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Suncor-Total marriage tested by oil sands uncertainty

Let's face it: relationships change. Infatuation wears off. Priorities shift and outside forces come into play.

It's the situation Suncor Energy Inc. and Total SA find themselves in now that the couple has backburnered another big project they once had trumpeted as a pillar of a large-scale alliance in the oil sands.

Total, the French oil major, said last week it shelved the Joslyn project, saying development costs were getting out of whack. Of the three multibillion-dollar oil sands proposals that were key to the Total-Suncor tie-up announced in late 2010, just one, Fort Hills, is moving ahead.

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The extensive alliance has been whittled down to working interests in a project, albeit an $13.5-billion one.

It shows how quickly the economics of the Alberta oil sands can turn when labour supplies, continental oil flows and the capacity to move crude to market are in flux, and also how corporate leadership changes can force the players to rethink why they are in the relationship in the first place.

No question – the "strategic oil sands alliance" was a big deal, with announcements out of Calgary and Paris. (Rather than flights of fancy, the vast majority of business alliances tend to be strategic.) Suncor, which was still digesting Petro-Canada following its 2009 takeover, acquired a 37-per-cent stake in Joslyn. Total got a 49-per-cent interest in the proposed Voyageur upgrading plant as well as part of Suncor's interest in Fort Hills, which had been under consideration for years. Total also paid Suncor $1.75-billion.

Both companies faced the prospect of rising costs for individual projects, so the deal allowed them to move forward while reducing their respective financial exposure.

Total, whose Canadian division was run by Jean-Michel Gires, no longer needed its own 295,000-barrel-a-day Edmonton-area upgrader for Joslyn, so the company cancelled it. Upgraders are pricey plants that turn raw bitumen wrung from the oil sands into light synthetic oil that is used by refineries with no special equipment to break down thicker feedstock.

Meanwhile, Suncor, under then-CEO Rick George, would no longer be on the hook for the entire Voyageur upgrader bill of $11.6-billion, and output from both mining projects could be fed into that plant, which had been stopped during the financial crisis.

Within a couple of years though, the oil sands landscape changed, as did the executives.

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Steve Williams, who succeeded Mr. George as Suncor's CEO in 2012, made it clear that he was not married to a previous goal of pumping half a million barrels a day by 2020, saying that on his watch, profit would trump growth.

As corporate changes were under way, so was a massive shift in continental energy supplies. Light oil from the North Dakota Bakken shale flooded many of the same markets served by synthetic crude from the oil sands, at far lower production cost. That squeezed the economics of upgrading. So in 2013, Voyageur was scrapped.

Last fall, Suncor, Total and Teck Resources sanctioned Fort Hills, a $13.5-billion project without an upgrader. The first oil production is expected by the end of 2017.

It was André Goffart, who replaced Mr. Gires as head of Total's Canadian division, who explained last week the reasons that plans for Joslyn are put away for now, a move that means layoffs.

He said it was all about insufficient margin – that prices for oil sands crude are staying in recent ranges and cost inflation is rearing its ugly head again. Better technology for extracting the Joslyn bitumen is also needed.

One thing's for sure, Mr. Goffart said, the decision is not the result of uncertainty over the ability to move crude to market due to the industry's struggles getting export pipelines approved.

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Maybe. But it's not hard to argue that insufficient pipeline capacity will keep Canadian crude prices volatile as long as there is a risk the supplies will get backed up. So the hard-to-peg margin makes development a riskier proposition.

Nonetheless, a relationship can inspire the partners to build a lot of things. This time, it appears it made Suncor and Total think better of it, which likely saved their investors a lot of heartache.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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