Suncor blasts NDP government and warns of possible layoffs

Suncor blasts NDP government and warns of possible layoffs

After being relatively quiet on the matter last week, Suncor Energy came out swinging this morning, warning that the Alberta government's recently mandated production cuts may have unintended consequences, including possible layoffs.

Suncor says it plans to boost total output 10% in 2019, rising to about 800,000 boe/day. Next year's guidance assumes production out of Alberta will be significantly constrained for the first three months of the year, with lower curtailment volumes expected for the remaining nine months.

Problems with the curtailment formula

Although the government has mandated an 8.7% production cut, Suncor’s curtailment allocation will initially be higher due to last year's extended maintenance outages at Syncrude and its Base Plant operations.

According to the government's formula, production quotas are measured from the highest 6 months of production for the past year (from November 2017 to November 2018).

The company warns lower production out of Alberta will translate into "artificially higher" operating costs at its oil sands operations, which now includes Fort Hills. COO Mark Little points out that Suncor has invested heavily into its upstream and downstream integration, which largely insulates it from day-to-day spot prices for Canadian crude.

Suncor says the government's intervention "creates long-term market uncertainty," reducing incentives for companies to invest in new processing plants or long-term transportation contracts.

Key concerns ignored, for now

Suncor says reducing rates during the winter months creates its own safety and reliability risks. The company typically operates at peak rates during the winter, when there are no regularly scheduled maintenance turnarounds.

The company also points out that some of its crude production is refined in Alberta, where there are no logistical constraints.

Syncrude has been operating well below nameplate capacity in recent years due to a number of reliability issues. According to the curtailment formula, the project will again need to be operated far-below normal capacity in 2019. The same can be said for its Base Pant operations, which also saw above-normal maintenance outages this year.

After sinking billions into Fort Hills, which only began normal operations in the third quarter, the facility is now required to reduce rates.

Finally, Suncor says it already has long-term take-or-pay commitments on pipelines to the Gulf Coast. Tolls will be paid regardless if those volumes are used or not.

No plans to increase capital spending

Overall capital spending will remain unchanged next year, forecasted to be between $4.9 and $5.6 billion. About two-thirds of those funds will be dedicated to maintenance and sustaining capital.

The remaining funds will be allocated towards continued implementation of autonomous haul trucks, ongoing development of its bi-directional pipeline to Syncrude, as well as accelerated deployment of the company's new PASS tailings technology (permanent aquatic storage structure). 

Replacement of its Base Plant coke-fired boilers, further in-situ expansions and coker replacement at its Montreal-East refinery will continue to be progressed, in preparation for possible sanctioning "at the appropriate time."

Crude-by-rail suddenly not so profitable

Alberta's mandated production cuts have dramatically reduced the spread between Canadian crude and the US benchmark, West Texas Intermediate (WTI), now making crude-by-rail transport out of the province uneconomical. 

As a final warning shot, Suncor says it may need to begin de-staffing contractors, but promises to continue working "cooperatively" with the NDP government and the Alberta Energy Regulator (AER).

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