| IVANHOE ENERGY INC ITEM 1A RISK FACTORS We are subject to a number of risks due to the nature of the industry in which we operate, our reliance on strategies which include technologies that have not been proved on a commercial scale, the present state of development of our business and the foreign jurisdictions in which we carry on business |
| The following factors contain certain forward-looking statements involving risks and uncertainties |
| Our actual results may differ materially from the results anticipated in these forward-looking statements |
| We are not able to guarantee the successful commercial development of the RTP ^TM Technology |
| To date, no commercial-scale RTP^TM Plants have been constructed using the RTP^TM Technology and, therefore, the process has not been proven to be financially viable on a commercial scale |
| Other developers of competing heavy-oil processing technologies may have significantly more financial resources than we do and may be able to use this to obtain a competitive advantage |
| We may not be able to conclude joint venture or production-sharing contracts using the RTP ^TM Technology |
| We have signed an MOU to study the economic feasibility of RTP™ heavy oil processing facilities in Iraq but we can give no assurances as to when or if we will be able to conclude joint ventures or production-sharing contracts employing RTP^TM Technology |
| 15 _________________________________________________________________ We are not able to guarantee the successful commercial development of our licensed GTL technology |
| To date, no commercial-scale GTL plants have been constructed using the Syntroleum Process and, therefore, the process has not been proven on a commercial scale |
| Other developers of GTL technology have significantly more financial resources than we do and may be able to use this to obtain a competitive advantage |
| We may not be able to conclude a GTL development and production-sharing contract |
| To date, we have been unsuccessful in concluding a GTL development and production-sharing contract and we can give no assurances as to when or if we will be able to conclude a contract in any of the countries where we are now, or will be, exploring GTL project opportunities |
| Our efforts to commercialize the Syntroleum Process and the RTP ^TM Technology may give rise to claims of infringement upon the patents or proprietary rights of others |
| We own licenses to employ the Syntroleum Process and the RTP^TM Technology process but we may not become aware of claims of infringement upon the patents or rights of others in these respective technologies until after we have made a substantial investment in the development and commercialization of projects utilizing these licensed technologies |
| Third parties may claim that the technologies we license have infringed upon past, present or future patented technologies |
| Legal actions could be brought against the licensor and us claiming damages and seeking an injunction that would prevent us from testing or commercializing the affected technologies |
| If an infringement action were successful, in addition to potential liability for damages, we and our licensors could be required to obtain a claiming party’s license in order to continue to test or commercialize the affected technologies |
| Any required license might not be made available or, if available, might not be available on acceptable terms, and we could be prevented entirely from testing or commercializing the affected licensed technology |
| We may have to expend substantial resources in litigation defending against the infringement claims of others |
| Many possible claimants, such as the major energy companies that have or may be developing proprietary GTL or heavy oil processing technologies competitive with the Syntroleum Process and the RTP^TM Technology that we license, may have significantly more resources to spend on litigation |
| Technological advances could significantly decrease the cost of upgrading petroleum and, if we are unable to adopt or incorporate technological advances into our operations, the RTP ^TM Technology could become uncompetitive or obsolete |
| We expect that technological advances in the processes and procedures for upgrading heavy oil and bitumen into lighter, less viscous products will continue to occur |
| It is possible that those advances could make the processes and procedures, which are integral to the RTP^TM Technology, less efficient or cause the upgraded product being produced to be of a lesser quality |
| These advances could also allow competitors to produce upgraded products at a lower cost than that at which RTP^TM Technology is able to produce such products |
| If we are unable to adopt or incorporate technological advances, our production methods and processes could be less efficient than those of our competitors, which could cause RTP^TM Technology facilities to become uncompetitive |
| In addition, alternative sources of energy are continually under development |
| Alternative energy sources that can reduce reliance on oil and bitumen may be developed, which may decrease the demand for RTP^TM Technology upgraded product |
| It is also possible that technological advances in engine design and performance could reduce the use of oil and bitumen, which would lower the demand for such products |
| Expansion of our operations will require significant capital expenditures for which we may be unable to provide sufficient financing |
| Our need for additional capital may harm our financial condition |
| We will be required to make substantial capital expenditures far beyond our existing capital resources to develop a GTL, EOR or RTP^TM Technology project, to exploit our existing reserves and to discover new oil and gas reserves |
| Historically, we have relied, and continue to rely, on external sources of financing to meet our capital requirements to continue acquiring, exploring and developing oil and gas properties and to otherwise implement our corporate development and investment strategies |
| We have, in the past, relied upon equity capital as our principal source of funding |
| We plan to obtain the future funding we will need through debt and equity markets or through project participation arrangements with third parties, but we cannot assure you that we will be able to obtain additional funding when it is required and whether it will be available on commercially acceptable terms |
| We also make offers to acquire oil and gas properties in the ordinary course of our business |
| If these offers are accepted, our capital needs may increase substantially |
| If we fail to obtain the funding that we need when it is required, we may have to forego or delay potentially valuable opportunities to acquire new oil and gas properties or default on existing funding commitments to third parties and forfeit or dilute our rights in existing oil and gas property interests |
| Our limited operating history may make it difficult to obtain future financing |
| 16 _________________________________________________________________ We have a history of losses and must generate greater revenue to achieve profitability |
| We commenced operations in 1997 and have been involved in three start-up situations in Russia, China and the US Like most start-up companies we have incurred losses during our start-up activities |
| Our current cash flows alone are insufficient to fund our business plans, necessitating further growth and funding for implementation |
| We may be unable to achieve the needed growth to obtain profitability, fund debt repayments and related interest payments and may fail to obtain the funding that we need when it is required |
| Conflict in the Middle East may hamper our GTL and EOR project objectives |
| Ongoing tensions and conflict in the Middle East could harm our business by making it difficult or impossible to continue our pursuit of GTL and EOR projects in the region or to obtain financing for projects we do succeed in obtaining |
| It is impossible to predict the occurrence of such events, how long they will last, the economic consequences of the conflict for the energy industry, regionally and globally, and how our business might be affected over the longer term |
| Government regulations in foreign countries may limit our activities and harm our business operations |
| We carry on business in China and we may, in the future, carry on business in other foreign jurisdictions with governments, governmental agencies or government-owned entities |
| The foreign legal framework for the agreements through which we carry on business now or in the future, particularly in developing countries, is often based on recent political and economic reforms and newly enacted legislation, which may not be consistent with long-standing local conventions and customs |
| As a result, there may be ambiguities, inconsistencies and anomalies in the agreements or the legislation upon which they are based which are atypical of more developed legal systems and which may affect the interpretation and enforcement of our rights and obligations and those of our foreign partners |
| Local institutions and bureaucracies responsible for administering foreign laws may lack a proper understanding of the laws or the experience necessary to apply them in a modern business context |
| Foreign laws may be applied in an inconsistent, arbitrary and unfair manner and legal remedies may be uncertain, delayed or unavailable |
| You should not unduly rely on reserve information because reserve information represents estimates |
| Reserve estimates involve a great deal of uncertainty, because they depend in large part upon the reliability of available geologic and engineering data, which is inherently imprecise |
| Geologic and engineering data are used to determine the probability that a reservoir of oil and natural gas exists at a particular location, and whether oil and natural gas are recoverable from a reservoir |
| Recoverability is ultimately subject to the accuracy of data including, but not limited to, geological characteristics of the reservoir structure, reservoir fluid properties, the size and boundaries of the drainage area and reservoir pressure and the anticipated rate of pressure depletion |
| The evaluation of these and other factors is based upon available seismic data, computer modeling, well tests and information obtained from production of oil and natural gas from adjacent or similar properties, but the probability of the existence and recoverability of reserves is less than 100prca and actual recoveries of proved reserves usually differ from estimates |
| Reserve estimates also require numerous assumptions relating to operating conditions and economic factors including, among others, the price at which recovered oil and natural gas can be sold, the costs of recovery, prevailing environmental conditions associated with drilling and production sites, availability of enhanced recovery techniques, ability to transport oil and natural gas to markets and governmental and other regulatory factors, such as taxes and environmental laws |
| A negative change in any one or more of these factors could result in quantities of oil and natural gas previously estimated as proved reserves becoming uneconomic |
| For example, a decline in the market price of oil or natural gas to an amount that is less than the cost of recovery of such oil and natural gas in a particular location could make production thereof commercially impracticable |
| The risk that a decline in price could have that effect is magnified in the case of reserves requiring sophisticated or expensive production enhancement technology and equipment, such as some types of heavy oil |
| Each of these factors, by having an impact on the cost of recovery and the rate of production, will also affect the present value of future net cash flows from estimated reserves |
| In addition, estimates of reserves and expected future net cash flows therefrom prepared by different independent engineers, or by the same engineers at different times, may vary substantially |
| Information in this document regarding our future plans reflects our current intent and is subject to change |
| We describe our current exploration and development plans in this document |
| Whether we ultimately implement our plans will depend on availability and cost of capital; receipt of additional seismic data or reprocessed existing data; current and projected oil or gas prices; costs and availability of drilling rigs and other equipment, supplies and personnel; success or failure of activities in similar areas; changes in estimates of project completion costs; our ability to attract other industry partners to acquire a portion of the working interest to reduce costs and exposure to risks and decisions of our joint working interest owners |
| 17 _________________________________________________________________ We will continue to gather data about our projects and it is possible that additional information will cause us to alter our schedule or determine that a project should not be pursued at all |
| We cannot guarantee the successful commercialization of our exploration activities |
| We have exploration and development projects in the US and China |
| Our projects are at various stages and, like all exploration companies in the oil and gas industry, we are exposed to the significant risk that our exploration activities will not necessarily result in a discovery of economically recoverable volumes |
| We might not be successful in acquiring and developing new prospects and our exploration and development properties may not contain any significant proved reserves |
| Our future exploration and development success depends upon our ability to find, develop and acquire additional economically recoverable oil and natural gas reserves |
| The successful acquisition and development of oil and gas properties requires proper forecasting of recoverable reserves, oil and gas prices and operating costs, potential environmental and other liabilities and productivity of new wells drilled |
| Estimates of cost to explore, develop and produce are inherently inexact |
| As a result, we might not recover the purchase price of a property from the sale of production from the property, or might not realize an acceptable return from properties we acquire |
| Our estimates of exploration, development and production costs can be affected by such factors as permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties and unusual or unexpected formations, pressures and work interruptions |
| Exploration and development involves significant risks |
| Few wells which are drilled are developed into commercially producing fields |
| Substantial expenditures may be required to establish the existence of proved reserves, and we cannot assure you that sufficient commercial quantities of oil and gas deposits will be discovered to enable us to recover our exploration and development costs and sustain our business |
| Our business may be harmed if we are unable to retain our licenses, leases and working interests in licenses and leases |
| If we, or the holders of the licenses or leases, fail to meet the specific requirements of each license or lease, the license or lease may terminate or expire |
| We cannot assure you that any of the obligations required to maintain each license or lease will be met |
| The termination or expiration of our licenses or leases or our working interest relating to a license or lease may harm our business |
| Some of our property interests will terminate unless we fulfill certain obligations under the terms of our agreements related to such properties |
| If we are unable to satisfy these conditions on a timely basis, we may lose our rights in these properties |
| The termination of our interests in these properties may harm our business |
| Complying with environmental and other government regulations could be costly and could negatively impact our production |
| Our operations are governed by numerous laws and regulations at various levels of government in the countries in which we operate |
| These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues and may, among other potential consequences, require that we acquire permits before commencing drilling; restrict the substances that can be released into the environment with drilling and production activities; limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas; require that reclamation measures be taken to prevent pollution from former operations; require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells and remediating contaminated soil and groundwater and require remedial measures be taken with respect to property designated as a contaminated site |
| Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties |
| We maintain limited insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time |
| However, we do not believe that insurance coverage for the full potential liability of environmental damages is available at a reasonable cost |
| Accordingly, we could be liable, or could be required to cease production on properties, if environmental damage occurs |
| The costs of complying with environmental laws and regulations in the future may harm our business |
| Furthermore, future changes in environmental laws and regulations could occur that result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations |
| 18 _________________________________________________________________ Crude oil and natural gas prices are volatile |
| Fluctuations in the prices of oil and natural gas will affect many aspects of our business, including our revenues, cash flows and earnings; our ability to attract capital to finance our operations; our cost of capital; the amount we are able to borrow and the value of our oil and natural gas properties |
| Both oil and natural gas prices are extremely volatile |
| Oil prices are determined by international supply and demand |
| Political developments, compliance or non-compliance with self-imposed quotas, or agreements between members of the OPEC can affect world oil supply and prices |
| Any material decline in prices could result in a reduction of our net production revenue and overall value |
| The economics of producing from some wells could change as a result of lower prices and as a result, we could elect not to produce from certain wells |
| Any material decline in prices could also result in a reduction in our oil and natural gas acquisition and development activities |
| In addition, a material decline in oil and natural gas prices from historical average prices could adversely affect our ability to borrow and to obtain additional capital on attractive terms |
| Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty agreeing on such value |
| Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploration projects |
| We compete for oil and gas properties with many other exploration and development companies throughout the world who have access to greater resources |
| We operate in a highly competitive environment in which we compete with other exploration and development companies to acquire a limited number of prospective oil and gas properties |
| Many of our competitors are much larger than we are and, as a result, may enjoy a competitive advantage in accessing financial, technical and human resources |
| They may be able to pay more for productive oil and gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial, technical and human resources permit |
| Our share ownership is highly concentrated and, as a result, our principal shareholder significantly influences our business |
| As at the date of this annual report, our largest shareholder, Robert M Friedland, owned approximately 21prca of our common shares |
| As a result, he has the voting power to significantly influence our policies, business and affairs and the outcome of any corporate transaction or other matter, including mergers, consolidations and the sale of all, or substantially all, of our assets |
| In addition, the concentration of our ownership may have the effect of delaying, deterring or preventing a change in control that otherwise could result in a premium in the price of our common shares |
| If we lose our key management and technical personnel, our business may suffer |
| We rely upon a relatively small group of key management and technical personnel |
| David Martin and E Leon Daniel, in particular, have extensive experience in oil and gas operations throughout the world |
| We do not maintain any key man insurance |
| We do not have employment agreements with certain of our key management and technical personnel and we cannot assure you that these individuals will remain with us in the future |
| An unexpected partial or total loss of their services would harm our business |