Oil sands projects slow down in response to weak oil prices

November 03, 2012

Suncor has a trio of big oil sands projects underway. The company is reviewing the viability of the projects and cutting costs.

The price of oil (WTI) at $84.86 per barrel has been sliding. The medium-term trend for crude oil prices is down. Oil needs to trade at around $90 for Suncor’s Fort Hills project to be economic. The break-even price for Joslyn is around $90/barrel.

• The timetable for the Joslyn oil sands mine is up in the air. Project costs are estimated at 7-9 billion. The construction workforce is expected to peak at approximately 4,100 workers. The Joslyn North Mine portion of the Lease is expected to yield over 874 million barrels of bitumen over its 20 year lifespan at a production rate of 100,000 barrels per day. The Joslyn North Mine Project is scheduled to commence production in 2018.
• The economics of their Voyageur upgrader, which would turn heavy oilsands crude into a product that’s easier to refine, appear “challenged” as volumes of light oil from formations such as the Bakken continue to grow. Project Voyageur is the centrepiece of the Suncor growth strategy. This is a multi-phase plan to increase its oil sands production to more than 550,000 barrels a day by 2016, a 120% rise on 2004’s production.
• Production at the Fort Hills mine has been pushed back to 2017. Fort Hills’ resources at around 3.4 billion barrels of bitumen, would be recovered through open-pit mining. The Project will be developed in two phases. The first phase of approximately 160,000 barrels per day. The project cost is estimated at $10-20 billion.

Suncor is the largest operator in the oilsands, with huge mining operations north of Fort McMurray, a 12 per cent interest in the Syncrude Canada Ltd. mine, a 41 per cent stake in the yet to be developed Fort Hills mine and steam-driven operations at Firebag and Mackay River. Suncor said it now expects to spend $6.65 billion this year, down from the $7.5 billion it predicted earlier.

Suncor (ticker SU on TSX) trades at $34.65 per share and the company has a market cap of $53 B.

Suncor and Total S.A. formed a $1.75-billion joint venture in late 2010 encompassing the Fort Hills and Joslyn mines and the Voyageur upgrader.

Commentary

The declining oil price, as with commodity prices generally, has been somewhat surprising lately. The US Federal Reserve has adopted an extremely aggressive monetary easing policy stance which one would expect would inflate oil prices. Countering the fed action are industry actions - drilling and finding more oil (e.g.Bakken) using new technologies (fracking and horizontal drilling).

If the oil price falls below $80, expect further curtailment of activity in the oil sands.

Sources

• a)http://www.minyanville.com/sectors/precious-metals/articles/precious-metals-precious-metals-market-stock/11/2/2012/id/45526



• b)http://www.thestar.com/business/article/1281079--suncor-delays-fort-hills-mine-until-2017



• c)http://www.fortmcmurraytoday.com/2008/09/17/fort-hills-project-costs-skyrocket



• d)http://www.total-ep-canada.com/upstream/joslyn.asp



• e)Carrie Tait, "Suncor joins spending retreat", Globe and Mail, 2-Nov-2012, p.B1.



• f)http://www.hydrocarbons-technology.com/projects/voyageur/