Suncor further delays Fort Hills project

Nathan VanderKlippe, Globe and Mail, Jan. 12 2010--Suncor Energy Inc. is reassessing the economics of its proposed Fort Hills oil sands project and setting off another round of layoffs as the energy sector grapples with soaring costs inherited during the oil boom.

Canada's biggest energy company will cut 1,000 jobs as it sells a number of natural gas assets, and puts off a decision on how to develop the Fort Hills oil sands mine until later next year, another delay for a project that was already put on hold in late 2008.

Even with oil prices nearly triple what they were a year ago and far above long-term averages, the chastened energy sector continues to wrestle with costs that soared during the boom a few years ago, as companies took on ambitious but expensive projects. Even though commodity prices have rallied to healthy levels, memories remain fresh from last year when sub-$40 (U.S.) oil prices shook the industry, triggering losses and a sense of deep gloom.

Today, following a merger with Petro-Canada designed to drop costs by more than $1.3-billion (Canadian) a year, Suncor remains far from where it wants to be.

“We are by our own admission probably one of the most inefficient companies in this particular realm of companies,” Suncor investor relations vice-president John Rogers told a BMO Capital Markets meeting in New York Tuesday as he compared Suncor to a list of the top global energy companies.

He pointed to Suncor's continued lack of a centralized purchasing area as an example.

“We have a number of systems from the merger that do not tie together very well,” he said. “It's not only a problem. … It's also an opportunity as we go forward.”

Among Suncor's most important remaining tasks is mapping out which of a broad slate of projects it will build first. Two 68,000 barrel-per-day expansions of its Firebag project are currently under way. The first, Firebag 3, should be built by November.

But questions have long surrounded Fort Hills, a massive new mine that was designed by majority owner Petro-Canada before it was put on hold in late 2008. At the time, cost estimates had risen to $25.3-billion from $15.2-billion.

Even after Petro-Canada shelved plans for a $10-billion upgrader, which was part of the $25.3-billion price tag, Fort Hills did not meet Suncor's investment criteria, Mr. Rogers said.

Suncor owns 60 per cent of Fort Hills; the remainder is split between UTS Energy Corp. and Teck Resources Ltd.

Fort Hills will still be a “key part” of Suncor achieving its goal to produce one million barrels a day by 2020, but not without major change, Mr. Rogers said.

“We really need some time to step back from that particular asset, go through a total relook of it, a total recosting of it and a total rescheduling of it before we determine how it should be progressed.”

As a result, Suncor won't detail its plans for Fort Hills until later in 2011, Mr. Rogers said. UTS chief executive officer Will Roach said in November, 2009, that he expected it would take “about a year to sort out the best way to develop Fort Hills.”

Mr. Roach did not return a call for comment Tuesday. Macquarie Capital Markets analyst Chris Feltin called the news bittersweet for UTS.

“UTS shareholders are getting the benefit of gaining from Suncor's experience in terms of oil sands mines and operations,” he said. The downside, he said, is the further delay in cash flow for a company that currently has none.

Suncor has already achieved more than the $300-million in operating cost savings it promised when it combined with Petro-Canada, but Mr. Rogers said yesterday the final number could be higher than $400-million, as Suncor continues bringing the two companies together.

The company will consider boosting its dividend in 2011 as it restrains its capital spending plans, he said.

Suncor is also moving fast to sell off some of its natural gas assets as it works to refocus on the oil sands. It has put for-sale signs on 250 million to 350 million cubic feet in daily gas production, and expects to have more than half already sold by mid-2010. It expects to lose about 1,000 employees through that process, and plans to use the divestiture revenues to reduce its debt from $13-billion to $10-billion.

Suncor already let go of 1,000 workers last year. It said yesterday it is considering contract workers for some of its information systems and supply chain jobs. Less than 100 jobs should be affected, a spokesman said.