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Syncrude Canada Ltd.'s oil sands processing facility stands in Fort McMurray, Alberta, Canada, on Tuesday, June 29, 2010.

Jimmy Jeong/Bloomberg

Syncrude Canada Ltd. was hailed as a pioneer when it first extracted crude from the world's third-largest oil reserve – Alberta's bitumen deposits. It transformed thick tarry goo once used to patch leaky canoes into synthetic oil, helping to create an industry that is now a cornerstone of the Canadian economy.

But now, Syncrude's complex web of machinery has turned into the oil sands industry's most unreliable operation, suffering frequent breakdowns that cause production problems. And oil's great plunge this year is only making matters worse.

Syncrude's average daily output has declined every year since 2010. Production is averaging 259,000 barrels a day this year, down 15 per cent from 305,000 in 2007.

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Syncrude cut production expectations four times in 2014, with the most recent trim announced just late Monday. And Canadian Oil Sands Ltd., Syncrude's largest investor with a 36.74 per cent stake, has repeatedly cut the mine's annual production prediction over the past seven years.

Sinking oil prices are the lastest blow. Profits have dropped sharply and Canadian Oil Sands' stock has been cut by more than half since early this year to about $9, around a 10-year low. It slashed its dividend 42 per cent on Dec. 3, and some analysts are already warning another dividend cut is in store as the company struggles to cover expenses next year.

Syncrude's troubles are tied to some key factors: a problematic management structure introduced in 2006; soaring industry costs; and the difficulty of maintaining equipment that has been chugging along for four decades.

"We have had a particularly challenging 2014," Ryan Kubik, Canadian Oil Sands chief executive, said in an interview at the company's Calgary headquarters. "Everybody wants to run at design capacity all the time, but with the complexity of the facilities these oil sands operations have, that's just not really realistic."

Its partners – including Suncor Energy Inc., the oldest oil sands operator and a 12 per cent Syncrude shareholder – have expressed disappointment over the years.

Imperial Oil Ltd., controlled by Exxon Mobil Corp., took control of Syncrude's operations in 2006 in a 10-year management agreement. It was designed to prop up the mining and upgrading project by drawing on Imperial and Exxon's expertise in everything from refining to "management and operating best practices."

But Imperial and Exxon came in with an "underestimation" of how hard it is to run an oil sands project, according to one of Syncrude's former senior executives.

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"They had no idea what they were getting into in terms of complexity," said Mark Sherman, a former vice-president of operations at Syncrude's upgrader and utilities division. "They applied a very simplified refining model to a very complex, integrated mining, extraction and upgrading process."

Mr. Sherman worked at Syncrude between 2000 and 2008. The leadership swap created employee turmoil. Institutional knowledge, he said, was lost when Exxon took the lead.

Exxon, through Imperial, controls 25 per cent of Syncrude. It brought in its own people to run the project, starting with the refinery manager from Exxon's Fawley complex in the U.K. Syncrude is on its third Exxon leader since 2007. Syncrude's current leader came from Exxon's Nigerian operation.

Canadian Oil Sands' Mr. Kubik admits some employees on the ground left when Exxon took over. "Any time you bring in leadership and a different approach to things, people who were comfortable with the old approach will leave," he said.

Syncrude is also a victim of rapid growth in the oil sands industry – the one it helped create. Suncor, Imperial, and a handful of other energy companies have their own multibillion-dollar projects on the go, adding pressure on costs across the board as companies fight for materials and labour.

Add it all up, and Syncrude has transformed from pioneer to poster child for operating problems.

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"What's eaten our lunch this year has been the upgrading portion," said Darren Hardy, Canadian Oil Sands' senior vice-president of operations.

For example, a valve broke at Syncrude's coker 8-1, and the project's sulphur processing units were unco-operative this year. Monday's production cut came from a problem at the mine's sour-water treater. Last year, a boiler associated with coker 8-1 broke down in May, and then Syncrude bumped up its scheduled maintenance plan for the coker to June because of problems tied to the failure. The repair effort took longer than expected. Extraction units, mine trains, and hydrogen units all have surprised Syncrude over the years.

Rich Kruger, a veteran of Exxon's global operations who took over as Imperial's chief executive in 2013, said Syncrude has grappled with "higher than typical" plant problems in recent years.

At a conference last April, Mr. Kruger touted Exxon's ability to manage large, complex assets, and pledged to focus on the "bread and butter" aspects of the business. "There's not any particular silver bullets here," he said.

Exxon's understanding of Syncrude is deeper now and its operating systems can better attack the project's struggles, Mr. Kubik said.

"Those systems now are more mature to the point where they are identifying the exact plant fixes we need to make. They are coming up with the design changes in order to get those fixes," he said. "We've got a scheduled implementation of how those fixes are going to be put into the plant."

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"So we have a lot more clarity on how we're going to get there."

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