BUSINESS

Suncor: Fort Hills mine production delayed by one year until 2017

11/01/2012 11:10 EDT | Updated 01/23/2014 06:58 EST
CALGARY - Suncor Energy Inc. expects crude from its Fort Hills oilsands mine to start flowing a year later than previously thought and says ever-growing production from places like North Dakota challenges the economics of its Voyageur upgrader.

Those two projects, as well as the Joslyn mine, are part of a $1.75-billion joint venture Suncor inked with French energy giant Total SA in 2010. The partners are undertaking a review of those three projects in an effort to drive down costs.

"We haven't completed the review, but early indications are that we've been able to add significant value to the mining projects," CEO Steve Williams told analysts on a conference call Thursday to discuss Suncor's third-quarter results.

"However, the production timeline for Fort Hills is likely to be delayed by about a year to 2017."

Suncor owns 40.8 per cent of Fort Hills and is the operator. Total holds a 39.2 per cent stake and Vancouver-based miner Teck Resources Ltd. (TSX:TCK.B) owns the remaining 20 per cent.

Meanwhile, Voyageur's economics "appear challenged in light of the projected ramp up in tight oil production in the North American market."

The Bakken formation that stretches through parts of North Dakota, Montana and Saskatchewan, for instance, has been an important new source of supply for the North American marketplace. That oil is of better quality than the tarry bitumen produced in the oilsands, and therefore commands a better price.

"Clearly the volumes of tight oil that are being produced are impressive," Williams said.

There's room for both tight oil and oilsands crude in the North American market, he said, but it does put upgrading — converting oilsands crude into a lighter product that's easier to refine — "under more stress."

"They're margin projects that only work because of the difference between the value between light and heavy materials, which we think get squeezed in a world with more tight oil," he said.

"So we're fully aware of it and we've factored it into our investment plans."

Fort Hills, Joslyn and Voyageur are being weighed on their individual merits, and could theoretically be scrapped if they're not found to be economically viable.

Williams says the focus will be on profitability and quality rather than on meeting stringent timelines. It's a view many in the oilsands have been adopting in recent years to avoid the major cost overruns the sector experienced before the recession caused expansions to come to a screeching halt.

In releasing its results late Wednesday, Suncor said it now expects to spend $6.65 billion this year, down from the $7.5 billion it predicted earlier.

Suncor owes the lower spending to its new Firebag Stage 4 oilsands project, which came in 10 per cent under budget, as well as slowing the pace of the Total joint-venture developments.

Suncor isn't the only oilpatch name to signal a more frugal approach these days. Talisman Energy Inc.'s new CEO, Hal Kvisle, said on a conference call earlier this week that 2013 spending will be about 25 per cent lower than this year, with much less of a focus on risky international exploration.

Wednesday night, Suncor announced third-quarter net earnings of $1.56 billion, or $1.01 per share, compared with $1.29 billion, or 82 cents per share, in the same 2011 period. The upswing was mainly due to exchange rate fluctuations.

Operating earnings, a better gauge of the company's underlying performance, fell to $1.3 billion, or 85 cents per share, compared with $1.79 billion, or $1.14 per share, a year earlier.

The earnings beat the average estimate of 78 cents per share, according to Thomson Reuters.

Suncor said the drop in operating earnings was due to higher share-based compensation expense, lower production volumes from offshore assets undergoing planned maintenance work and higher depreciation, depletion and amortization charges.

Revenues were $9.6 billion, down from $10.4 billion in the corresponding 2011 quarter.

Williams became CEO of Suncor in May, when Rick George retired after more than two decades at the helm. Williams had been Suncor's chief operating officer prior to his promotion to the top job.

Through its merger with Petro-Canada in 2009, Suncor inherited oil assets in Libya and Syria. As conflict broke out in Libya in February 2011, Suncor pulled its employees out of the North African country. Production has since been resuming there.

In December, Suncor pulled its employees out of Syria in order to comply with sanctions aimed at isolating the regime of President Bashar Assad. During the second quarter Suncor took a $694-million charge against its second-quarter results related to Syria, where violence continues to rage.

Suncor also has assets in the U.K. North Sea, off Canada's East Coast, four refineries and a chain of Petro-Canada-branded gas stations.

Suncor shares rose more than three per cent to $34.68 Thursday on the Toronto Stock Exchange.