Suncor Energy Inc.'s three major oil sands projects are facing delays as soaring costs and competitive oil markets force the energy giant to join the growing ranks of Canadian resource companies pulling back from expensive growth plans.
Canada's largest oil company said its planned Voyageur upgrader is "struggling" to make financial sense, its undeveloped Fort Hills bitumen mine has likely been delayed by about a year, and the timetable for its Joslyn mine remains up in the air. As Suncor reviews the economics of all three projects, it sliced its 2012 budget by 11 per cent.
"Voyageur economics appear challenged in light of the projected ramp-up in tight oil production in the North American market," Suncor chief executive officer Steve Williams said on the company's third-quarter conference call Thursday. Mr. Williams said the case for the upgrader, which is slated to cost $11.6-billion, has been hurt by surging light oil production in the United States, which is refined south of the border.
Fort Hills and Joslyn are also multibillion-dollar projects, ranking as the third- and sixth-most expensive projects in the oil sands, respectively, according to BMO Nesbitt Burns. Oil needs to trade around $90 (U.S.) a barrel to make Fort Hills economic, and around $80 for Joslyn to make a respectable profit, BMO said in an earlier analysis.
With a weak global economic backdrop, resource companies ranging from oil producers to gold miners are under pressure to balance expansion desires with expensive and risky blueprints.
Conservatism is sweeping executive offices, with Suncor, Teck Resources Ltd. and Talisman Energy Inc. among the major companies tightening their budgets as they reported third-quarter results. Barrick Gold Corp. is coping with major cost overruns at its key South American gold mine, and is shifting money away from other projects to help fund the development.
Executives, content to spend billions chasing growth before the economic downturn, are now looking at costs through a more complex lens, said Egizio Bianchini, vice-chair and global co-head of BMO's global metals and mining group. Leaders are putting more emphasis on other costs such as royalties, taxes and overhead now than they did when production growth was their main goal.
"When you pile all that on, the margin isn't as big as it needs to be," Mr. Bianchini said.
In Suncor's case, a flood of new oil production in the U.S. is an added competitive threat.
North Dakota exemplifies how quickly light oil production has grown, with its Bakken formation leading the charge. North Dakota alone produced an average of 218,604 barrels of oil a day in 2009, 309,768 barrels a day in 2010 and 418,923 barrels a day in 2011, according to the state's Department of Mineral Resources. In August this year, North Dakota pumped out 701,134 barrels of oil a day, more than triple what it did three years ago.
France's Total and Suncor announced a partnership agreement on Voyageur, Fort Hills and Joslyn at the end of 2010, and the deal was finalized in March, 2011. Mr. Williams in July said the company was reviewing the three growth efforts, and said it is possible not all will proceed. He echoed those statements Thursday. Total declined to comment. Suncor had already spent about $3.5-billion on Voyageur when the project was sidelined in the downturn of 2009.
Suncor has other expansion projects on its plate, and its Firebag Stage 4 is now expected to come in 10 per cent under its $2-billion budget and three months ahead of schedule. The company said this further explains why it cut its 2012 spending plan.
Suncor's cash operating costs in the oil sands, save for its stake in Syncrude Canada Ltd., fell to $33.35 a barrel, well below its target of $35 a barrel. The oil sands giant expects to spend $6.65-billion this year, down $850-million from its previous estimate of $7.5-billion, Suncor said in its third-quarter results released late Wednesday.
Suncor earned $1.555-billion or $1.01 a share in the third quarter, up from $1.287-billion or 82 cents a year earlier. . Its operating profit totalled $1.303-billion or 85 cents, down from $1.789-billion or $1.14 in the third quarter last year.