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The Econo Miss

by Archives February 5, 2008

Although already bursting at the seams, Fort McMurray is about to get even bigger and busier. The oldest oil sands miner in the area, Suncor Energy Ltd. has announced a $20.6 billion expansion project that follows on the heels of a lucrative royalties deal with the Alberta government.
Suncor’s board of directors revealed the Voyageur project will include the expansion of the company’s extraction facility and a third upgrader which will process a daily 245,000 barrels of bitumen into high-grade crude. The expansion follows through on the strategy introduced in 2001 and will target Suncor’s goal of producing 550,000 barrels per day by 2012. This will increase its capacity by 52 per cent within the next four years. The project is also slated to create 800 more full-time and permanent jobs. It will be financed with cash flow from operations, credit and debt.
The announcement comes only a day after a new royalties agreement was signed with the Alberta government. The new agreement leaves Suncor able to operate in a predictable and secure environment. The company will pay 20 per cent more on royalties only from their mining operations and it leaves them with certainty in bitumen valuation, allowed costs and certain taxes. Alberta has in turn agreed not to seek money from outside this contract.
Their old contract which was signed in 1997 required Suncor to pay one per cent of revenue until gains on their projects were returned; the company was then to pay 25 per cent of their net revenue. The understanding is now that the company has a stable royalty system to work with and can confidently undertake new projects. Syncrude, the second-largest mining operation in the area is already in talks with the province to negotiate a similar agreement.
Last fall, when Alberta set up a government panel to negotiate royalties with companies operating in the area, the panel recommended an increase to 36 per cent, with a nine per cent hike on natural gas and 11 per cent on oil. The oil company and investor backlash was immediate; they argued the hike would not be economically viable because under the proposed system operators would be struggling to cope with the increasing costs. Since the announcement last fall, EnCana Corp, one of the largest operating in the area, cut their 2008 capital investment substantially. The previously low royalty rates were designed to allow maximum investment and growth in the area, but Alberta has since then re-evaluated its position and is now looking towards substantial gains in the next four decades of oil sands mining.
Other companies operating in the oil sands have also found the environment less favourable and have put some development projects on hold. Despite the postponement of some projects, international interest and development in the area is high.
In the past two years, companies from China, South Korea and Norway have all taken advantage of the area’s crude assets. The latest hopeful for some stakes in Alberta’s oil wealth is India’s largest oil producer, Oil and Natural Gas Corp.
India’s resource giant is now in talks with companies operating in the area to secure reserves for its expanding economy in the area to secure reserves for its expanding economy.

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