Syncrude improvements happened faster than expected, get ready for governance changes: Suncor CEO

Image: Joey Podlubny/JWN

Suncor is reaping the benefits of its increased stake in Syncrude, with increased production at the project contributing to record Suncor volumes in the fourth quarter of 2016.

Throughout the drawn-out negotiation process in late 2015 that ultimately resulted in Suncor acquiring Canadian Oil Sands and its majority owner share of Syncrude, CEO Steve Williams continually stressed the opportunities presented to help improve reliability and realize the benefit of potential project synergies.

So far the results have been better than expected.

“I promised that we would devote experienced personnel to work closely with the operating team from Imperial, Exxon and from Syncrude to drive major performance improvements and realize significant long-term added value for our shareholders,” Williams said during an analyst call Thursday morning.

“As it turned out, the performance improvements materialized more quickly than we had planned for. In the fourth quarter, Suncor’s share of Syncrude production increased to just under 190,000 bbls/d with cash costs of $32.55/bbl, so that’s down 19 percent from the similar quarter in 2015.”

For the full year 2016, with the exception of the second quarter, when production was curtailed due to the Fort McMurray wildfires and planned maintenance downtime, Syncrude achieved average utilization rates of 97 percent and cash costs of just over $30/bbl.

“In fact, the third and fourth quarters represented the best six months of production the Syncrude facility has ever achieved,” he said.

“At this point last year we forecast immediate savings of about $25 million annually in reduced overhead, and as it turned out we actually captured more than twice that savings, and we generated $360 million free cash flow from our increased stake with an average WTI price for the year of just $43.36/bbl.”

Williams cautioned that it is still early stages, but he anticipates continued success.

“It’s a little bit premature to expect this level of performance to continue every quarter, but we do have an increased confidence that sustained utilization rates in excess of 90 percent and cash costs of $30/bbl or less are very reasonable goals in the mid-term.”

Suncor expects to unlock "significant future value through changes in governance and support services as well as increased collaboration on operational front,” Williams said.

“In fact, between the performance improvements, cost reductions, and lease and asset development initiatives, we’ve identified potential opportunities with a net present value for Suncor of over $2 billion, and that potential value is incremental to the original business case.”

For example, he said Syncrude is slightly over-capacity with hydrotreating equipment at its upgrader: “We can find ways of filling that up, so it will make money for all involved.”

Another example Williams offered was the benefit of Suncor’s “multiple parallel path” approach to development.

“We have two mines, we have two in situ plants, any one of those doesn’t effect the operations of our upgrader and hydrotreaters. We think we can bring some of that flexibility quite quickly to Syncrude,” he said.

“They have some maintenance coming up in the next six months, and we’re looking at how we can put our MacKay River in situ bitumen in there to keep the back end of the plant operating whilst work is being done on the front end. Those are exactly the sort of connections I was talking about when I said, you know we’re next door neighbors, we can give some of our redundancy and duplication and share that with Syncrude.”

The corporate structure of Syncrude will be changing, Williams indicated, through a process led by Syncrude CEO Mark Ward in collaboration with the joint venture owners.

“We’ll be looking at where we duplicate services and costs. We have a great opportunity to integrate some of our services and governance and you will see Syncrude move in the direction of an operating business rather than a completely stand-alone corporate entity, which was wholly appropriate in the past, probably is less appropriate as we go forward.”

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