-independent

member of the board of directors and the executive resources committee, public policy and corporate responsibility committee, nominations and corporate governance committee and community collaboration and engagement committee under the relevant standards. As an employee of Exxon Mobil Corporation, D.C. Brownell is independent of the company’s management and is able to assist these committees by reflecting the perspective of the company’s shareholders.

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Item 14. Principal accountant fees and services

Auditor information

The audit committee of the board of directors recommends that PwC be reappointed as the auditor of the company until the close of the next annual meeting. PwC has been the auditor of the company for more than five years and are located in Calgary, Alberta. PwC is a participating audit firm with the Canadian Public Accountability Board.

Auditor fees

The aggregate fees of PwC for professional services rendered for the audit of the company’s financial statements and other services for the fiscal years ended December 31, 2020 and December 31, 2019 were as follows:

Audit-related fees 92 94

Tax fees - -

All other fees - -

Audit fees included the audit of the company’s annual financial statements, internal control over financial reporting, and a review of the first three quarterly financial statements in 2020. Audit-related fees consisted of other assurance services including the audit of the company’s retirement plan and royalty statement audits for oil and gas producing entities. The company did not engage the auditor for any other services.

The audit committee formally and annually evaluates the performance of the external auditor, recommends the external auditor to be appointed by the shareholders, recommends their remuneration and oversees their work. The audit committee also approves the proposed current year audit program of the external auditor, assesses the results of the program after the end of the program period and approves in advance any

non-audit

services to be performed by the external auditor after considering the effect of such services on their independence.

All of the services rendered by the auditor to the company were approved by the audit committee.

Auditor independence

The audit committee continually discusses with PwC their independence from the company and from management. PwC have confirmed that they are independent with respect to the company within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Alberta, the Public Company Accounting Oversight Board (United States) (PCAOB) and the rules of the U.S. Securities and Exchange Commission. The company has concluded that the auditor’s independence has been maintained.

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PART IV

Item 15. Exhibits, financial statement schedules

Reference is made to the table of contents in the “Financial section” on page 41 of this report.

The following exhibits, numbered in accordance with Item 601 of Regulation

S-K,

are filed as part of this report:

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(101) Interactive Data Files (formatted as Inline XBRL).

Copies of Exhibits may be acquired upon written request of any shareholder to the vice president, investor relations, Imperial Oil Limited, 505 Quarry Park Boulevard S.E., Calgary, Alberta T2C 5N1, and payment of processing and mailing costs.

Item 16. Form

10-K

summary

Not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf on February 24, 2021 by the undersigned, thereunto duly authorized.

Imperial Oil Limited by /s/ Bradley W. Corson

(Bradley W. Corson) Chairman, president and chief executive officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 24, 2021 by the following persons on behalf of the registrant and in the capacities indicated.

Signature Title

/s/ David C. Brownell (David C. Brownell) Director

/s/ David W. Cornhill (David W. Cornhill) Director

/s/ Krystyna T. Hoeg (Krystyna T. Hoeg) Director

/s/ Miranda C. Hubbs (Miranda C. Hubbs) Director

/s/ Jack M. Mintz (Jack M. Mintz) Director

/s/ David S. Sutherland (David S. Sutherland) Director

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Financial section

Table of contents Page

Financial information (U.S. GAAP) 42

Frequently used terms 43

Overview 45

Business environment and risk assessment 46

Results of operations 51

Liquidity and capital resources 57

Capital and exploration expenditures 60

Market risks and other uncertainties 61

Critical accounting estimates 63

Management’s report on internal control over financial reporting 69

Report of independent registered public accounting firm 70

Consolidated statement of income (U.S. GAAP) 74

Consolidated statement of comprehensive income (U.S. GAAP) 75

Consolidated balance sheet (U.S. GAAP) 76

Consolidated statement of shareholders’ equity (U.S. GAAP) 77

Consolidated statement of cash flows (U.S. GAAP) 78

Notes to consolidated financial statements 79

1. Summary of significant accounting policies 79

2. Accounting changes 85

3. Business segments 86

4. Income taxes 88

5. Employee retirement benefits 89

6. Other long-term obligations 94

7. Financial and derivative instruments 95

8. Share-based incentive compensation programs 97

9. Investment and other income 98

10. Litigation and other contingencies 98

12. Miscellaneous financial information 100

13. Financing and additional notes and loans payable information 101

16. Accounting for suspended exploratory well costs 104

17. Transactions with related parties 105

18. Other comprehensive income (loss) information 106

Quarterly financial data 112

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Financial information (U.S. GAAP)

Net income (loss):

Per share information (Canadian dollars)

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Frequently used terms

Listed below are definitions of several of Imperial’s key business and financial performance measures. The definitions are provided to facilitate understanding of the terms and how they are calculated.

Capital employed

Capital employed is a measure of net investment. When viewed from the perspective of how capital is used by the business, it includes the company’s property, plant and equipment, and other assets, less liabilities, excluding both short-term and long-term debt. When viewed from the perspective of the sources of capital employed in total for the company, it includes total debt and equity. Both of these views include the company’s share of amounts applicable to equity companies, which the company believes should be included to provide a more comprehensive measurement of capital employed.

Business uses: asset and liability perspective

Total long-term liabilities excluding long-term debt (8,276 ) (8,355 ) (8,034 )

Add: Imperial’s share of equity company debt 26 24 23

Total company sources: Debt and equity perspective

Add: Imperial’s share of equity company debt 26 24 23

Return on average capital employed (ROCE)

ROCE is a financial performance ratio. From the perspective of the business segments, ROCE is annual business segment net income divided by average business segment capital employed (an average of the beginning and

end-of-year

amounts). Segment net income includes Imperial’s share of segment net income of equity companies, consistent with the definition used for capital employed, and excludes the cost of financing. The company’s total ROCE is net income excluding the

after-tax

cost of financing divided by total average capital employed. The company has consistently applied its ROCE definition for many years and views it as the best measure of historical capital productivity in a capital-intensive, long-term industry. Additional measures, which are more cash flow based, are used to make investment decisions.

Financing (after-tax), including Imperial’s share of equity companies 52 66 77

Return on average capital employed (percent) – corporate total (6.4 ) 7.7 8.1

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Cash flows from operating activities and asset sales

Cash flows from operating activities and asset sales is the sum of the net cash provided by operating activities and proceeds from asset sales reported in the Consolidated statement of cash flows. This cash flow reflects the total sources of cash both from operating the company’s assets and from the divesting of assets. The company employs a long-standing and regular disciplined review process to ensure that assets are contributing to the company’s strategic objectives. Assets are divested when they no longer meet these objectives or are worth considerably more to others. Because of the regular nature of this activity, the company believes it is useful for investors to consider sales proceeds together with cash provided by operating activities when evaluating cash available for investment in the business and financing activities, including shareholder distributions.

Proceeds from asset sales 82 82 59

Total cash flows from operating activities and asset sales 880 4,511 3,981

Operating costs

Operating costs are the costs during the period to produce, manufacture, and otherwise prepare the company’s products for sale – including energy costs, staffing and maintenance costs. They exclude the cost of raw materials, taxes and interest expense and are on a

before-tax

basis. While the company is responsible for all revenue and expense elements of net income, operating costs represent the expenses most directly under the company’s control and therefore, are useful in evaluating the company’s performance.

Reconciliation of operating costs

From Imperial’s Consolidated statement of income

Less:

Imperial’s share of equity company expenses 64 76 74

Components of operating costs

From Imperial’s Consolidated statement of income

Depreciation and depletion (includes impairments) 3,293 1,598 1,555

Non-service pension and postretirement benefit 121 143 107

Imperial’s share of equity company expenses 64 76 74

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Management’s discussion and analysis of financial condition and results of operations

Overview

The following discussion and analysis of Imperial’s financial results, as well as the accompanying financial statements and related notes to consolidated financial statements to which they refer, are the responsibility of the management of Imperial Oil Limited.

The company’s accounting and financial reporting fairly reflect its business model involving exploration for, and production of, crude oil and natural gas and manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals and a variety of specialty products.

Imperial, with its resource base, financial strength, disciplined investment approach and technology portfolio, is well-positioned to participate in substantial investments to develop new Canadian energy supplies. The company’s integrated business model, with significant investments in Upstream, Downstream and Chemical segments, generally reduces the company’s risk from changes in commodity prices. While commodity prices depend on supply and demand and may be volatile on a short-term basis, Imperial’s investment decisions are grounded on fundamentals reflected in its long-term business outlook, and use a disciplined approach in selecting and pursuing the most attractive investment opportunities. The corporate plan is a fundamental annual management process that is the basis for setting operating and capital objectives, in addition to providing the economic assumptions used for investment evaluation purposes. Volume projections are based on individual field production profiles, which are also updated annually. Price ranges for crude oil, natural gas, refined products and chemical products are based on corporate plan assumptions developed annually and are utilized for investment evaluation purposes. Major investment opportunities are evaluated over a range of potential market conditions. Once major investments are made, a reappraisal process is completed to ensure relevant lessons are learned and improvements are incorporated into future projects.

The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as in any government payment transparency reports.

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Business environment and risk assessment

Long-term business outlook

Given the uncertainty around the near-term impacts of

COVID-19

on economic growth, energy demand and energy supply, and lack of precedent, the company is considering a range of recovery pathways to guide near-term plans. These pathways expect that energy demand will grow beyond 2019 levels as early as 2022 reflecting the phase out of

COVID-19

impacts and re-establishment of long-term supply / demand fundamentals. The “Long-term business outlook” is based on Exxon Mobil Corporation’s

Outlook for Energy

, which combined with the near-term pathways is used to help inform the company’s long-term business strategies and investment plans.

By 2040, the world’s population is projected at around 9.1 billion people, or about 1.6 billion more than in 2018. Coincident with this population increase, the company expects worldwide economic growth to average close to 2.5 percent per year, with economic output growing by around 75 percent by 2040. As economies and populations grow, and as living standards improve for billions of people, the need for energy is expected to continue to rise. Even with significant efficiency gains, global energy demand is projected to rise by more than 10 percent from 2018 to 2040. This increase in energy demand is expected to be driven by developing countries (i.e., those that are not member nations of the Organization for Economic

Co-operation

and Development (OECD)). Canada is expected to see flat to modest local energy demand growth through to 2040 and will continue to be a large supplier of energy exports to help meet rising global energy needs.

As expanding prosperity helps drive global energy demand higher, increasing use of energy efficient technologies and practices, as well as lower-emission products will continue to help significantly reduce energy consumption and emissions per unit of economic output over time. Substantial efficiency gains are likely in all key aspects of the world’s economy through 2040, affecting energy requirements for power generation, transportation, industrial applications, and residential and commercial needs.

Global electricity demand is expected to increase approximately 50 percent from 2018 to 2040, with developing countries likely to account for about 85 percent of the increase. Consistent with this projection, power generation is expected to remain the largest and fastest growing major segment of global primary energy demand, supported by a wide variety of energy sources. The share of coal fired generation is likely to decline substantially and approach 20 percent of the world’s electricity in 2040, versus nearly 40 percent in 2018, in part as a result of policies to improve air quality as well as reduce greenhouse gas emissions to address the risks related to climate change. From 2018 to 2040, the amount of electricity supplied using natural gas, nuclear power, and renewables is likely to nearly double, accounting for the entire growth in electricity supplies and offsetting the reduction of coal. Electricity from wind and solar is likely to increase about 400 percent, helping total renewables (including other sources, i.e., hydropower) to account for about 80 percent of the increase in electricity supplies worldwide through 2040. Total renewables will likely reach about 50 percent of global electricity supplies by 2040. Natural gas and nuclear are also expected to increase shares over the period to 2040, reaching more than 25 percent and about 10 percent of global electricity supplies respectively by 2040. Supplies of electricity by energy type will reflect significant differences across regions reflecting a wide range of factors including the cost and availability of various energy supplies and policy developments.

Energy for transportation – including cars, trucks, ships, trains and airplanes – is expected to increase by about 20 percent from 2018 to 2040. Transportation energy demand is likely to account for over 60 percent of the growth in liquid fuels demand worldwide over this period. Light-duty vehicle demand for liquid fuels is projected to peak prior to 2025 and then decline to levels seen in the early-2010s by 2040 as the impact of better fuel economy and significant growth in electric cars, led by China, Europe, and the United States, work to offset growth in the worldwide car fleet of about 60 percent. By 2040, light-duty vehicles are expected to account for about 20 percent of global liquid fuels demand. During the same time period, nearly all the world’s commercial transportation fleets are likely to continue to run on liquid fuels, which are widely available and offer practical advantages in providing a large quantity of energy in small volumes.

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Liquid fuels provide the largest share of global energy supplies today reflecting broad-based availability, affordability, ease of transportation, and fitness as a practical solution to meet a wide variety of needs. By 2040, global demand for liquid fuels is projected to grow to approximately 110 million

oil-equivalent

barrels per day, an increase of about 9 percent from 2018. The

non-OECD

share of global liquid fuels demand is expected to increase to about 65 percent by 2040, as liquid fuels demand in the OECD is likely to decline by close to 15 percent. Much of the global liquid fuels demand today is met by crude production from traditional conventional sources; these supplies will remain important, and significant development activity is expected to offset much of the natural declines from these fields. At the same time, a variety of emerging supply sources – including tight oil, deepwater, oil sands, natural gas liquids and biofuels – are expected to grow to help meet rising demand. The world’s resource base is sufficient to meet projected demand through 2040 as technology advances continue to expand the availability of economic and lower carbon supply options. However, timely investments will remain critical to meeting global needs with reliable and affordable supplies.

Natural gas is a

lower-emission,

versatile and practical fuel for a wide variety of applications, and it is expected to grow the most of any primary energy type from 2018 to 2040, meeting about 50 percent of global energy demand growth. Global natural gas demand is expected to rise about 25 percent from 2018 to 2040, with about half of that increase coming from the Asia Pacific region. Significant growth in supplies of unconventional gas – the natural gas found in shale and other tight rock formations – will help meet these needs. In total, about 55 percent of the growth in natural gas supplies is expected to be from unconventional sources. At the same time, conventionally-produced natural gas is likely to remain the cornerstone of global supply, meeting more than

two-thirds

of worldwide demand in 2040. Liquefied natural gas (LNG) trade will expand significantly, meeting about 40 percent of the increase in global demand growth, with much of this supply expected to help meet rising demand in Asia Pacific.

The world’s energy mix is highly diverse and will remain so through 2040. Oil is expected to remain the largest source of energy with its share remaining close to 30 percent in 2040. Coal is currently the second largest source of energy, but it is likely to lose that position to natural gas in the next few years. The share of natural gas is expected to reach more than 25 percent by 2040, while the share of coal falls to about two thirds of the natural gas share. Nuclear power is projected to grow significantly, as many nations are likely to expand nuclear capacity to address rising electricity needs as well as energy security and environmental issues. Total renewable energy is likely to exceed 15 percent of global energy by 2040, with biomass, hydro and geothermal contributing a combined share of more than 10 percent. Total energy supplied from wind, solar and biofuels is expected to increase rapidly, growing over 350 percent from 2018 to 2040, when they will likely be just over 6 percent of the world energy mix.

The company anticipates that the world’s available oil and gas resource base will grow not only from new discoveries, but also from increases in previously discovered fields. Technology will underpin these increases. The investments to develop and supply resources to meet global demand through 2040 will be significant – even if demand remains flat. This reflects a fundamental aspect of the oil and natural gas business as the International Energy Agency (IEA) describes in its

World Energy Outlook 2020

. According to the IEA’s Stated Energy Policies Scenario, the investment required to meet oil and natural gas supply requirements worldwide over the period 2019 to 2040 will be about US$17 trillion (measured in 2019 dollars). In the IEA’s Sustainable Development Scenario, which is in line with the objectives of the Paris Agreement on climate change, the investment need would still accumulate to US$12 trillion.

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International accords and underlying regional and national regulations covering greenhouse gas emissions continue to evolve with uncertain timing and outcome, making it difficult to predict their business impact. Imperial’s estimates of potential costs related to greenhouse gas emissions align with applicable provincial and federal regulations. Additionally, Imperial uses ExxonMobil’s

Outlook for Energy

as a foundation for estimating energy supply and demand requirements from various energy sources and uses, and the

Outlook for Energy

takes into account policies established to reduce energy related greenhouse gas emissions. The climate accord reached at the Conference of the Parties (COP 21) in Paris set many new goals, and many related policies are still emerging. The

Outlook for Energy

reflects an environment with increasingly stringent climate policies and is consistent with the aggregation of Nationally Determined Contributions (NDCs), which were submitted by signatories to the United Nations Framework Convention on Climate Change (UNFCCC) 2015 Paris Agreement. The

Outlook for Energy

seeks to identify potential impacts of climate related policies, which often target specific sectors. It estimates potential impacts of these policies on consumer energy demand by using various assumptions and tools – including, depending on the sector, application of a proxy cost of carbon or assessment of targeted policies (i.e., automotive fuel economy standards). As people and nations look for ways to reduce risks of global climate change, they will continue to need practical solutions that do not jeopardize the affordability or reliability of the energy they need. The company continues to monitor the updates to the NDCs that nations are expected to provide in preparation for COP 26 in Glasgow in November 2021 as well as other policy developments in light of net zero ambitions recently formulated by some nations, including Canada.

Practical solutions to the world’s energy and climate challenges will benefit from market competition in addition to well-informed, well-designed and transparent policy approaches that carefully weigh costs and benefits. Such policies are likely to help manage the risks of climate change while also enabling societies to pursue other high priority goals around the world – including clean air and water, access to reliable and affordable energy, and economic progress for all people. The company encourages sound policy solutions that reduce climate-related risks across the economy at the lowest societal cost. All practical and economically viable energy sources will need to be pursued to continue meeting global energy demand, recognizing the scale and variety of worldwide energy needs, as well as the importance of expanding access to modern energy to promote better standards of living for billions of people.

The information provided in the “Long-term business outlook” includes internal estimates and projections based upon ExxonMobil’s internal data and analyses, as well as publicly available information from external sources including the International Energy Agency.

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Upstream

Imperial produces crude oil and natural gas for sale predominantly into North American markets. Imperial’s Upstream business strategies guide the company’s exploration, development, production, research and gas marketing activities. These strategies include maximizing asset reliability, accelerating development and application of high impact technologies, maximizing value by capturing new business opportunities and managing the existing portfolio, as well as pursuing sustainable improvements in organizational efficiency and effectiveness. These strategies are underpinned by a relentless focus on operations integrity, commitment to innovative technologies, disciplined approach to investing and cost management, development of employees and investment in the communities within which the company operates.

Imperial has a significant oil and gas resource base and a large inventory of potential projects. The company continues to evaluate opportunities to support long-term growth. As future development projects bring new production online, Imperial expects growth from oil sands

in-situ

and mining, as well as unconventional resources, with the largest growth potential related to

in-situ.

Actual volumes will vary from year to year due to the factors described in Item 1A. “Risk factors”.

The upstream industry environment has a history of significant price volatility. Market demand and prices experienced a sharp decline in the first half of 2020 largely driven by the

COVID-19

pandemic. Following this decline, prices improved in the second half of the year as supply and demand began to rebalance. Prices for most of the company’s crude oil sold are referenced to Western Canada Select (WCS) and West Texas Intermediate (WTI) oil markets. In January 2019, the Government of Alberta’s temporary mandatory production curtailment regulations came into effect. Although the mandatory production curtailment decreased throughout 2019 and 2020, and was eliminated in December 2020, the regulatory authority to impose curtailment remains in place and there is the potential for curtailment to be

re-imposed

and increased. The duration of these regulations is uncertain. Imperial continually monitors the effects of these regulations and evaluates opportunities, including crude shipments by rail and the pace of the development of its Aspen

in-situ

oil sands project, as economically justified.

Imperial believes prices over the long term will be driven by market supply and demand, with the demand side largely being a function of general economic activities, levels of prosperity, technology advances, consumer preference and government policies. On the supply side, prices may be significantly impacted by political events, logistics constraints, the actions of OPEC, governments and other factors. To manage the risks associated with price, Imperial evaluates annual plans and all major investments across a range of price scenarios.

In 2020, Imperial

re-assessed

the long-term development plans of its unconventional portfolio in Alberta and no longer plans to further develop a significant portion of this portfolio. The decision resulted in a

non-cash,

after-tax

impairment charge of $1,171 million in 2020, thereby reducing the carrying value of those assets to fair value. The company retains its interest in these resources. These

non-core

assets are

non-producing,

undeveloped assets and the company does not expect any material future cash expenditures related to this impairment. This decision is consistent with Imperial’s strategy of focusing its upstream resources and efforts on its key oil sands assets as well as on only the most attractive portions of its unconventional portfolio. Imperial continues to produce from its developed acreage.

Kearl’s supplemental crushing facilities started operations in late 2019, with

ramp-up

of all units through early 2020. These facilities have further improved reliability, reduced planned downtime, lowered unit costs and enabled the asset to achieve higher volumes. As disclosed in the company’s 2019 Form

10-K,

the original production target in 2020 for Kearl was 240,000 barrels per day (about 170,000 barrels Imperial’s share). As a result of market conditions, the company adjusted planned maintenance and turnaround activity, and revised its full-year guidance for Kearl total gross production to 220,000 barrels per day (about 156,000 barrels Imperial’s share). In 2020, Kearl achieved record annual total gross production of 222,000 barrels per day (158,000 barrels Imperial’s share). Imperial continues to progress initiatives to enable the asset to achieve 255,000 barrels per day of total gross production in 2021 (about 181,000 barrels Imperial’s share). In 2020, gross bitumen production at Cold Lake was impacted by ongoing steam management. The company plans to focus on base performance in the near-term and expects gross bitumen production at Cold Lake to average approximately 130,000 barrels per day in 2021.

As described in more detail in Item 1A. “Risk factors”, environmental risks and climate related regulations, and

COVID-19

could have negative impacts on the upstream business.

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Downstream

Imperial’s Downstream serves predominantly Canadian markets with refining, logistics and marketing assets. Imperial’s Downstream business strategies competitively position the company across a range of market conditions. These strategies include targeting industry leading performance in reliability, safety and operations integrity, as well as maximizing value from advanced technologies, capitalizing on integration across Imperial’s businesses, selectively investing for resilient and advantaged returns, operating efficiently and effectively, and providing quality, valued and differentiated products and services to customers.

Imperial owns and operates three refineries in Canada, with aggregate distillation capacity of 428,000 barrels per day. Refining margins are largely driven by differences in commodity prices and are a function of the difference between what a refinery pays for its raw materials (primarily crude oil) and the market prices for the range of products produced (primarily gasoline, heating oil, diesel oil, jet fuel, fuel oil and asphalt). Crude oil and many products are widely traded with published prices, including those quoted on the New York Mercantile Exchange. Prices for these commodities are determined by the global and regional marketplaces and are influenced by many factors, including global and regional supply / demand balances, inventory levels, industry refinery operations, import / export balances, currency fluctuations, seasonal demand, weather and political climate. Imperial’s integration across the value chain, from refining to marketing, enhances overall value across the fuels business.

In 2020, demand for petroleum products was significantly impacted by the

COVID-19

pandemic, starting in the first half of the year. While there was some demand improvement in the second half of 2020, demand remained below 2019 levels. This unprecedented demand impact also adversely affected Imperial’s margins.

As described in more detail in Item 1A. “Risk factors”, proposed carbon policy and other climate related regulations, as well as continued biofuels mandates, could have negative impacts on the downstream business.

Imperial supplies petroleum products to the motoring public through Esso and Mobil-branded sites and independent marketers. At the end of 2020, there were about 2,400 sites operating under a branded wholesaler model whereby Imperial supplies fuel to independent third parties who own and operate sites in alignment with Esso and Mobil brand standards.

Chemical

North America continued to benefit from abundant supplies of natural gas and gas liquids, providing both low cost energy and feedstock for steam crackers. In 2020, margins were adversely impacted by continued industry capacity additions and effects related to

COVID-19.

Imperial maintains a competitive advantage through continued operational excellence, consistent product quality, investment and cost discipline, and integration of its chemical plant in Sarnia with the refinery. The company also benefits from its relationship with ExxonMobil’s North American chemical businesses, enabling Imperial to maintain a leadership position in its key market segments.

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Results of operations

In 2020, the balance of supply and demand for petroleum and petrochemical products experienced two significant disruptive effects. On the demand side, the

COVID-19

pandemic spread rapidly across Canada and the world resulting in substantial reductions in consumer and business activity and significantly reduced local and global demand for crude oil, natural gas, and petroleum products. This reduction in demand coincided with announcements of increased production in certain key

oil-producing

countries which led to increases in inventory levels and sharp declines in prices for crude oil, natural gas, and petroleum products. Market conditions continued to reflect considerable uncertainty throughout 2020 as consumer and business activity has exhibited some degree of recovery, but remained lower when compared to prior periods as a result of the pandemic. Despite actions taken by key

oil-producing

countries to reduce oversupply, and improved credit market conditions providing sufficient liquidity to credit-worthy companies, the unfavourable economic impacts appear increasingly likely to persist to some extent well into 2021.

In late March, the company announced significant reductions in 2020 capital and operating expense spending plans. Capital and exploration expenditures for 2020 were $874 million, in line with the company’s most recent guidance of $900 million, and less than half of 2019 expenditures. Capital expenditures in 2021 are expected to be approximately $1.2 billion. In addition, full-year production and manufacturing expenses were $985 million lower than the prior year. This decrease enabled the company to surpass its $500 million expense reduction commitment made in 2020 by nearly double.

The effect of

COVID-19

and the current business environment on supply and demand patterns negatively impacted Imperial’s financial and operating results in 2020. Industry conditions seen in 2020 have led to lower realized prices for the company’s products and have resulted in substantially lower earnings and operating cash flow throughout 2020 in comparison to 2019. In response to these conditions, the company operated certain assets at reduced rates and adjusted planned maintenance and turnaround activities throughout the second and third quarters in an effort to reduce

on-site

staffing levels and to better balance production with demand. Refinery utilization rates and petroleum product sales were reduced through the second quarter of 2020, but saw some improvement in product demands in the second half of the year. The length and severity of

COVID-19

impacts to demand and the current business environment are highly uncertain, with the future supply and demand patterns inherently difficult to predict.

In the second quarter of 2020, Canadian federal and provincial governments introduced plans and programs to support business and economic activities in response to the disruptive impacts from the

COVID-19

pandemic. The Government of Canada implemented the Canada Emergency Wage Subsidy (CEWS) as part of its

COVID-19

Economic Response Plan, and has extended the CEWS until June 2021. The company received wage subsidies under this program and, if eligible, intends to continue to apply for these wage subsidies. Additionally, in the fourth quarter, the Alberta government enacted an accelerated reduction in the corporate income tax rate to eight percent beginning July 1, 2020, compared with a previously legislated reduction to eight percent beginning January 1, 2022. The corporate income tax rate change did not have a significant impact on the company’s financial statements.

The company has taken steps, in line with federal and provincial guidelines and restrictions, to limit the spread of

COVID-19

among employees, contractors and the broader community, while also maintaining operations to ensure reliable supply of products to customers as a provider of essential services. The company maintains robust business continuity plans, which have been activated to minimize the impact of

COVID-19

on workforce productivity.

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Consolidated

2020

Net loss in 2020 was $1,857 million, or $2.53 per share on a diluted basis, compared to net income of $2,200 million or $2.88 per share in 2019. Current year results reflect a

non-cash

impairment charge of $1,171 million

after-tax,

related to the company’s decision to no longer develop a significant portion of its unconventional portfolio, and a favourable impact of about $115 million

after-tax,

associated with the Canada Emergency Wage Subsidy (CEWS), which includes Imperial’s proportionate share of a joint venture. Full-year 2019 results included a favourable impact of $662 million associated with the Alberta corporate income tax rate decrease.

2019

Net income in 2019 was $2,200 million, or $2.88 per share on a diluted basis, compared to net income of $2,314 million or $2.86 per share in 2018. 2019 results include a favourable impact, largely

non-cash,

of $662 million associated with the Alberta corporate income tax rate decrease. On June 28, 2019, the Alberta government enacted a 4 percent decrease in the provincial tax rate, from 12 percent to 8 percent by 2022.

Upstream

2020

Upstream recorded a net loss of $2,318 million for the year, compared to net income of $1,348 million in 2019. Results were negatively impacted by lower realizations of about $2,620 million, a

non-cash

impairment charge of $1,171 million, related to the company’s decision to no longer develop a significant portion of its unconventional portfolio, absence of a favourable impact of $689 million associated with the Alberta corporate income tax rate decrease in 2019, and lower volumes of about $130 million. These items were partially offset by lower royalties of about $540 million, lower operating expenses of about $250 million, favourable foreign exchange impacts of about $100 million, and about $70 million associated with the CEWS received by the company which includes Imperial’s proportionate share of a joint venture.

2019

Upstream net income was $1,348 million for the year, reflecting the favourable impact associated with the decreased Alberta corporate income tax rate of $689 million. Excluding this impact, 2019 net income was $659 million, up $797 million compared to a net loss of $138 million in 2018. Improved results reflect higher crude oil realizations of about $1,000 million, as well as higher volumes of about $350 million primarily at Syncrude and Norman Wells. Results were negatively impacted by higher royalties of about $230 million, higher operating expenses of about $190 million and lower Cold Lake volumes of about $120 million.

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Average realizations

Natural gas (per thousand cubic feet) 1.90 2.05 2.43

2020

WTI averaged US$39.26 per barrel in 2020, down from US$57.03 per barrel in 2019. WCS averaged US$26.87 per barrel and US$44.29 per barrel for the same periods. The WTI / WCS differential narrowed to approximately US$12 per barrel in 2020, from around US$13 per barrel in 2019. The Canadian dollar averaged US$0.75 in 2020, essentially unchanged from 2019.

Imperial’s average Canadian dollar realizations for bitumen decreased in 2020 primarily due to a decrease in WCS. Bitumen realizations averaged $25.69 per barrel, compared to $50.02 per barrel in 2019. The company’s average Canadian dollar realizations for synthetic crude decreased generally in line with WTI, adjusted for changes in exchange rates and transportation costs. Synthetic crude realizations averaged $49.76 per barrel, compared to $74.47 per barrel in 2019.

2019

WTI averaged US$57.03 per barrel in 2019, down from US$65.03 per barrel in 2018. WCS averaged US$44.29 per barrel and US$38.71 per barrel for the same periods. The WTI / WCS differential narrowed to average approximately US$13 per barrel in 2019, from around US$26 per barrel in 2018. The Canadian dollar averaged US$0.75 in 2019, a decrease of US$0.02 from 2018.

Imperial’s average Canadian dollar realizations for bitumen increased in 2019, supported primarily by an increase in WCS and lower diluent costs. Bitumen realizations averaged $50.02 per barrel, up from $37.56 per barrel in 2018. The company’s average Canadian dollar realizations for synthetic crude increased relative to WTI, primarily due to the narrowing of the western Canadian light crude differential. Synthetic crude realizations averaged $74.47 per barrel, up from $70.66 per barrel in 2018.

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Crude oil and natural gas liquids (NGL) - production and sales (a)

gross net gross net gross net

NGLs available for sale 2 2 2 1 1 2

Bitumen sales, including diluent (c) 401 387 406

Natural gas - production and production available for sale (a)

gross net gross net gross net

Production available for sale (f) 115 108 94

2020

Total gross production of Kearl bitumen averaged 222,000 barrels per day in 2020 (158,000 barrels Imperial’s share), the highest annual production in the asset’s history, up from 205,000 barrels per day (145,000 barrels Imperial’s share) in 2019. Improved production was mainly due to the addition of supplemental crushing facilities in 2020, partially offset by the balancing of near term production with demand through the advancement and extension of planned turnaround activities.

Gross production of Cold Lake bitumen averaged 132,000 barrels per day in 2020, compared to 140,000 barrels per day in 2019.

During 2020, the company’s share of gross production from Syncrude averaged 69,000 barrels per day, compared to 73,000 barrels per day in 2019.

2019

Total gross production of Kearl bitumen averaged 205,000 barrels per day in 2019 (145,000 barrels Imperial’s share), compared to 206,000 barrels per day (146,000 barrels Imperial’s share) in 2018.

Gross production of Cold Lake bitumen averaged 140,000 barrels per day in 2019, compared to 147,000 barrels per day in 2018.

During 2019, the company’s share of gross production from Syncrude averaged 73,000 barrels per day, up from 62,000 barrels per day in 2018. Higher production was mainly due to the absence of production impacts from the 2018 power disruption.

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Downstream

2020

Downstream net income was $553 million, compared to $961 million in 2019. Results were negatively impacted by lower margins of about $710 million, and lower sales volumes of about $290 million. These items were offset by lower operating expenses of about $190 million, lower turnaround impacts of about $190 million primarily related to reduced turnaround activity in the current year and improved reliability of about $180 million, primarily due to the absence of the Sarnia fractionation tower incident which occurred in April 2019.

2019

Downstream net income was $961 million, compared to $2,366 million in 2018. Earnings were negatively impacted by lower margins of about $1,130 million, reliability events of about $150 million, including the fractionation tower incident at Sarnia, higher net planned turnaround impacts of about $140 million, and lower sales volumes of about $130 million. These factors were partially offset by favourable foreign exchange impacts of about $90 million.

Refinery utilization

Utilization of total refinery capacity (percent) 80 83 93

Sales

Lube oils and other products 40 38 40

(b) Crude oil and feedstocks sent directly to atmospheric distillation units.

2020

Refinery throughput averaged 340,000 barrels per day in 2020, compared to 353,000 barrels per day in 2019. Capacity utilization was 80 percent, compared to 83 percent in 2019. Lower throughput was driven by reduced demand due to the

COVID-19

pandemic, partially offset by lower refinery turnaround activity and reliability events, including impacts from the Sarnia fractionation tower incident which occurred in April 2019. Petroleum product sales were 421,000 barrels per day in 2020, compared to 475,000 barrels per day in 2019. Lower petroleum product sales were primarily driven by reduced demand due to the

COVID-19

pandemic.

2019

Refinery throughput averaged 353,000 barrels per day in 2019, compared to 392,000 barrels per day in 2018. Capacity utilization was 83 percent, compared to 93 percent in 2018. Reduced throughput was mainly due to higher planned turnaround activities and impacts from the Sarnia fractionation tower incident. Petroleum product sales were 475,000 barrels per day in 2019, compared to 504,000 barrels per day in 2018. Lower petroleum product sales were mainly due to lower refinery throughput.

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Chemical

Sales

2020

Chemical net income was $78 million in 2020, compared to $108 million in 2019, primarily reflecting lower margins.

2019

Chemical net income was $108 million in 2019, compared to $275 million in 2018, primarily due to lower margins.

Corporate and other

2020

Corporate and other expenses were $170 million in 2020, compared to $217 million in 2019.

2019

Corporate and other expenses were $217 million in 2019, compared to $189 million in 2018.

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Liquidity and capital resources

Sources and uses of cash

Cash provided by (used in)

Increase (decrease) in cash and cash equivalents (947 ) 730 (207 )

Cash and cash equivalents at end of year 771 1,718 988

The company issues long-term debt from time to time and maintains a commercial paper program. However, internally generated funds cover the majority of its financial requirements. Cash that may be temporarily surplus to the company’s immediate needs is carefully managed through counterparty quality and investment guidelines to ensure that it is secure and readily available to meet the company’s cash requirements and to optimize returns.

Cash flows from operating activities are highly dependent on crude oil and natural gas prices, as well as petroleum and chemical product margins. In addition, to provide for cash flow in future periods, the company needs to continually find and develop new resources, and continue to develop and apply new technologies to existing fields in order to maintain or increase production.

The company’s financial strength enables it to make large, long-term capital expenditures. Imperial’s portfolio of development opportunities and the complementary nature of its business segments help mitigate the overall risks for the company and its cash flows. Further, due to its financial strength, debt capacity and portfolio of opportunities, the risk associated with delay of any single project would not have a significant impact on the company’s liquidity or ability to generate sufficient cash flows for its operations and fixed commitments.

Funding of registered retirement plans complies with federal and provincial pension regulations, and the company makes contributions to the plans based on an independent actuarial valuation completed at least once every three years depending on funding status. The most recent valuation of the company’s registered retirement plans was completed as at December 31, 2019. The company contributed $195 million to the registered retirement plans in 2020. Future funding requirements are not expected to affect the company’s existing capital investment plans or its ability to pursue new investment opportunities.

Cash flow from operating activities

2020

Cash flow generated from operating activities was $798 million in 2020, compared to $4,429 million in 2019, primarily reflecting lower realizations in the Upstream and unfavourable working capital impacts.

2019

Cash flow generated from operating activities was $4,429 million in 2019, up from $3,922 million in 2018, primarily reflecting favourable working capital effects, partially offset by lower earnings excluding the impact associated with the Alberta corporate income tax rate decrease.

Cash flow from investing activities

2020

Investing activities used net cash of $802 million in 2020, compared to $1,704 million used in 2019, primarily reflecting lower additions to property, plant and equipment.

2019

Investing activities used net cash of $1,704 million in 2019, compared with $1,559 million used in 2018, primarily reflecting higher additions to property, plant and equipment.

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Cash flow from financing activities

2020

Cash used in financing activities was $943 million in 2020, compared to $1,995 million used in 2019.

At the end of 2020, total debt outstanding was $5,184 million, compared with $5,190 million at the end of 2019.

In response to market conditions, during the second quarter of 2020, the company entered into a $500 million committed short-term line of credit to May 2021, and a $300 million committed short-term line of credit to June 2021. These facilities were in addition to existing credit facilities of $500 million. The company has not drawn on these facilities.

In November 2020, the company extended the maturity date of one of its existing $250 million committed short-term line of credit to November 2021. The company has not drawn on the facility.

The maturity date of the other existing $250 million credit facility remains unchanged at November 2021. The company has not drawn on the facility.

During 2020, the company, under its share purchase program, purchased about 9.8 million shares for $274 million. In response to market conditions, substantial purchases under the share purchase program were suspended on April 1, 2020.

Dividends paid in 2020 were $649 million. The per share dividend paid in 2020 was $0.88, up from $0.82 in 2019.

2019

Cash used in financing activities was $1,995 million in 2019, compared with $2,570 million used in 2018.

At the end of 2019, total debt outstanding was $5,190 million, compared with $5,180 million at the end of 2018.

In September 2019, the company extended the maturity date of its existing long-term, variable-rate, Canadian dollar loan from ExxonMobil to June 30, 2025. All other terms and conditions remained unchanged.

In November 2019, the company increased the capacity of its

non-interest

bearing, revolving demand loan with ExxonMobil from $75 million to $150 million. The loan represents ExxonMobil’s share of a working capital facility required to support purchasing, marketing, transportation and derivative arrangements for crude oil and diluent products undertaken by Imperial on behalf of ExxonMobil. At December 31, 2019 the company had borrowed $111 million under this arrangement.

In November 2019, the company extended the maturity date of its existing $250 million committed long-term line of credit to November 2021. The company has not drawn on the facility.

In December 2019, the company extended the maturity date of its existing $250 million committed short-term line of credit to December 2020. The company has not drawn on the facility.

During 2019, the company, under its share purchase program, purchased about 38.7 million shares for $1,373 million, including shares purchased from Exxon Mobil Corporation.

Dividends paid in 2019 were $631 million. The per share dividend paid in 2019 was $0.82, up from $0.70 in 2018.

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Financial strength

The table below shows Imperial’s consolidated

debt-to-capital

ratio. The data demonstrates the company’s creditworthiness:

percent

Debt-related interest incurred in 2020, before capitalization of interest, was $102 million, compared with $138 million in 2019. The average effective interest rate on the company’s debt was 2.0 percent in 2020, compared with 2.7 percent in 2019.

The company’s financial strength represents a competitive advantage of strategic importance providing it the opportunity to readily access capital markets under the full range of market conditions and enables the company to take on large, long-term capital commitments in the pursuit of maximizing shareholder value.

Commitments

The following table shows the company’s commitments outstanding at December 31, 2020. It combines data from the Consolidated balance sheet and from individual notes to the consolidated financial statements, where appropriate.

Payment due by period

Long-term debt excluding finance lease obligations (a) 15 - 4,447 - - 4,447

Unrecognized tax benefits totalling $36 million have not been included in the company’s commitments table because the company does not expect there will be any cash impact from the final settlements as sufficient funds have been deposited with the Canada Revenue Agency. Further details on the unrecognized tax benefits can be found in note 4 to the financial statements on page 88.

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Litigation and other contingencies

As discussed in note 10 to the consolidated financial statements on page 98, a variety of claims have been made against Imperial and its subsidiaries. Based on a consideration of all relevant facts and circumstances, the company does not believe the ultimate outcome of any currently pending lawsuits against the company will have a material adverse effect on the company’s operations, financial condition, or financial statements taken as a whole.

Additionally, as discussed in note 10, Imperial was contingently liable at December 31, 2020, for guarantees relating to performance under contracts. These guarantees do not have a material effect on the company’s operations, financial condition, or financial statements taken as a whole.

Imperial Oil Ltd IMO US Equity

IMO · 10-K · period ended 2020-12-31

Item 1A. Risk factors

Item 1B. Unresolved staff comments

Item 2. Properties

Item 3. Legal proceedings

Item 4. Mine safety disclosures

Item 6. Selected financial data

Item 7A. Quantitative and qualitative disclosures about market risk

Item 8. Financial statements and supplementary data

Item 9A. Controls and procedures

Item 9B. Other information

Item 10. Directors, executive officers and corporate governance

Item 11. Executive compensation

Item 14. Principal accountant fees and services

Item 15. Exhibits, financial statement schedules

Item 16. Form

Imperial Oil Ltd IMO US Equity☆

IMO · 10-K · period ended 2020-12-31

Item 1A. Risk factors

Item 1B. Unresolved staff comments

Item 2. Properties

Item 3. Legal proceedings

Item 4. Mine safety disclosures

Item 6. Selected financial data

Item 7A. Quantitative and qualitative disclosures about market risk

Item 8. Financial statements and supplementary data

Item 9A. Controls and procedures

Item 9B. Other information

Item 10. Directors, executive officers and corporate governance

Item 11. Executive compensation

Item 14. Principal accountant fees and services

Item 15. Exhibits, financial statement schedules

Item 16. Form

Imperial Oil Ltd IMO US Equity