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Bulldozers work clearing an area at the new Suncor Fort Hills oil sands mining operations near Fort McMurray, Alta, Sept.17, 2014.

Todd Korol/REUTERS

Suncor Energy Inc. is accelerating production at a major oil sands mine, threatening to exacerbate a glut that has driven prices for the heavy crude to multiyear lows.

Calgary-based Suncor said on Monday that output at its $17-billion Fort Hills bitumen mine is poised to climb after the first of three major production units at the site began operations on Jan. 27, about four weeks later than planned.

Despite the delay, Suncor reiterated that production is forecast to reach 90 per cent of the project's 194,000-barrels-a-day capacity by the end of the year (at full capacity, Suncor's share of the output would be around 103,000 b/d).

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In a statement, chief executive officer Steve Williams heralded the start of continuous production at one of the "best long-term growth projects in our industry."

But crude from the megamine is entering an oil market hampered by severe pipeline constraints and weak prices, marking an inauspicious kick-off for one of the priciest developments built in northern Alberta.

Fort Hills, located about 90 kilometres north of Fort McMurray, was delayed for years before Suncor and partners Total SA and Teck Resources Ltd. finally decided to build it in 2013.

Oil prices buckled a year later, tumbling by more than half from around $100 (U.S.) a barrel. U.S. prices have rebounded to around $65, but the price for superthick oil sands crude has turned sharply lower.

The discount on Western Canadian Select (WCS) heavy crude against West Texas intermediate oil has widened to more than $27 in recent weeks, pressured by extended restrictions on TransCanada Corp.'s Keystone pipeline and Enbridge Inc.'s mainline shipping network.

Adding to the strain, major railways have balked at shipping large quantities of crude without long-term commitments from producers, slowing deliveries and forcing more oil to pile up in storage.

Suncor has previously forecast its share of Fort Hills production would hit 20,000 to 40,000 b/d in the first quarter, with cash operating costs per barrel initially pegged at $70 (Canadian) to $80.

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Spokeswoman Sneh Seetal on Monday stressed the company has secured enough capacity on existing pipelines for its share of Fort Hills production, although she would not disclose specific marketing arrangements for competitive reasons.

While costs are expected to fall over time as production increases, Toronto-Dominion Bank analyst Menno Hulshof forecasts Fort Hills will generate negative cash flow of $240-million this year under the current outlook for future oil prices.

Mr. Hulshof told clients the project is expected to operate at an average of 57 per cent of its capacity this year, which translates to gross production of 111,000 b/d.

The outlook assumes operating expenses of $33.61 a barrel and a discount of $25 (U.S.) for WCS against U.S. WTI. TD forecasts positive cash flow of $102-million (Canadian) in 2019 for the project.

Suncor CEO Mr. Williams has boosted the company's interest in Fort Hills twice through the downturn as partner Total has pulled back, part of a wider sell-off from the region by the world's largest energy companies.

The French oil major has cut its stake over three years from 39.2 per cent to 26.05 per cent, citing high costs and questions about the project's profitability.

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This month, Suncor agreed to pay an extra $300-million in development costs for the project, putting an end to a commercial spat between the companies. Suncor now owns a 53.06-per-cent stake. Teck owns the remaining 20.89-per-cent share.

Total said on Monday the company was pleased the project had achieved first oil after a "challenging construction program of several years in a difficult climatic environment."

But the company said it aims to limit spending to the most profitable projects in its portfolio and said its ownership interest in Fort Hills should "settle" around 25 per cent "once the final project cost is known."

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