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Suncor ‘all about the tar sands' again

Suncor ‘all about the oil sands' again
After its merger with Petro-Canada, Canada's biggest energy company is backing away from natural gas

Shawn McCarthy
Toronto — Globe and Mail
Sep. 16, 2009

Canada's biggest energy company is putting natural gas on the back burner.

Suncor Energy Inc. plans to sell a significant portion of the natural gas portfolio it inherited from Petro-Canada as it prepares to restart its expansion plans in the oil sands.

After completing the merger with Petrocan this summer, Suncor is Canada's fifth-largest natural gas producer, but is not looking to gas to fuel its growth over the longer term, John Rogers, the company's vice-president of investor relations, said on Tuesday.

Suncor “continues to be all about the oil sands,” Mr. Rogers told an investors' conference in Toronto. “Oil sands will be the growth vehicle for the company.”

Energy companies are coping with a prolonged slump in natural gas prices, owing to a supply overhang, tepid demand amid the sluggish economy and mild weather. Mr. Rogers acknowledged that Suncor will have to be patient in order to reap reasonable value from the sale of its gas assets.

In contrast, oil sands producers have seen their economics improve from last winter. They're now enjoying lower operating and construction costs and higher prices – especially for their heavy oil, since its price discount to lighter, conventional crudes has narrowed.

The price differential between light and heavy crudes is typically greater than 30 per cent, but is now below 20 per cent, providing greater revenues to producers of raw bitumen. Canadian companies are less likely to build expensive upgraders that refine the bitumen into synthetic crude so long as there is a narrow price differential between the two grades.

Canada's heavy oil and bitumen producers are benefiting from expanded pipeline access to key markets – particularly the U.S. Gulf Coast – as well as from investments by U.S. refiners to allow them to handle heavier grades of crude, and from a decline in production of heavy oil in Saudi Arabia, Mexico and Venezuela.

Suncor slammed the brakes on oil sands expansion last fall as a result of the collapse in crude prices and the turmoil in capital markets, and is now conducting a strategic review following the Petrocan merger.

The company will reveal its expansion plans after a board meeting in November, Mr. Rogers told the Peters & Co. Ltd. oil and gas conference.

The Suncor executive said the company will focus on oil sands, while developing other low-cost oil and gas properties that will provide the cash flow necessary to finance its growth.

“All of our divisions from the downstream [refining and marketing] to natural gas are really there to support the oil sands and the growth of the oil sands going forward.”

Suncor has a long list of multibillion-dollar oil sands projects in the queue, including further development at its Firebag and Voyageur projects, as well as the Fort Hills mine and upgrader in which Petrocan had partnered with Teck Resources Ltd. and UTS Energy Corp.

Peters & Co. analyst Andrew Boland said Suncor is eager to reassure the market that it remains among the top tier of oil sands producers, a group that remains a darling of investors, despite concerns about cost and environmental pressures.

“They've probably taken to heart some of the commentary that they are no longer the pure oil sands pick,” he said. “They're going to strive to get back to a pure oil sands entity.”

Peters & Co. warned that the glut of natural gas will keep pressure on prices until late 2010 – a blessing for oil sands producers who use the fuel to create steam for in situ production.

But it also gave a sobering forecast for oil prices, suggesting that the global market remains oversupplied and that “the recovery in crude oil prices could be short-lived.”

Over the long term, however, the world will need higher-priced oil, like that from the oil sands, the Peters & Co. analysts said in a report released at the conference.

Meanwhile, costs have dropped dramatically for the oil sands industry, with the easing of the labour crunch, the decline of steel prices and the lower cost of natural gas and other energy needed to produce bitumen at both mine sites and the in situ projects.

At its 2008 peak, the oil sands sector invested $20-billion in expansion and employed nearly 40,000 people in construction, many of them foreign temporary workers, said Bill Lingard, chief executive officer of Flint Energy Services Ltd., one of the industry's major construction companies.

Capital expenditure was cut in half this year to $10-billion, and many of the foreign workers were sent home.

The silver lining to the slump: Labour costs are down 15 per cent, productivity is sharply higher and steel prices are down 50 per cent from their peak. As a result, projects that would have been questionable at oil prices of $80 (U.S.) a barrel are now attractive at $60, Mr. Lingard said.

The current price of $70 represents a “sweet spot,” where companies will move forward with expansions, but at a more measured pace to avoid reigniting inflationary cost pressures.


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