Suncor says upgrading relegated to back burner

CALGARY - Suncor Energy isn't in any rush to build upgraders to process the combined bitumen production arising from its merger with Petro-Canada, its chief executive said Wednesday.

Rick George said the company wants to be "bitumen long" before committing to building new and expensive facilities to convert raw oilsand into light, synthetic crude oil.

"There's no need to build the upgrader if you don't have the bitumen to fill it," George told analysts on a conference call to discuss the company's lower second-quarter results. Any surplus production could easily be absorbed by refiners in the United States, he added.

"I expect that to be a fairly good strategy over the next four or five years."

Both Suncor and Petro-Canada have delayed major upgrading projects since oil prices began falling last year. Last fall, Petro-Canada indefinitely postponed an integrated upgrader for the proposed Fort Hills mine, and Suncor in January put its Voyageur expansion-- which included a third 200,000-barrel-a-day upgrader --into "safe mode" prior to the merger announcement.

George said no decisions have been made on what projects will be revived once the merger formally closes on Aug. 1.

But Chris Feltin, an analyst with Tristone Capital in Calgary, said he expects the third and fourth phases of the Firebag in situ project, which were also delayed prior to the merger, to be the first in the queue ahead of the Voyageur upgrader.

"In our interpretation, there is no imminent need to bring it(Voyageur)off the shelf," he said, noting that new pipelines such as Enbridge Inc.'s Alberta Clipper line to Cushing, Okla., and TransCanada's Keystone artery to the U. S. Gulf Coast "are expected to keep differentials low for three to five years."

Differentials -- or the spread between light and heavy oil prices -- are at or near all-time lows, which some observers are suggesting might herald a permanent structural shift in heavy oil markets. Low differentials discourage upgrading by reducing the price premium gained by converting bitumen into light oil.

According to the dailyoilbulletin.comwebsite, the difference between a barrel of Imperial Bow River heavy crude and Edmonton light par was about $6, or less than 10 per cent per barrel. Gil McGowan, president of the Alberta Federation of Labour, blamed big new bitumen " super pipelines" to the U. S. for eroding the cost advantage of cheaper feedstocks needed to encourage value-added processing at home.

"On the surface, it sounds like a good thing because producers get a higher price for their product. But in reality it's a bad thing for Alberta because it removes the competitive advantage for Alberta-based upgraders and refiners," he said in an interview.

McGowan said the Voyageur delay is "deeply troubling" coming from a company like Suncor which for 40 years upgraded virtually all of its production in the province.

"If a stalwart company like that has no choice but to bail out on Alberta, then we've got a real problem on our hands."

George's comments came a day after the Alberta government issued a request for proposals to upgrade 75,000 barrels a day of bitumen it plans to take in lieu of royalty payments, which McGowan termed "a drop in the bucket" compared with overall oilsands output of about 1.2 million barrels a day.

The federation advocates "aggressive" policies like export restrictions, conditional lease agreements for companies working in the oilsands and even the creation of a Crown energy corporation to spearhead the construction and operation of Alberta-based upgraders and refineries. McGowan singled out oilsands developers such as EnCana, ConocoPhillips, Husky and ExxonMobil, which are planning to export most of their raw bitumen to the U. S. for processing.

"Voyageur, that's a project that could have created thousands of short-term construction jobs and hundreds of longer-term operations jobs," said Mc-Gowan.

Meanwhile, Suncor posted a $51-million second-quarter loss, or six cents a share, compared with profits of $829 million, or 89 cents a share, a year earlier. Thus far in 2009, the company has lost $240 million compared with profits of $1.54 billion after the first half of 2008.

Analysts were disappointed with the result.

Feltin said the numbers took him by surprise.

"We were definitely expecting results to be higher quarter over quarter."

In a research note, Andrew Potter with UBS Securities said Suncor's operating earnings of 20 cents a share were well below his estimates of 31 cents and a street consensus of 34 cents.

Dragan Trajkov with Salman Partners in Calgary said non-cash charges were greater than expected and slapped the shares with a "sell" rating.

Suncor's shares lost 20 cents on the Toronto Stock Exchange, to close the day at $36.