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Canadian Oil Sands pushes back major Syncrude mine

Marcel Coutu, president and CEO of Canadian Oil Sands Ltd.

Jeff McIntosh/The Canadian Press/Jeff McIntosh/The Canadian Press

Canadian Oil Sands Ltd. expects production at the Syncrude Canada Ltd. oil sands project to rise about 7 per cent next year, but the development's largest investor is resigned to holding off on major expansions until reliability problems get sorted out.

Canadian Oil Sands, which has a 37-per-cent stake in the sprawling oil sands mining and synthetic-crude processing project, forecast production of 106 million barrels per day to 117 million barrels in 2012, up from an estimated 105 million to 107 million this year.

At the midpoint, output would average 309,000 barrels a day, still well below the 350,000 bpd capacity, the company said.

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The company plans to spend $1.46-billion in 2012 on the operation, net to its interest, as it moves forward with initiatives to improve the environmental performance at the northern Alberta site, and move and upgrade mining equipment.

It announced the budget during a quarter in which unplanned outages of processing equipment showed the plant is still prone to mechanical hiccups that eat into production forecasts four years after the partners brought in Exxon Mobil Corp. to manage the equipment and systems.

"We have been disappointed with Syncrude's production performance over the past few years and we know this sentiment is shared by many of our investors," Canadian Oil Sands chief executive Marcel Coutu said. "While Syncrude's capacity utilization is very similar to that of our peers, we plan to do better."

oil – shut down unexpectedly in recent weeks.

Exxon Mobil's Canadian affiliate, Imperial Oil Ltd. , the venture's second-largest stakeholder, served notice last month that it wants to focus on reliability, as opposed to big capacity increases, until the end of the decade.

Previously, the partners planned to lift production to 600,000 bpd by 2020, largely with the addition of a new mine called Aurora South.

Mr. Coutu said that project is now not expected to start production until the early 2020s. However, some spending on engineering and construction could start during this decade given that it takes about five years to complete such an undertaking.

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"The priority of developing our Aurora South leases has shifted by a few years to allow some time to improve the economics of these new projects and reduce the risk profile that we see today," he said. Improving current operations could result in production rising 20 per cent, he said.

Cash flow will stay at high enough levels to maintain Canadian Oil Sands' dividend, Mr. Coutu said.

That commitment is not surprising with major capital expenditures pushed back, despite the fact that this year's spending and dividends will exceed cash flow by around $300-million, FirstEnergy Capital Corp analyst Michael Dunn said.

However, the move contrasts with the modus operandi of most oil sands developers, which capture and hold investor interest in the face of rising costs, volatile oil prices and environmental opposition with the promise of big production gains at regular intervals.

In 2012, Canadian Oil Sands expects sales to total $3.68-billion, based on a U.S. crude oil price assumption of $85 per barrel. It forecast Synthetic crude prices to average $2 a barrel above the U.S. benchmark oil, versus about $8 in 2011, when Canadian Natural Resources' Horizon oil sands project suffered an eight-month outage.

Syncrude's other partners are Suncor Energy Inc., Nexen Inc., Sinopec., JX Holdings unit Mocal Energy, and Murphy Oil Corp.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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