Business strategy for a changing energy future
The global oil and gas industry is in the midst of a major structural adjustment due in large part to technology that opened up new oil supply, such as shale oil, and reduced the supply cost curve. As the industry adjusts in an effort to emerge stronger and leaner, a focus on where the industry is headed and the key influencers in both the short and longer term is essential.
Suncor’s Oil Sands operations are a concentrated unconventional oil play. Our perspective of the future tells us that now is the time to know where our competitive advantage lies and to play to that advantage.
We have been an operator in the Athabasca oil sands for more than 50 years and the majority of our production comes from the oil sands. There is strategic advantage in having a top-tier resource base of some of the highest-quality reservoirs in the Athabasca oil sands region and substantial scale of physically integrated operations in the region. Furthermore, our largely integrated value chain allows us to extract full value for our resource.
By operating multiple, large oil sands facilities in this region, we are able to leverage location and logistics synergies between the facilities, allowing us to drive efficiencies and reliability, and optimizing and reducing environmental impact including greenhouse gas emissions.
Over the past few years, we have increased facility reliability resulting in Oil Sands operations cash operating costs falling from $39.05/bbl in 2011 to $25.25/bbl in 2018.
Recent market conditions have provided opportunities to assemble a larger base of reserves. Our acquisition in 2018 of an additional 5% equity position in the Syncrude joint operation has increased our ownership to almost 59%. This counter-cyclical investment increases our production at a very attractive cost per flowing barrel relative to a greenfield project of a similar scope and nature.
This acquisition increases our exposure to carbon pricing. However, by increasing our position in Syncrude, we have the opportunity to leverage our relationship with an experienced operator with a strong technology program to further advance energy efficiencies at both our Base plant and the Syncrude facility.
While often characterized as being the oil basin most vulnerable to a low oil demand scenario, the very long operating life and low decline rate of our assets are, paradoxically, a major advantage under a scenario of either declining demand for crude oil or a correspondingly lower oil price environment. Our long-term reserves base presents minimal finding and exploration costs or risk. The nature of the resource requires high upfront capital investment to develop a project, but once the initial infrastructure is in place, the reservoir can be incrementally developed over a long period of time, without exploration risk, or the high capital requirements of a new project.
Oil sands facilities are more comparable to manufacturing operations. Once operating, they are built to last 40 plus years with a steady output. Production does not rapidly peak and decline, so each new incremental expansion results in production growth. Once high upfront capital costs are depreciated, a facility can continue to operate with low operating costs and sustaining capital requirements while continuing to evaluate energy efficiency opportunities. These characteristics also provide a unique opportunity to advance technologies to reduce emissions given the concentration of assets in the basin.
Transportation fuels in a carbon constrained future
While we expect our upstream crude oil production will continue to supply oil markets, our downstream and marketing business is more exposed to North American refined product supply and demand dynamics.
Governments at all levels in Canada are seeking to diversify transportation fleets to use lower carbon intensity fuels and, as a result, the transportation fueling landscape is expected to change over time. Reducing GHG emissions from the transportation sector is arguably one of the toughest challenges, in that transportation is fundamental to economic productivity and because liquid petroleum fuels are available at a relatively low cost and high energy density.
We see demand for gasoline moderating over the next 10 years, as light vehicle fuel efficiency standards take effect and alternative fuels adoption widens. We see no near-term demand destruction for distillates in North America. In the longer term, we believe diesel will remain the predominant fuel for heavy haulage, aviation, marine and rail, and we see demand growth with increasing economic activity. Heavy-duty vehicle fuel efficiency standards and biodiesel blending are expected to offset some of the economically-driven demand growth.
Enormous strides in fuel efficiency have been made to date through ambitious regulation and by consumer uptake of more efficient light-duty vehicles. Between 2000 and 2010, fleet emissions in Canada decreased from 193 grams per kilometre to 166 g CO2e/km, a drop of 14%. As the vehicle fleet continues to turn over in the next decade, fleet average emissions are projected to reach 97 g CO2e/km by 20251. While it is unclear what course the United States will take on vehicle efficiency standards, there is technical potential to meet even more ambitious fuel efficiency standards. The advances in engine and drivetrain technologies as well as the development and use of lighter weight materials mean that, on the basis of fuel use per kilometre travelled, the internal combustion engine of the future will, we believe, not only be cost competitive, but also be very carbon competitive with alternative fuels.
In our view, hybrid, plug-in hybrid and electric vehicles are becoming cost-effective additions to the passenger vehicle fleet and will, along with fuel efficiency standards, contribute to moderating growth in long-term global gasoline demand. We believe that cost, carbon competitiveness and consumer convenience mean liquid fuels will remain the primary fuel source of vehicle mobility for many years.
Regardless of the external policy environment, Suncor is taking action to reduce the emissions intensity of our liquid fuels in several ways. One way is through biofuel blending. Suncor owns and operates the largest ethanol plant in Canada, which provides the ethanol we blend into our gasoline. Heavy haul trucks, aviation and marine fuels of the future will require advanced biofuel blending. We are evaluating optimization work at our St. Clair ethanol plant to increase the quality of our products and develop lower carbon intensity ethanol. We are also increasing biocontent to our diesel and gasoline.
Suncor also monitors technologies being developed by other parties to determine if, and when, an investment in the technology could be applied to our business. In 2019, we invested in Enerkem Inc., which manufactures biofuels and renewable chemical products from household garbage that would otherwise be landfilled. In addition to a financial investment, a number of Suncor employees have been seconded to Enerkem’s facility in Edmonton. We also continue to invest in biofuel technology companies such as LanzaTech.
While we continue to reduce the emissions intensity of our liquid fuels we are evolving and expanding our current product offering to meet growing customer demand. Through our Petro-Canada brand, we announced construction in 2019 of a coast-to-coast electric vehicle fast-charging network spanning more than 50 Petro-Canada stations. These sites will provide universal options to charge a variety of electric vehicles and will provide a charging experience that is above the current norm in Canada. We have invested in level three direct current fast chargers, a step change technology that is built beyond the needs of today and positioned for the future of charging in Canada. This exciting initiative will enable us to learn more about this emerging market as we continue to evaluate options and respond to the evolving needs of our customers.
Offshore oil production
Suncor has an interest in every major development offshore of Canada’s east coast. Suncor operates Terra Nova and has interests in the Hibernia, White Rose and Hebron projects. We are a non-operating partner in the Buzzard and Golden Eagle fields in the United Kingdom North Sea and have expanded our options in this area through the purchase of a participating interest in the Rosebank pre-development opportunity. We have also recently acquired a participating interest in the Fenja development located in the Norwegian Sea. With diligent management of produced methane, offshore crude oil is generally among the lowest carbon intensity sources of crude globally.
Low-carbon renewable power generation
Our energy scenarios tell us that a key pathway towards a lower-carbon energy system is to substantially increase cogeneration and renewable power generation capacity and then electrify a greater percentage of the energy system.
Suncor entered the renewable power generation business in 2002. Since then, we have developed eight wind projects totalling 395 MW. Today, we are partners in four operational wind power facilities with a generating capacity of 111 MW. By developing new renewable projects and subsequently selling down our working interest, Suncor is able to generate profitable returns on investment and create cash flow to support further renewable developments. Suncor has a strong portfolio of renewable power development sites across Canada that will further reduce grid intensity in regions like Alberta and Saskatchewan, which have a carbon-intensive grid.
We are also exploring the opportunity to develop our first utility-scale solar photovoltaic facility in Alberta to complement our experience in developing, constructing and operating wind power projects. As part of investment evaluation, we assess economic, environmental and social benefits including Indigenous partnerships in renewables. This activity also generates emission credits that can be used to offset the emissions in our oil sands operations.
The requirement for steam at crude oil extraction, processing and refining facilities creates the opportunity for high-efficiency cogeneration that provides steam and power to our facilities and delivers surplus power to the grid at a carbon intensity lower than any other hydrocarbon-based generation. For an energy system in transition, the value of cogeneration is high; in addition to providing a reliable, low-cost baseload to manage the intermittency of wind and solar power, cogeneration can economically replace coal generation with a much lower carbon intensity power. Suncor currently has cogeneration units installed at its oil sands Base plant, Firebag, and Fort Hills facilities, and exports low-carbon excess electricity generated from these units to the provincial grid.
With both renewable and cogeneration capacity, Suncor provides approximately 900 MW to its own sites and exports approximately 400 MW to the Alberta grid.
As climate regulations are implemented across jurisdictions, renewable power benefits from greater scale which can improve technology, efficiency and improve economics. Equipping wind and solar sites with battery storage to optimize the facility’s integration to the power grid could further improve effectiveness. An enabling factor will be market design that allows for dynamic interaction between a renewable, but intermittent, power source and baseload sources like cogeneration.
In 2017, we took the first steps in the regulatory process to potentially replace the coke-fired boilers with cogeneration units2 at our oil sands Base plant. In addition to providing the facility with steam needed for operations, the cogeneration units may export an additional 800 megawatts (MW) of electricity to the provincial grid, equivalent to roughly 7% of Alberta’s current electricity demand. Should the project proceed as planned, construction is targeted to begin in 2020, with commissioning of the cogeneration units expected to commence by 2023.
Engagement with our supply chain
Suncor is also more aggressively integrating sustainability into our supply chain. Through our Supplier Code of Conduct, we are clear that we expect our business associates to be aligned with our sustainable development approach and that we will work together to seek ways to reduce environmental impacts, support the communities in which we work and collectively contribute to economic growth. To that end, we have taken further steps towards engaging with our suppliers on their sustainability performance, including:
- identifying sustainability risks and opportunities in our supply chain
- building collaborative relationships with peers and suppliers
- embedding sustainability into market activities and supply chain management and field logistics culture
One of our first steps was to review our suppliers’ available sustainability reports, codes of conduct and CDP responses. We assessed the performance of suppliers that make up the top 50% of our annual spend. Through this assessment, we learned that more than 90% of those suppliers publicly report on sustainability, and 42% report to the CDP.
We also kicked off strategic supplier meetings that included sharing sustainability goals and targets, and how our companies can work together to achieve continuous improvement. This resulted in new prequalification questions that incorporate multiple sustainability factors including GHG performance and goal-setting.
For specific requests for proposal (RFP), we are drafting the next version of our sustainability supplemental questionnaire for all potential suppliers responding to Suncor RFPs. This enhanced supplemental questionnaire is expected to launch later in 2019.
Lastly, as we know collaborative relationships will help us advance sustainable procurement, we are in the planning stages to host a supply chain sustainability forum with suppliers and service providers in the fourth quarter of 2019. This work will enable us to further explore opportunities with current and potential partners and create more environmental and social impact opportunities within Suncor and the market.
Facility resilience to extreme weather events
Suncor assesses specific risks to its physical assets in light of various potential operational hazards to which those assets may be subject, including the risk of extreme weather events, which are possible in the course of operations in the areas where we operate. Suncor manages these risks through facility design and operational procedures. We also maintain, where appropriate, insurance for damage to, or loss of, assets as well as production interruption.
Many of Suncor’s facilities routinely operate in an annual temperature range of -40 to + 40°C and facilities are built to withstand extreme weather events. Prolonged periods of extreme cold could force these facilities to shut down for periods of time to ensure worker safety and prevent undue stress on equipment. Prolonged periods of extreme heat may lead to production cuts if adequate supply of cooling water is not available. Suncor’s refineries in Montreal and Sarnia have access to extremely large bodies of cooling water, so are far less exposed to this risk.
Hurricanes and icebergs
Suncor’s Terra Nova installation, off the coast of Newfoundland, operates on the edge of the Atlantic windstorm area which is subject to hurricanes and icebergs. The risk of hurricane season is managed through a continuous weather tracking service that monitors storm systems in the North Atlantic. There is also a risk in the region of floating icebergs causing damage to our installations. This risk is managed through the design of facilities and a continuous monitoring system tracking iceberg locations. Where the course of an iceberg cannot be altered, an emergency response system allows for the floating platform to be disengaged and moved to safer water, protecting the asset and mitigating environmental risks but resulting in production disruption.
Precipitation, droughts and wildfires
Most of Suncor’s operated facilities are not in stressed watersheds where the availability of water, or severe restrictions on water withdrawals, could compromise our ability to operate. Limits to oil sands water withdrawal during winter low flow periods are managed through on-site water storage where facility design permits. Our Commerce City refinery is located in a water-stressed region and a potential curtailment of water supply would require bringing in water by pipeline or truck. Water management is a priority at Suncor, driving industry-leading innovation at our facilities to reduce, recycle, reuse and return water.
There is also a risk of seasonal flooding in certain areas in which Suncor operates, which we manage through contingency plans to protect facilities that include backup generators and pumps to drain critical operating units and equipment.
Suncor’s oil sands facilities are located within Canada’s boreal forest and wildfires pose a risk to our operations and the communities nearby. To mitigate this risk, we manage our production facilities in line with FireSmart guidance. We have detailed emergency preparedness and response plans in place to ensure emergency situations resulting from wildfire risks are managed effectively. Suncor also partners with other operators and the Regional Municipality of Wood Buffalo in mutual aid agreements to collectively manage emergencies.
2 This project has not been sanctioned and is subject to, among other items, climate policy clarity.