Business strategy for a changing energy future
Our 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, more than ever, 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, reduce energy costs and optimize the handling of water, waste, and tailings.
Over the past few years, we have become a top tier operator through increased facility reliability. Oil Sands operations cash operating costs have fallen from $39.05 CAD/bbl in 2011 to $23.80 CAD/bbl in 2017.
Recent market conditions have provided opportunities to assemble a larger base of top tier 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 indirectly increases our exposure to carbon pricing. Over the last few years, Suncor has achieved a significant improvement in energy intensity at our own Oil Sands Base plant mine and upgrader through debottlenecking and improving reliability. 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.
We test our oil sands business and growth strategy against the three long-term energy scenarios. Under each of these scenarios, including the most aggressive decline in oil demand, we believe a substantial amount of oil will be required for decades. Meeting that demand at either low, or highly volatile, oil prices will be a challenge.
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 and a correspondingly lower oil price, or an extended period of uncertainty and volatility in investment and commodity markets.
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+ 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 only.
Market access for our bitumen
Market access to global refineries allows Canada to receive full value for its product.
Suncor has an interest in all of the major pipelines that are currently proposed and/or approved (Keystone XL, Line 3 and Trans Mountain), but it’s important to note no single pipeline will affect our ability to execute our growth plans for the future. While we firmly believe that pipelines represent the safest and most environmentally sound way to transport product, even if further delays in pipeline projects occur, we have adequate logistical flexibility to move our production to market including Fort Hills.
In May 2018, the Government of Canada announced an agreement to buy the Trans Mountain pipeline and related infrastructure to ensure the pipeline is built. With the announcement, the government reinforced the importance of this infrastructure to all Canadians.
Market access is critical and in the national interest to ensure we receive full value for our production because this in turn means further investment in jobs, education and healthcare. What’s key is that this pipeline be built and operated safely and responsibly. We will do our part to support this happening.
Transportation fuels in a carbon constrained future
While we expect our upstream crude oil production will continue to supply global 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 greenhouse gas (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/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/km by 2025*.
While it is unclear what course the United States will take on vehicle efficiency standards going forward, there is technical potential to meet even more ambitious fuel efficiency standards. The advances in technology to capture waste heat, computerized engine optimization, as well as the development and use of lighter weight materials mean that, on the basis of fuel use per km 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 will become 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 that liquid fuels will remain the primary fuel source of vehicle mobility for many years. The most effective action we can take is to continue to reduce the emissions intensity of our liquid fuels.
One way to do this 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.
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 given our strategic objectives and operations.
Strategically, advancing biodiesel technology for wider use in cold climates allows us to leverage our view that diesel demand will remain strong. We have the flexibility to optimize our integrated model to switch or supplement existing refining capacity to process biofuels and introduce biological crude components if it makes sense from a value creation perspective.
Over the longer term, if gasoline demand declines while distillate demand grows or remains flat, refineries will need to shift the ratio of their gasoline to distillate output. Reconfiguring a refinery to produce more distillate requires capital, and the economics of distillate production require large, complex refineries that run on heavy crude feedstock. Those refineries unable to make the investment, due to size, scale, age or crude diet, will need to reduce capacity, and we expect that would lead to continued rationalization of refining capacity on the continent.
As older and less efficient refineries close, the supply balance will support refining margins. We believe the refineries that will survive will be those that have the flexibility to process cheaper crude feedstocks, are well-located for domestic and export markets, have sound cost management, and a strong focus on energy efficient and reliable operations. Suncor’s refineries are well-positioned to meet this potential trend.
Our approach to our marketing and distribution business entails a cautious evaluation of options for the future. Suncor, through its Petro-Canada brand, currently operates electric vehicle charging at select retail stations which is helping us learn more about this emerging market. We continue to evaluate options and the viability of expanding our current position and respond to the evolving needs of our customers.
In the quest to diversify fuelling options, several lower carbon options such as LNG, CNG, hydrogen and electric vehicles are being promoted. We believe the market does not have the capacity for multiple choices, and it is not clear yet which technology will see the greatest consumer adoption.
In the early part of this decade, Suncor sold less strategic natural gas assets that were not directly supplying our oil sands operations. This was largely motivated by a strategy of cash generation and a view that natural gas prices would stay in a down cycle for an extended period.
In 2018, Suncor sold its mineral land holdings in north-eastern British Columbia, Canada to Canbriam Energy Inc. in exchange for a 37% equity stake. The sale is consistent with Suncor's strategy to focus on a core portfolio of high return, oil-producing assets while funding a strong and competitive natural gas company. Natural gas is expected to play a critical role in bridging to a low-carbon future, particularly in transitioning power generation away from coal.
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 and renewable power generation
Our energy scenarios tell us that a key pathway towards decarbonization of the energy system is to substantially increase low-carbon and renewable power generation capacity and then electrify a greater percentage of the energy system.
Suncor entered the renewable power generation business in 2002 to begin participating in this growing energy sector – building today's oil sands resources while also bringing along new sources of energy for tomorrow. Since 2002, we have developed eight wind projects totalling 395 megawatts (MW). Today, we are partners in four operational wind power facilities with a generating capacity of 111 MW of wind generation.
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 new renewables 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 that 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 our investment evaluation, we assess economic, environmental and social benefits including Indigenous partnerships in renewables. This activity also considers emission credits that can be used to offset the emissions in our oil sands operations.
The requirement for steam at crude oil extraction and processing 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 that is lower than any other hydrocarbon based generation.
For an energy system in transition, the value of cogeneration is high; in addition to providing an effective baseload to manage the intermittency of wind and solar power, cogeneration can economically replace coal generation with much lower carbon intensity power. Suncor currently has cogeneration units installed at its Oil Sands Base plant, Firebag, MacKay River 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 700 MW to its own sites and exports approximately 500 MW to the Alberta grid.
As climate regulation is 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 replace coke-fired boilers with cogeneration units at our Oil Sands Base plant. In addition to providing the facility with steam needed for operations, the cogeneration units are expected to export up to approximately 800 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 2019, with commissioning of the cogeneration units expected to commence by 2022.
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 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 Named Atlantic Windstorm Zone, an area that 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 but resulting in production disruption.
Precipitation and droughts
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 is managed through contingency plans to protect facilities that include backup generators and pumps to drain critical operating units and equipment.