Suncor Faces Risk on Rising Costs on Oilsands Venture

Suncor Energy Inc. and partners Total SA and Teck Resources Ltd. face rising costs and shipping risks with their Fort Hills oil sands project, the first mining operation to get a green light in two years.

The C$13.5 billion ($12.9 billion) Fort Hills venture in northern Alberta, 40 percent owned by Suncor with the remainder divided between Teck and Total, will produce 180,000 barrels a day within 12 months of startup in 2017, Suncor Chief Executive Officer Steve Williams said yesterday during a conference call.

To counter rising costs, Suncor has been boosting efficiencies at its operations and reviewing projects, including the Voyageur upgrader which the company canceled earlier this year. Imperial Oil Ltd. in February boosted the cost of its Kearl oil sands mining site by 18 percent as the company made changes to the design.

Even with the threat of higher costs, the oil sands provide a stable supply source for global energy companies that are also investing in U.S. shale formations, which become more expensive as development continues and production from wells decline, said Mike Tims, chairman of Peters & Co., a Calgary-based investment bank.

“Fort Hills reinforces their long-term view on oil prices despite the headwinds on costs,” he said.

Suncor shares fell 2.9 percent to C$36.80 at the close in Toronto today. Total slipped 1.1 percent to 44.76 euros, while Teck was down 0.8 percent to C$28.20.

Fort Hills

Fort Hills, which had initially been slated to start in 2016, has 3.3 billion barrels of reserves and will produce oil for about 50 years, Suncor said. Williams is “very confident” the project will be built on budget, he said during the call.

The Fort Hills partners require a $100 Brent oil price for the project to be economic, Andre Goffart, president of Total’s Canadian division, said in a phone interview yesterday. The “break-even” price is lower than that, he said.

“That’s most important to us because we believe that this is the kind of oil price level we are going to see in the years to come,” Goffart said.

Brent for December settlement dropped $1.02, or 0.9 percent, to $108.84 a barrel on the London-based ICE Futures Europe exchange yesterday. Brent gained 0.4 percent this month.

Fort Hills represents a “milestone” for Total in the oil sands and will provide decades of production and cash flow at steady rates from a country with a stable political regime, Goffart said.

Construction Costs

Royal Dutch Shell Plc also said yesterday it will go ahead with the Carmon Creek project in the Peace River oil-sands area, an 80,000 barrel-a-day drilling development that will use steam to melt the bitumen so it flows.

Controlling costs for construction of Fort Hills will be important in an industry that has suffered steady inflation over the last few years, Goffart said. Fort Hills also requires new export pipeline capacity from Alberta and Total is closely monitoring the U.S. review of Keystone XL and political sentiment around proposed pipelines to Canada’s Pacific and Atlantic coasts, he said.

Rail transport of oil is a short-term solution that Total is considering for its share of production from Fort Hills, he said.

“We rely on access to both east and west,” Goffart said, adding that transportation issues will eventually be resolved. “It’s clear that going west, looks at the moment, a bit more challenging.”

Suncor’s Williams is not concerned about transportation challenges related to the Fort Hills project.

“Let me be really, really clear: we have no market access issues,” he said during the conference call. “We have plans in place, which will take all of our base barrels and all of our growth barrels to market.”

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