CALGARY, Alberta Suncor Energy Inc (SU.TO), Canada's largest oil and gas company, is poised to walk away from the centerpiece of a C$20.6 billion ($20.6 billion) expansion plan as rising U.S. oil supplies alter the economics of oil sands production.
Shares of Suncor, the dominant producer in Canada's oil sands, slumped nearly 6 percent after it reported late on Tuesday a C$562 fourth-quarter net loss and an operating profit that fell well short of expectations as it wrote down the value of its long-delayed Voyageur upgrader by C$1.49 billion.
Rising U.S. oil production is threatening the viability of what was once Suncor's central strategy - to mine bitumen from the oil sands, upgrade it into refinery-ready synthetic crude and then sell it to refiners in the U.S. Midwest and elsewhere or process it in its own refineries.
The company said it would announce a decision on whether to proceed with Voyageur by the end of March but conceded that the project, part of a joint-venture with French oil major Total SA (TOTF.PA) may not proceed.
"We're looking at all options," Steve Williams, Suncor's chief executive, said on a conference call. "At one extreme you could go ahead with the project as it is. At the other extreme you could cancel the whole project and go ahead with nothing."
While synthetic crude normally fetches a premium to West Texas Intermediate crude, the U.S. benchmark, refiners in the Midwest now have ready access to ever-growing volumes of less-expensive light oil from unconventional fields like the Bakken in North Dakota and the Eagle Ford in Texas.
As well, new pipeline projects like TransCanada Corp's (TRP.TO) controversial Keystone XL project or Enbridge Inc's (ENB.TO) Flanagan South expansion to take heavy bitumen from the oil sands to high-paying markets such as the Gulf of Mexico refining cluster offer the prospect of higher Canadian oil prices.
Lower light oil prices and increased demand for Canadian heavy crude means that upgraders, most profitable when the differential between light and heavy crude is high, may no longer be economic, especially since every major oil sands project has run billions of dollars over their initial budgets.
As long as you get access to the market it just doesn't make sense to build an upgrader," said Kyle Preston, an analyst with National Bank Financial.
As planned, Voyageur will process the bitumen from two new oil sands mines that are part of the C$20.6 billion joint venture that includes Teck Resources Ltd (TCKb.TO) as a mining partner.
A decision on whether to proceed with the first of those mining projects, dubbed Fort Hills, will come in the second half of this year once all the partners are satisfied it will be profitable.
"The sanction decision will be made around economics and the good news is, of the three projects this is currently the best one," Williams said.
PROFITS MISS TARGET
Late on Tuesday Suncor said operating profit, which excludes most one-time items, fell 30 percent to C$1 billion, or 65 Canadian cents a share, on lower oil prices and an extended maintenance shutdown of its operations off the coast of Newfoundland.
The operating result lagged the average analyst estimate of 76 Canadian cents, according to Thomson Reuters I/B/E/S.
Suncor also said it would fight what could be a C$1.2 billion bill from Canadian tax authorities over the treatment of derivative losses.
It expects to win the dispute and has filed an objection to a preliminary ruling, but will still need to pay C$600 million until the matter is resolved, it said.
Shares of the company, which have dropped 1.5 percent over the past 12 months, were down C$1.93 to C$32.45 by midafternoon on the Toronto Stock Exchange.