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Holding the Fort

November 01, 2013

There are many reasons why Suncor Energy Inc. and its partners could have walked away from the giant Fort Hills oil sands mine. Yet they chose instead to move ahead with a $13.5 B mega-project.

The reasons for not going ahead might have included: weakening world old prices (now under $100/barrel), pipeline bottlenecks, weak and uncertain capital markets, US becoming the world’s largest oil producer with new finds, and so on.

Yet Suncor Energy Inc. unveiled plans to move forward with a $13.5-billion bitumen mine in northern Alberta. The company holds a 40.8% interest in the mine, with Total SA (Total E&P Canada Ltd.) and Teck Resources Ltd. holding 39.2% and 20%, respectively.

The project, 90 kilometres north of Fort McMurray has an estimated 3.4 billion barrels of bitumen reserves to be recovered. The project would raise output in northern Alberta by 180,000 barrels a day, with production set to begin by the fourth quarter of 2017. The company has spent $650-million on the project to date. Spending on the project for next year is included in an expected capital budget of between $7-billion and $8-billion. Fort Hills is expected to account for approximately 15 per cent of Suncor’s total capital budget on average per year.  Suncor plans to stage production and cap its workforce at 5,000 to 5,500 people.

The project is scheduled to produce first oil as early as the fourth quarter of 2017 and achieve 90 per cent of its planned production capacity of 180,000 barrels per day within 12 months. With best estimate contingent resources of approximately 3.3 billion barrels of bitumen, the mine life is expected to be in excess of 50 years at the current planned production rate.

The Fort Hills project has been designed to utilize Suncor’s latest technology and approach to tailings management and reclamation processes. Suncor says it will closely monitor operations to allow for existing and future water quality standards and environmental requirements to be met or exceeded throughout the life of the project. The project will aim to return all disturbed lands to as close to a natural state as possible. Returns are above cost of capital with bitumen prices of $50 - $60 barrel.

The Canadian Association of Petroleum Producers forecast that production from Alberta’s bitumen reserves, the world’s No. 3 crude deposit, is expected to climb 26% from 2012 to 2.3 million barrels a day by 2015, rising to 5.2 million barrels by 2030.

Suncor (ticker SU on TSX) trades at $37.18 per share and has a market cap of $55 B.


As eloquently described by Rick George in his book Sun Rise, Suncor did not get to be the largest oil and gas company in Canada by being timid. It took risks when others ran for cover and eventually built itself up through projects and acquisitions to be a $50 B mega-player in the oil sands.

The companies chose to move ahead on a very long term project in spite of short term volatility. Their calculus is that Fort Hills will be a profitable and viable project.