Suncor Energy Inc., Canada’s biggest oil-sands producer, has cancelled its $11.6-billion Voyageur upgrader project because of soaring capital costs – and the belief that better profits are to be found in shipping out unprocessed bitumen.
Calgary-based Suncor will take a $140-million writedown that will erode its first-quarter profit – reducing operating cash flow by $180-million – related to scrapping the huge venture, marking the latest hits resulting from Voyageur’s financial woes. In February, Suncor wrote off $1.5-billion of its investment in the upgrader, in a fourth-quarter charge.
“Since 2010, market conditions have changed significantly, challenging the economics of the Voyageur upgrader project,” Suncor chief executive officer Steve Williams said in a statement Wednesday. “That’s why we undertook a thorough review of the project to determine whether it met our criteria for long-term, profitable growth.”
Suncor has already invested $3.5-billion in Voyageur, but decided to pull the plug after a detailed review launched in late 2012 with partner Total E&P Canada Ltd.
Suncor, which now has the full interest in Voyageur’s assets after acquiring Total’s stake for $515-million, said it tried to make the best of a tough situation in Northern Alberta’s oil sands.
“We are pleased with the value this deal provides to Suncor,” Mr. Williams said in his statement.
“Among other things, we will now be able to exclusively utilize the partnership assets to continue driving value from our base business and to support our profitable oil sands growth.”
Last month, the company expressed concern that the price gap between heavy and light oil will narrow, resulting in evaporating profits from processing bitumen and placing financial pressures on Voyageur. U.S. producers have been able to crank up their output of light oil, adding to supplies and forcing Suncor to rethink the wisdom of investing billions of dollars to refine bitumen, which has the consistency of molasses. North Dakota’s Bakken light oil play, for instance, has contributed to crude supplies.
Suncor and Syncrude Canada Ltd. are the two major trailblazers in Northern Alberta’s oil sands, with Suncor opening its original plant in 1967 and Syncrude in 1978.
Suncor has been able to make its operations more efficient in the past by improving technology. In the early 1990s, the company abandoned a system of “bucket wheels” that scooped up the raw material – a method prone to frequent breakdowns, and famously embarked on expansion in a period of low oil prices. Since 1992, Suncor has thrived by assigning massive trucks to scoop up oil-laden sand, which is then refined into synthetic light crude at an upgrader.
But in 2013, technological breakthroughs aren’t on the horizon while the economics of opening a new upgrader to convert the resource-rich sand into marketable, synthetic light crude oil just doesn’t make sense to Suncor.
“This decision is in line with our commitment to capital discipline and our stated plan to allocate capital with priority given to developing higher-return growth projects and accelerating the return of cash to shareholders through dividends and share buybacks,” Mr. Williams said.
Suncor’s decision comes as the energy giant and Alberta environmental officials conduct an investigation this week into a leak of industrial waste water into the Athabasca River, near Fort McMurray.