Suncor Energy squeezes profit from Canadian sands

Global Finance, Sep 2002 by Platt, Gordon

CANADA

When Suncor Energy tapped the first commercial barrel of crude oil from the Athabasca oil sands in northern Alberta, Canada, in 1967, there were many who doubted it could create a viable business. Since the start of the Great Canadian Oil Sand project near Fort McMurray, the integrated Canadian energy company has produced more than 680 million barrels of oil and is boosting production at a rapid rate.

Suncor Energy is on course to increase average production from 123,200 barrels per day (bpd) in 2001 to 200,000 bpd this year and up to 550,00 bpd in 10 years.

"We are a very unusual energy company because we have such huge reserves," says Rick George, president and CEO. The company's oil-sands leases contain more than 12 billion barrels of recoverable resources.

"We have no exploration costs, which makes us more like a manufacturing company," he says. "On our leases you can find oil with the toe of your boot in many places."

George says it takes about two tons of bituminous sand to produce a barrel of oil, which means Suncor Energy's heavy hauling trucks, the biggest in the world, move about 400,000 tons of sand a day.

The Athabasca oil-sands deposit, created millions of years ago when the area was an inland sea, is the world's largest known petroleum resource. The Canadian government estimates there are at least 300 billion barrels of recoverable bitumen, a tar-like substance that can be upgraded to high-quality oil, within 250 miles of Fort McMurray.This is comparable to all of the proven oil reserves of Saudi Arabia, George points out. It is enough oil to supply all of Canada's consumption needs and all of the United States' import needs for the next 75 years.

Already, about one-third of Canada's crude oil production comes from the Alberta oil sands. Within five years, more than half of Canadian production is expected to come from this source.

Suncor's planned expansion will enable it to lower unit operating costs and help the company achieve its goal of becoming one of the lowestcost producers of oil in North America, according to George.

"Our strategy is crystal clear," he says. "I tell our workers every day to operate safely, increase production, reduce costs and reduce environmental impact."

Since he joined the company in 1991, George says, Suncor has reduced cash operating costs of oil production from about C$20 a barrel (US$15) to C$12 a barrel (US$8).

"Our goal is to cut the cost per barrel in US dollars to about $6 or $6.50, which is certainly competitive with anybody," he adds.

George says the benefits of expanded production are reflected in the company's financial results. Second-quarter earnings of C$229 million were up from C$164 million in the same period a year earlier, despite a year-over-year decline in oil prices.

Suncor plans to finance its growth internally. "We have never sold equity in the 10 years we have been a publicly traded company," George says.

The next phase of expansion, the Firebag Project, will use a new technology known as steam-assisted gravity drainage. Pairs of horizontal wells will be drilled underground to inject steam into the oil-sands deposits and collect the bitumen released by the heat.

"This in-situ process involves much less land disturbance than open-pit mining," George says. "And we will use waste water to generate the steam."

The 385 employees and contractors who are working on the Firebag construction site, 25 miles northeast of Suncor's existing oil-sands plant, were evacuated on June 26 when a forest fire threatened the area. They returned a week later, however, and work is progressing on schedule.

Some 11% of Suncor's employees in its oil-sands operations are Aboriginals, and the company signed C$100 million worth of contracts with Aboriginal businesses last year.

"If we are going to be successful, we must make sure that the community in which we operate is strong and healthy," says George, a Colorado native who, along with his wife and three children, became a Canadian citizen in 1996."I am proud of our relations with the local community and with the productivity and attitude of our employees," he adds.

By late 2002 Suncor plans to apply for regulatory approval for Voyageur, a 10-year expansion project that will cost C$1 billion a year.

George says Voyageur will be implemented in a manner that will ensure Suncor is a sustainable energy company that will enhance the quality of life in the regional municipality of Wood Buffalo.

Analysts praise Suncor for its well-planned growth strategy and say the company is likely to continue to grow despite uncertain economic conditions in the United States, Canada and other markets around the world. However, some analysts point out that the oil-sands business is beginning to get more crowded, particularly with Shell Canada expected to start up a C$5 billion entry by the end of this year.

The Syncrude Project, a joint venture of AEC Oil Sands, Canadian Oil Sands Investments, Conoco Canada, Imperial Oil Resources, Mocal Energy, Murphy Oil, Nexen, and Petro-Canada Oil & Gas, is the largest oilsands producer, with a slight lead over Suncor.