SUNCOR PLANS TO EXPAND OIL SANDS PRODUCTION TO 450,000 BPD BY 2008

Suncor Energy’s Annual Report for 1999 reports it was a year of achievements and challenges for the company.

During 1999 Suncor began construction on the second phase of Project Millennium. This $2-billion expansion of its Oil Sands operation will require, at the peak of construction, nearly 3,000 workers.

At the same time, unexpectedly high oil prices have helped soften the blow of some disappointing operational results. At the Oil Sands plant two unplanned outages at the upgrader facilities resulted in 16 lost days of production. Despite the outages, Oil Sands still managed to meet its average daily production target for the year, averaging 105,600 barrels per day.

Construction on Suncor’s Oil Sands expansion, one of the largest construction projects in North America by a single company, began in the second quarter of 1999. Project Millennium is designed to more than double oil sands production by 2003, while at the same time reducing estimated cash costs to between $8.50 and $9.50 per barrel. In addition to increasing production and lowering unit costs, Millennium should also improve the plant’s overall reliability. When part of the process goes down for maintenance, its operating counterpart can continue to process oil. The need for shutdowns of the entire plant will be virtually eliminated.

Oil sands production is targeted to rise to 225,000 barrels of oil per day in 2003. Increasing production capacity is the best and fastest way for Suncor to achieve lower costs and higher margins.

In early 2000 Suncor entered the next phase of oil sands growth beyond Project Millennium by announcing its plan to invest $750 million to further expand the oil sands business. The plan includes building a commercial-scale in situ facility and expanding the upgrading capacity of the Fort McMurray operation. The Firebag In Situ Oil Sands Project is designed to deliver an additional 35,000 barrels per day of bitumen to the Oil Sands plant by the end of 2004. The Firebag heavy-oil deposits, located about 40 kilometers from Fort McMurray, could have a recovery potential of about 5 billion barrels of bitumen and will be developed using steam-assisted gravity drainage technology that Suncor has piloted at its Burnt Lake facility.

Long-term plans call for further investments to increase in situ production in stages to about 140,000 barrels of bitumen per day by the end of the decade. With increasing investment in new technology and continuing actions to reduce the environmental impacts of its operations, the company’s long-term vision is to increase oil sands production to about 400,000 to 450,000 barrels per day in 2008.

This year’s annual report has a new section that highlights Suncor’s priorities for future growth in Oil Sands. After the Steepbank Mine project, Project Millennium is the next major step in this direction and even more growth is in store for oil sands in the future. Suncor’s extensive land position in northeastern Alberta has mineable and in situ resources that have the potential to provide a major platform for future growth well into the 21st century. By increasing production and driving costs down, the company is moving closer to its goal of becoming the lowest cost producer of oil in North America.

The $2-billion second phase of the project is scheduled to begin commissioning in the second half of 2001, and is designed to increase total Oil Sands production to 225,000 barrels per day in 2003.

Nearly 80 percent of the engineering and 17 percent of construction was completed by 1999 year-end.

In the business of mining for oil, bigger is better. Project Millennium is part of staged growth initiatives that are designed to nearly double the size of Suncor’s current Oil Sands operation. The benefits of higher production and lower costs are demonstrated by the project’s bottom-line economics: even if the price of crude declines below US$15 per barrel, the project would still generate a return higher than Suncor’s 11 percent cost of capital.

Project Millennium will increase reliability and availability of facilities. Each part of the process, from mining to upgrading, will be "twinned." This means the ability to sustain some of the cash flow from operations during planned maintenance shutdowns of one process or train.

Oil Sands earned $174 million in 1999 compared with $150 million in 1998. This increase was mainly attributable to a 7.5 percent increase in sales volumes and a 7.5 percent increase in Oil Sands crude oil price. These factors were partly offset by higher operating costs.

This increase was tempered by a loss in Suncor’s hedging program which decreased year-over-year Oil Sands earnings by $88 million.

During a 28-day, $20-million planned maintenance shutdown in 1999, Oil Sands halted production of sweet (low-sulfur) crude oil and produced only lower-priced sour crude oil. In addition, the selling price of sour crude declined during this period.

The combined impact of the above price factors resulted in a year-over-year increase in earnings of $46 million.

Oil Sands increased production in 1999 for the seventh consecutive year to an average of 105,600 barrels per day from 93,600 barrels per day in 1998 (Figure 1).

Figure 1

Cash operating costs did not change significantly from 1998 (Figure 1). Per-barrel costs were $11.40 in 1999--the first full year of operation for the Steepbank Mine and fixed plant expansion--compared with $11.50 in 1998.

Total operating costs per barrel in 1999 were $14.75--against a target of $13.85--compared with $13.75 per barrel in 1998. (Total operating costs are equal to the total expenses--including non-cash charges, but excluding royalties--divided by sales volumes.)

Suncor has recognized proven and probable reserves of 476 million barrels and 2,028 million barrels, respectively, on the leases it currently has regulatory approval to mine. Management believes that these reserves are sufficient to support Project Millennium’s planned production target of 225,000 barrels per day for a period in excess of 30 years. This does not include any reserves for the Firebag in situ leases. Management believes that by 2002, Oil Sands could reduce total operating costs, which include cash operating costs as well as non-cash costs, to the $11.65 to $12.75 per barrel range from the 1999 level of $14.75 per barrel.