Suncor to draw on oilsands experience as it aims to keep lid on Fort Hills costs

CALGARY – Suncor Energy Inc. says it will draw from its own deep experience in Alberta’s oilsands — and learn from some of the pitfalls of its peers — as it aims to keep a lid on costs at its newly sanctioned Fort Hills oilsands mine.

“We know that projects have been difficult in this region,” said Suncor CEO Steve Williams on a conference call Thursday.

“We’ve been learning these lessons over a number of years.”

Indeed, Williams noted Suncor (TSX:SU) has spent $20 billion in the oilsands region in northeast Alberta over the past four years, and managed to bring those projects on or below budget.

That’s not an easy task in a sector where labour and materials cost have a history of getting out of hand.

Suncor announced late Wednesday that it and its partners — Teck Resources Ltd. (TSX:TCK.B) and Total E&P Canada Ltd. — had formally decided to move ahead with Fort Hills after years of delay.

In its entirety, the mine is expected to cost $13.5 billion, of which Suncor will shoulder $5.5 billion. It’s expected to start producing crude in late 2017 at the earliest.

Fort Hills will be built during a relatively quiet period in the oilsands, which means the partners have been able to land some fairly competitive contracts, said Williams.

A decision on Joslyn, another oilsands mining joint-venture with Total E&P Canada, likely won’t be made for some time, as the companies wouldn’t want the two projects to overlap, he added.

The mine north of Fort McMurray, Alta., was shelved by its former operator, Petro-Canada, in late 2008 as the financial crisis hit and costs spiralled out of control. Suncor took over Petro-Canada the following year.

A separate Total-Suncor joint-venture to build an upgrader to process the oilsands bitumen into a lighter type of crude refineries can handle, was scrapped earlier this year due to poor economics.

At Fort Hills, bitumen will be processed with a technology called paraffinic froth treatment, which eliminates the need for a multibillion-dollar upgrader on site. Imperial Oil Ltd. (TSX:IMO) uses that method at its oilsands operations.

Fort Hills, with a mine life of about fifty years, has an expected internal rate of return of 13 per cent, said chief financial officer Bart Demosky.

“It’s the kind of asset that most companies can only dream of having,” he said.

The project will represent on average about 15 per cent of Suncor’s annual capital expenditures — expected to be about $7 billion to $8 billion next year — “which is not a significant burden for the company,” Demosky said.

Steve Reynish, executive vice-president of oilsands ventures at Suncor, said front-end engineering at Fort Hills is 95 per cent complete, and much of the infrastructure necessary to start construction is already in place.

Suncor doesn’t intend to have more than 5,500 workers on site at any given time, and work will be spread as evenly as possible over the construction period.

“We believe that will certainly enable us to monitor cost and schedule in a much more controlled way,” said Reynish.

“We have learned lessons from our own projects and from the projects of the others in the recent past and we have strategies and logistics to support that.”

The most recent oilsands mine to start up in the Fort McMurray region — the first phase of Imperial’s $12.9-billion oilsands mine — came in well over budget and months behind schedule.

A large contributor to the higher Kearl costs had to do with bringing enormous South Korean-made modules to Fort McMurray by truck. Amid public resistance to the modules moving along secondary highways in Idaho and Montana, Imperial ended up breaking down the modules into smaller parts, transporting them to site on U.S. Interstate highways, and putting them back together.

Suncor said it would be sourcing some of its equipment from overseas, but executives on the conference call expressed confidence they can avoid the kinds of challenges Imperial encountered.

Lanny Pendill, an energy analyst at Edward Jones, said the economics of Fort Hills, and the assumptions behind them, look “reasonable.”

If anything, there might be some room for upside when it comes to the project’s rate-of return.

“It’s pretty conservative to think that oil may average $95 over the next 50 some-odd years,” he said.

Suncor won’t be immune to factors beyond its control, like industry-wide cost inflation, but the company has the advantage of being an old hand at oilsands mining, Pendill said.

Greenpeace campaigner Mike Hudema called on the federal government to step in and put a stop to the project.

“Allowing another massive open pit tar sands mine to go ahead is simply irresponsible and shows that the federal and Alberta governments are doing what is best for oil companies rather than what is good for communities and the environment,” he said, adding that there is also concern over the mine’s impact on nearby wetlands.