Suncor, Total and Teck green-light $14B Fort Hills oilsands megaproject

Suncor Energy (TSX: SU; NYSE: SU) and its partners Total E&P Canada Ltd. (a subsidiary of Paris-based Total (NYSE: TOT) and Teck Resources (TSX: TCK.B; NYSE: TCK) are proceeding with the Fort Hills oilsands mine project in Alberta’s Athabasca region, 90 km north of Fort McMurray. 

Ownership is divided between developer and operator Suncor, at 40.8%; Total, 39.2%; and Teck, 20%. 

Although Teck’s percentage is relatively small, its $2.9-billion share of the $13.5-billion total development costs will easily make it the largest-ever investment by a traditional mining company in Alberta’s oilsands.

Suncor says the project is scheduled to produce its first oil during the fourth quarter of 2017, and achieve 90% of its planned production capacity of 180,000 barrels per day of bitumen within one year.

With a resource base of 3.3 billion barrels of bitumen, the Fort Hills mine life is expected to exceed 50 years at the current planned production rate. 

On the same day as the Fort Hills announcement, Calgary-based Enbridge (TSX: ENB; NYSE: ENB) unveiled its plan to build its $1.6-billion Wood Buffalo Extension pipeline, which would bring crude at a rate of 490,000 barrels of diluted bitumen per day from Fort Hills and other Suncor oilsands projects to its hub in Hardisty, Alta. Due to be completed in 2017, work will include building a 450 km, 30-inch pipeline from Enbridge’s Cheecham Terminal to its Battle River Terminal at Hardisty, plus associated terminal upgrades.

The Fort Hills project was shelved in 2008 by then-partners Petro-Canada, UTS Energy and Teck at the onset of the global recession. Since that time, three changes have improved the project’s prospects: more growth-oriented owners, with Suncor buying Petro-Canada in 2009 and Total buying UTS in 2010; the rebound in the global economy and oil prices; and improvements in the project’s technical aspects, including its reworking as bitumen producer, and its synergies with Suncor’s existing infrastructure.

“The Fort Hills project is one of the best undeveloped oilsands mining assets in the Athabasca region, an excellent fit with Suncor’s diversified production portfolio and will generate significant economic value for Suncor, Alberta and Canada,” Suncor president and CEO Steve Williams said in a release. “Given its combination of ore quality and resource size, we expect this project will be a significant source of long-term cash flow for the company and contribute strong returns for our shareholders.”

Suncor says its $5.5-billion share of the capital investment in Fort Hills is expected to account for 15% of its total capital budget per year during construction, and that the project’s capital intensity amounts to $84,000 per flowing barrel of bitumen, or within the range of similar recently completed oilsands mining projects.

“The Fort Hills economics are positive,” Williams said. “Great effort has been made to ensure that our depth of experience and recent technology improvements in oilsands mines are integrated into the development of the project. We are delighted that the other owners share our enthusiasm for this exciting new development.”

For Total, Fort Hills is a “milestone” that “provides a solid platform from which to advance the development of future projects, while reinforcing Total’s strategy to become a significant producer here in Canada.” 

Teck is fully committed to a long-term ownership stake in Fort Hills, and has its eyes on developing its nearby oilsands projects, namely Frontier (100% owned) and Lease 421 Area (50%). 

“Fort Hills is one of the best undeveloped assets in the Athabasca region and is a natural fit with our business strategy of acquiring and developing long-life assets in stable jurisdictions,” said Teck’s president and CEO Don Lindsay in a release. “With Fort Hills and our other oilsands assets, we are building a new division within Teck that will create value, significant cash flow and diversification for our business for decades to come.”

As Lindsay stated later in his “Investor Day” presentations on Nov. 5, because of Teck’s core competency in large truck-and-shovel projects, “oilsands mining is right in the sweet spot for us”, and added that “we do not plan to go into in situ oils or conventional energy exploration and production.”

As for its specific financial commitments, Teck must spend C$2.94 billion between 2014–2017 for construction, followed by 27.5% of the next $3.2 billion in project capital spending — expected by early 2015 — and 20% thereafter. These figures include a remaining earn-in of C$240 million.

Teck intends to fund its share with cash-on-hand, free cash flow over the four-year period, and $2 billion in an unused line of credit. 

It has yet to decide how it will market its 50,000-barrel-per-year share of diluted production.

“We are often asked if we want to be a mining company or an energy company, and we don’t think that these are mutually exclusive,” Lindsay said.