Friday, March 22, 2013

Suncor likely to pull the plug on Voyageur

This is what $3.5 billion buys you these days.
After Suncor's CFO Bart Demosky spoke pretty critically of the project last week, the Voyageur upgrader is looking like it's going to be shelved. This is a big project - $11.6 billion according to the article, taking in 269,000 barrels of bitumen and outputting 218,000 barrels of synthetic crude each day. I'm not really sure how a project that big just gets "cancelled" like some TV show - the article says Suncor has already spent $3.5 billion on the site (it's not clear if that includes the money spent by their 50/50 JV partner, Total). I probably shouldn't use words like "cancelled", since the final decision on the project won't be made until later this month.

The pessimism is apparently caused by increasingly crappy economics. The big glut of shale oil in the US has increased the supply of light, sweet crude similar to what comes out of bitumen upgraders. As a result, the price of synthetic crude has dropped, and there's less profit to be made turning a barrel of bitumen into it. At the same time, labour and equipment costs in Alberta are sky high. Suncor took a $1.5 billion writedown on the upgrader last year, apparently the reason it lost $562 million in Q4 2012.

This is the classic problem with upgrading bitumen - it employs quite a lot of people, but it's a margin game with slim profits for companies. As a result, politicians, particularly those on the labour-left, love the idea but companies would rather spend their capital on things with better returns, particularly if they have a big list of better options, which companies like Suncor do in their upstream operations. For $11 billion, Suncor could probably produce hundreds of thousands of  barrels more bitumen per day. From that perspective, ditching Voyageur makes a lot of sense.

Location map of the project. Taken from the Total
site, sorry I don't know what they mean by
red areas "not included in agreement" or why
they labelled the NWT as "Canada".
Irving Oil has an interesting take on this - build upgraders in Newfoundland where labour's cheap and (presumably) there aren't nearly as many more attractive options for the capital (he actually says "the coasts" but I'm sure they're aware of the political problems getting a bitumen pipeline across the Rockies). Then Albertans could focus on increasing production, where our expensive workforce is more justified. That article also points out that it might make more economic sense to add coker units to existing refineries in the US, rather than building standalone upgraders in Canada.

Voyageur (or what's finished of it so far) is located north of Fort McMurray. It was intended to upgrade bitumen from the Joslyn and Fort Hills sites, both of which are JVs between Suncor and Total, as well as any other takers in the region. It's not clear what these projects will do with their bitumen if they can't upgrade it at Voyageur.

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