Suncor Energy Inc. is writing off $1.5-billion of investment in its Voyageur oil sands upgrader, gambling that an easing in massive price discounts for bitumen will eat away profits from processing crude in Alberta.
It's an outlook that holds little comfort for Alberta and Ottawa, where political leaders have warned about the fiscal impact of depressed prices for bitumen, since Suncor's predictions are predicated on a coming glut of light oil in the United States, which stands to drive down overall crude prices on the continent.
And it was a difficult pill for Suncor, which saw its shares tumble more than 5 per cent Wednesday after it warned of a possible $1.2-billion unexpected tax bill – which it is disputing – and reported a quarterly earnings loss, owing largely to the Voyageur writedown.
In the giddy oil sands expansion of 2008, the Voyageur upgrader stood as a key part of Suncor's growth plans. But in early 2009, amid the huge spending uncertainty caused by crashing oil prices, Suncor halted work after 15 per cent of the $11.6-billion plant had been built, and $3.5-billion spent.
Now, it is further backing away from a project that stands at risk of cancellation.
For Suncor, the writedown is a costly bet that the so-called "bitumen bubble," which has created a deep discount for heavy oil and choked off revenues, will soon pop. Coming years, Suncor says, hold a radically different outlook, one where heavy oil sands bitumen will prove more valuable.
For that reason, the company says, it's backing away from upgrading oil, the industry term for the process of converting heavy bitumen into lighter oil. Upgrading profits rise with a wider gap between heavy and light oil.
But the company's reasons for doing so don't necessarily lend much reason for optimism in Alberta, since Suncor believes light oil – itself a major Alberta product – is in for its own troubles. Look ahead and North America stands to have "too much light, effectively sweet crude ... and if anything, we have too little heavy crude," said Steve Williams, Suncor's chief executive officer.
"Our view is that will cause a squeeze on upgrading margins and make it challenged."
Such a shift would, Mr. Williams noted, be "quite a change" from current circumstances, with Canadian heavy oil futures trading this week nearly $30 (U.S.) a barrel below West Texas Intermediate, the most actively traded crude oil blend on the continent. Those discounts have had a real impact: Suncor's fourth-quarter average oil sands selling price fell to $77.37 (Canadian) from $98.02 the year before, and helped drive operating earnings to $1-billion, down from roughly $1.3-billion in the previous three quarters.
Suncor's logic is rooted in the windy plains of North Dakota, where the rapid development of the Bakken play – and, elsewhere in the U.S., others like it – has uncorked a fountain of light oil. As that floods the market, Suncor believes, it will help to narrow the "differential" between heavy and light oil.
In the oil sands, where heavy oil is a critically important product, that belief has numerous adherents – even among those who stand to gain from lower bitumen pricing. For North West Upgrading Inc., which is working to build a new Alberta bitumen-to-diesel refinery, cheap bitumen means more profit. But North West chairman Ian MacGregor largely agrees with Suncor's read of future pricing.
"Because of what's happened with Bakken, the economist of light are challenged," he said. Others are taking the possibility seriously enough that they're beginning to look at alternative arrangements. Crescent Point Energy Corp., for example, has begun speaking with buyers in Europe about the potential of selling its product across the Atlantic.
Price gaps between light and heavy oil have proven notoriously difficult to forecast. But sinking light oil prices may not help the energy industry much, given that light oil provides the pricing benchmark for heavy crude, too.
The immediate future, however, doesn't hold much hope for heavy oil, which has been expected to recover in part as refineries are converted to process heavier crude. Those conversions should serve to boost demand and Suncor, for example, is now publicly musing about augmenting heavy capacity at its Montreal refinery. But one of the largest such projects, the conversion of BP PLC's Whiting refinery, is experiencing delays and isn't likely to reach its full capacity until 2014, BP said this week.
In the meantime, Suncor is contemplating a greater use of trains to transport its product, both out of the oil sands and to Montreal.
At the same time, it must sort out some of the issues arising out of Voyageur, which it co-owns with Total S.A. The two companies must decide whether to cancel that plant or build it – "there is no easy way to go to a half or quarter-size upgrader," Mr. Williams said. A decision is expected by the end of March.
Suncor and Total have also linked arms on two large oil sands mines, Fort Hills and Joslyn. Mr. Williams said Fort Hills is likely to be built – a decision will come this fall – but he gave little reason for hope on Joslyn. With bleak prospects for two of three projects, Mr. Williams said Suncor and Total could look to extend their partnership elsewhere.
"I met with [Total chief executive officer] Christophe [de Margerie] just before Christmas, and we were both very optimistic about the long-term future of the joint venture," Mr. Williams said.
Suncor reported a fourth-quarter loss of $562-million or 37 cents per share, driven largely by the Voyageur writedown. Cash flow fell to $2.24-billion or $1.46 from $2.65-billion in the fourth quarter of 2011.
Markets had expected much stronger results. BMO Nesbitt Burns, in a note to investors, called the Suncor quarter "disappointing."