The Syncrude mine may not have been the first major oil operation in the Athabasca oilsands, but it was the second — and now it stands as one of the region’s dominant oilsand projects.
The Great Canadian Oil Sands project, now known as the Suncor project and operated by Suncor Energy (SU-T, SU-N), reached production in 1967 and has the distinction of being first. But just over 10 years later, in 1978, Syncrude came on stream.
Since then the project has entrenched itself as one of Canada’s largest and most consistent oil producers. It has weathered trying times — the latest involves a $100-million lawsuit filed by the Alberta government, which alleges it hasn’t received its share of revenues from Syncrude — but there is still plenty more oil to come out of the ground.
Syncrude is operated as a joint venture between Canadian Oil Sands (COS-T), with 37%; Imperial Oil (IMO-T, IMO-X), with 25%; Suncor Energy, 12%; Sinopec Shanghai Petrochemical (SHI-N), 9%; Nexen (NXY-T, NXY-N), 7%; Mocal Energy, 5%; and Murphy Oil (MUR-N), 5%.
With respect to the latest lawsuit, a recently filed statement of claim reads: “Despite demands, the defendants have refused to pay the unpaid royalty proceeds or any part thereof.”
While the wording is harsh, both the government and Syncrude insist that relations are not as acrimonious as they appear. The two parties have been locked in negotiations over the royalty issue ever since former Premier Ed Stelmach introduced a new royalty structure for oil companies in 2008.
The new structure took effect for Syncrude in April 2010, and the two parties have been working on a deal ever since. The government-filed claim marks the two-year anniversary of the date the new royalties were set to take effect, and if the government didn’t file within that two-year window, it would have lost its right to take legal action.
But negotiations are taking -longer than expected, with the main stumbling block being Syncrude’s payment for production since transitioning to the new royalty structure.
When the structure was introduced, Syncrude opted to pay royalties on bitumen production rather than on the synthetic crude, which is the facility’s final product.
Part of the sticking point of negotiations is determining whether the royalty should be charged on bitumen or crude, when dealing with the inventories Syncrude held during the transition.
Another complication with Syncrude switching to a royalty on bitumen is that it is more difficult to establish a benchmark for bitumen than for upgraded crude. (Benchmarks are market-established prices that can be used as a reference point for determining the appropriate royalty dollar figure.) Finding a market price for the bitumen that comes out of the ground at Syncrude is proving difficult, but disputes could get resolved in the bigger picture, and Syncrude should continue digging up oil from its impressive suite of assets.
The principal asset is the Mildred Lake mine, which hosts upgrading and administrative facilities 40 km north of Fort McMurray. Syncrude also encompasses the Aurora South and the Aurora North mines, which are located 35 km northeast of the Mildred Lake plant.
Whether it’s Aurora or Mildred Lake, the companies are mining the McMurray formation — a lower Cretaceous, oil-bearing quartz sandstone outcropped along the lower Athabasca River in the northeastern part of the province. The formation overlies Devonian limestone from the Beaverhill Lake group and underlies marine clays of the Clearwater formation.
This geology has yielded enough oil for Syncrude to supply 15% of Canada’s total oil needs — the project has an impressive production capacity of 350,000 barrels per day.
But big-time capacity isn’t achieved overnight. While Mildred Lake opened in 1978, heavy expansion at the site didn’t get underway until 1996, with production ramping up to 81.4 million barrels by 1999. Further expansion came with adding the Aurora mine in 2001, which helped push production up to 90 million barrels that year.
By the end of this April, the operation had turned out 36.7 million barrels at an average daily rate of 303,600 barrels per day. Guidance for total year-end production was, however, downgraded slightly to 301,000 barrels per day from the previous estimate of 309,000 barrels.
This year’s lower-than-expected production is a result of maintenance on Coker 8-1, which returned to full capacity rates in April.
But costs are down and this year’s production could improve on last year’s total, which turned out 105.2 million barrels at an average rate of 288,300 barrels per day.
The project reported operating $32.68 per barrel in a 17% decrease from $35.53 per barrel during last year’s first quarter. The decrease came primarily from lower natural gas prices and lower expenses connected to its long-term incentive plans.
While the mine has given much already — with historical production of over 2 billion barrels — it has plenty left to give. As of the end of last year Syncrude had proven and probable reserves of 4.8 billion barrels of synthetic crude oil. It had another 5.2 billion barrels of contingent resources and 1.6 billion barrels of prospective resources.
The joint venture isn’t pinching pennies when it comes to getting barrels out of the ground, either. Canadian Oil Sands, the largest shareholder, reported that capex in the first quarter rose to $141 million, from $109 million last year. Much of that capital, it says, will go towards replacing and relocating four of Syncrude’s five mining trains and supporting its tailings-management plans.
These are new fittings for a mine with a long history, and a long future ahead of it.
Be the first to comment on "Syncrude keeps on rolling"