Suncor's oil sands plan doubles in cost to $20-billion
The figure is a dramatic increase from the tentative estimates Suncor made in 2005, when a company executive said that the Voyageur oil sands project would likely cost somewhere over $10-billion. Suncor's move, which comes as companies are weighing the impact of Alberta's new royalty regime, is a vote of confidence in the oil sands. The company feels "comfortable" with the new figure and "really good" about announcing the project at this time, said chief executive Rick George. "This latest investment marks an exciting new chapter for our company," he said. While Suncor still has "a long way to go in terms of engineering" on Voyageur, the firm has "some degree of assurance on what the costs ... are," he said. The project is by far the largest to be sanctioned by an oil sands firm since last October, when Alberta increased the royalties that oil producers will have to pay starting in 2009. It will add 200,000 barrels of oil a day to Suncor's production, enabling it to hit its long-term target of producing 550,000 barrels of oil a day by 2012. While most observers believe the new royalty structure shouldn't prevent development of the oil sands, little in the way of new activity has been seen in the sector since the changes were announced. Decisions on some projects, such as Petro-Canada's Fort Mackay development, have been delayed as companies appraise the impact of the royalty changes. However, Suncor hasn't been deterred by the uncertainty or by the dramatic rise in costs seen over the last three years in the oil patch. The company, which has already spent $2.5-billion on Voyageur, will spend a total of $20.6-billion on the project - a gargantuan figure, but one that's not out of line with the amount expected to be spent on integrated projects being developed by other firms. Voyageur will include an upgrader capable of processing 245,000 barrels a day of bitumen, which will cost $11.6-billion to build. The bitumen itself will come from a $9-billion, four-stage expansion of the company's Firebag extraction facility near Fort McMurray. "It doesn't surprise me that the economics still work, as the royalties that were announced for the oil sands weren't as bad as people feared," said Randy Ollenberger, a Calgary-based analyst with BMO Nesbitt Burns Inc. "But this should offer some reassurance that the economics [for the oil sands] are still there." The Voyageur project also marks a shift for Suncor in that Firebag's bitumen will be produced by steam-assisted gravity drainage (SAGD). where steam is pumped into an underground oil reservoir to create mobility and allow the bitumen to be extracted. While Suncor already runs some SAGD operations, the company has a long history of mining the oil sands with trucks and shovels - building its first mine in 1967 - and mining had been expected to play a larger part in Voyageur. "The expansion is more weighted to [SAGD] than we had assumed," said Andrew Potter, a Calgary-based analyst with UBS Securities Canada Inc. While Voyageur would likely have higher operating costs than previously expected as a result, UBS had assumed that the project would cost $23-billion to build, so Suncor's lower cost estimate should be viewed as "a slight positive," Mr. Potter added. Using SAGD instead of open-pit mining will reduce the expansion's environmental impact, said Mr. George. He added Suncor's experience in the oil sands means it will overcome the high cost and labour shortage problems that have plagued other major developments in the region. "We're the largest investor in the business and we're not a newcomer to this - we've got more experience than anyone," he said. "This is our major business, we are a large player, we have the balance sheet ready to go and we have the organizational capacity and the experience to go with this. All of those factors lead us to believe we have a better chance of success than some of the other competitors." The sanctioning of Voyageur comes a day after Suncor announced a new deal with the Alberta government that will see it pay more royalties on its existing oil sands operations. However, the announcements are unrelated as new projects, such as Voyageur, come under the royalty framework set out by the government in October, rather than under the pre-existing agreements, said Suncor spokesman Brad Bellows. SUNCOR ENERGY (SU) Close: $93.50, up $2.40 ***
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CALGARY -- Bowing to the massive increase in oil sands project costs, Suncor Energy Inc. said yesterday it will ratchet up its Voyageur investment to more than $20-billion.