Suncor Energy Inc (SU) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Petro-Canada 2004 third quarter earnings results conference call. I would now like to turn the meeting over to Mr. Gordon Ritchie Senior Director of Investor Relations. Please go ahead, Mr. Ritchie.

Thank you, Operator, and good morning everyone, and thank you for joining us today. On the call this morning are Petro-Canada's Chief Executive Officer, Ron Brenneman, Harry Roberts, the Chief Financial Officer, and Helen Wesley, our Senior Director of Corporate Communications. Ron is actually joining us from New York where he will speak at the Merrill Lynch conference later today. As usual, we provide forward-looking information during the call, so, please, refer to the disclaimers in our disclosure material. Ron and Harry will comment on third quarter results, and then we will open up the lines for questions, first to the analysts and then to media. As always, Derek and I will be available after the call to answer any detailed modeling questions, and that should allow us to focus on key business issues while we have Ron and Harry on the call.

So, with that, Ron, I'll turn it over to you in New York.

Thanks and good morning, everyone. As Gordon said, I'm here in New York, right after the election, which, as predicted, is close and interesting. I'm not so sure the one coming up in Alberta will be such a cliff-hanger, but at any rate, the Democratic process is never dull. The same could be said about Petro-Canada.

We had a notable quarter in two respects. First, we continue to make strides toward our long-term. The most significant milestone was the sale of the government's remaining interest in Petro-Canada. The sale removed any uncertainty about when the government would (indiscernible), and significantly broadened their shareholder base. We estimate that well over 40% of our shares are now held outside Canada. We also advanced a number of strategic initiatives in the quarter. The Prima deal closed, and we began integrating those U.S. Rockies properties, and at the same time our LNG strategy started to take place with the signing of two complementary agreements. But, the second notable, our quarterly financials did not meet expectations. This was, primarily, due to events in the downstream business and in East Coast Oil, though I will start my review today with those two businesses.

The downstream shortfall was due to a continuation of tough competition squeezing marketing margins, as well as two new factors. Petro-Canada is a pig player in the asphalt and heavy fuel oil markets in eastern Canada. Currently, about 22% of the yield from our crude runs at Montreal and Oakville ends up in these two products. In the third quarter, benchmark prices for both failed to keep pace with the crude price run up. Light heavy differential prices widened, causing refiners to switch to heavier crudes. The result has been an over supply of heavy products depressing northeast prices for both asphalt and for heavy fuel oil. The earnings impact of these factors was about $20 million during the third quarter. While these market fundamentals are carrying over into the fourth quarter, our exposure will diminish as we wind down operations at our Oakville refinery.

The other unique factor in the quarter relates to the closure of Oakville. If preparing to wind the operation down, we are starting to draw down crude inventory, and in the third quarter we started with the heavy crudes which had a negative inventory evaluation effect. This lowered earnings by about $10 million. Now, as we draw the remaining lighter inventory down over the next two quarters, we expect this negative adjustment to reverse. For the most part then, these factors will improve as the market corrects itself and as we wind down the Oakville refinery. More importantly, we continue to make progress on improving the fundamentals of the downstream business. Deep bottlenecking at Montreal, to offset the Oakville closure, is on track with a 35 day turn around in the fourth quarter for tie-ins. Lubricant sales in the high margin markets are running 11% over last year. Sea store sales are up 13% over last year with same-store sales up 9%.

But, our marketing folks introduced two creative new cards, a gasoline discount Master Card with Citibank, and a discount card with a GM car sales promotion. Our unique ability to partner in these cross promotions is a real competitive advantage for us. The other item which impacted third quarter financial performance occurred in our East Coast Oil operations where the planned turn around of the turnover FPSO took longer than expected. Additional repairs to the compression system, crude oil heater and riser valves significantly extended our planned two-week shutdown. Because of flaring limits, Terra Nova had to operate at reduced rates until mid October, and our share of the impact was about 1 million-barrels of production. Some of this is coming pack as flush production with the FPSO currently back up and running at about 165,000 barrels a day. Hibernia continued its stellar performance, with quarterly production averaging more than 200,000 barrels a day.

In Oil Sands the MacKay River plant had a successful five day turn around in September, this allowed us to install new heat exchangers and water treating equipment for improved reliability. The plant has had uninterrupted operations since restarting, and production is now about 20,000-barrels a day. Since June we have seen continued improvement in performance with third quarter reliability at 88%. And, Syncrude continued its run of three consecutive quarters of solid operations. So, Oil Sands was a big factor in our quarter over quarter gains.

Our North American natural gas business had a solid quarter. We closed the Prima acquisition, and launched our 100 day integration plan. We've appointed Don Clake(ph), formerly VP of production in western Canada as VP, U.S. Rockies. We also managed an employee retention program, and insured critical systems were in place for business continuity. The U.S. Rockies performed well in the quarter producing 56 million cubic feet a day equivalent. We're becoming more familiar now with the assets, and we are still very confident we can double this production by 2007. As a matter of fact, North Shell Draw(ph), which is the first of four new coal bed methane projects saw higher than expected initial production in the quarter. Looking forward, our permitting situation is on track to drill more than 200 locations next year.

Now, when we acquired Prima, we expected it to be earnings neutral in 2004. In fact, it contributed positively to third quarter earnings, which is a good sign of the value of that transaction. Another good news story in the North American natural gas business is in gas marketing. In the first half of 2004 our gas price netbacks rank number one against peer groups in western Canada. This translated into more than $30 million of incremental revenue during the first half of the year. This is another example of our focus on improving the profitability of existing operations.

In International, we advanced on our strategy to build the long life asset component of our portfolio by signing LNG agreements with Gazprom and TransCanada. It's still very early days in those developments, but those first steps are important. The projects we currently have underway in the north sea, Pict, Buzzard and De Ruyter are all progressing well.

That wraps up my operational comments, so, over to you, Harry, to cover the financial highlights.

Thanks, Ron. Topping the list of financial points was our share repurchase program. Following the sale of the government block, we repurchased a maximum allowable number of shares in the 30 day period, about 5.3 million shares. All together to date we have repurchased about 6 million shares at cost of approximately $390 million. We see this as value adding, so, we intend to carry on with the program as long as that remains the case. As well, in late October, we filed a base shelf prospectus which will give us additional flexibility to issue long-term debt in U.S. capital markets over the next two years.

In other financial matters, cash flow was affected by the two items that typically cause differences between earnings and cash flow. Tax deferrals resulting from our upstream partnership decreased cash flow by approximately $35 million in the quarter, compared to an increase of $5 million in the third quarter of last year. And the LIFO FIFO effect in the downstream reduced cash flow by about $35 million, compared to an increase of $7 million in 2003. The effect of these two items, therefore, was to lower cash flow by about $82 million, compared to third quarter last year. For the first nine months of 2004, these two factors have lowered cash flow by about $300 million, compared to the same period in 2003.

So, those are the main items from my end. Back to you, Ron.

So, to sum up the quarter, some unique conditions resulted in earnings short falls in both the down stream and East Coast Oil, but we remain on target with our annual production guidance, and we made some great strides toward our long-term strategy. So far, this has been a good year for us. Operationally, all our key projects remain on track. Strategically, we entered negotiations on the Syria middle area gas project, we purchased the position in Buzzard, acquired Prima and began collaboration on two components of an LNG project. We've also returned cash to shareholders, first with the 50% dividend increase, and second with the share buyback.

This all represents very significant progress on our two-part strategy to improve the profitability of our existing operations and to deliver profitable growth. While this growth may be lumpy as we bring on new projects over the next couple of years, I believe Petro-Canada is in a strong position to create shareholder value, not only in the near term but also in years to come. Back to you, Gord.

Thanks, Ron. Before we begin answering questions, I do want to you to know that we expect to share production and capital spending outlook for 2005 on December 20th, so, I'd ask you to circle your calendars for a conference call on December 20th. We now would be pleased to answer questions from investors and analysts, and then when yours are done, we'll take questions from the media. Over to you, operator.

Thank you, Mr. Richie. (Operator instructions) The first question is from Alan Stepa Salman Partners. Please go ahead.

In your past presentations you have always shown a chart that depicts the up coming shorter and longer term development projects for the Company. Given all the recent acquisitions, are you now comfortable with the distribution of shorter, medium and longer term projects? Or, do you still feel the need to add additional medium-term or short-term products to that portfolio? Thanks.

Alan, to the extent we see opportunities to do so, of course, we'd be happy to slot some more projects into that near term picture. And, I think, it's also important to recognize that, we have a pretty good portfolio of the longer-term projects, we are always looking to add to those as well. So, we've also been quite consistent in saying that, our first priority is always to add good projects to that list and build on the profitable growth that we have been seeing over the last few years. So, the answer is, yes, if we see the right opportunities we will do so.

And, just one follow-up question. As far as costs, both on the capital side, as well as in the operating cost front, are you seeing a lot of cost pressures there, and potentially could you, you know, be cutting your activity levels to maintain a certain capital budget next year? What are your thoughts going forward into 2005, in general?

We are seeing cost pressures, the same as everyone else is. I think, the western Canada basin is probably most indicative of that. If you take steel prices alone, which are up considerably over last year, it's adding about 10 cents, that single factor is adding about 10 cents to our F&D costs. And, we are seeing increase costs for things like trucking services, and rig rates, same as everyone else is. And, of course, that is a concern to us. On the other hand, we have been pretty successful in adding investment opportunities to our portfolio. If you think about Buzzard and Prima, for example, those do require some capital to bring them onstream, so that we -- I mean we have seen our capital program increase pretty consistently here over the last couple or three years to the point where it is about 3 billion today, and I would expect, although we haven't put our business plan in total together yet, but, that that will be up a little bit next year again.

But the emphasis would be on executing the program as opposed to maintaining a certain budget level in '05.

Absolutely. Our budget is always zero base from the ground up, and it is aimed specifically at what it is we see as being attractive, not some predetermined capital level.

Great, thank you.

Thank you. The following question is from Greg Pardy from Scotia Capital. Please go ahead.

Good morning, Ron. A couple of questions. Just first on Syria, could you bring us up-to-date just on where you stand with the middle area gas development project? Because, I know it was released back in -- or negotiations, I guess, were beginning back in April. And, I guess as a follow-up to that is, in the absence of that deal coming through, does it make a whole lot of sense to stay in Syria, especially given the declines you are seeing there? And, the last second part is just a housekeeping item, could you break out Terra Nova and Hibernia crude production in the quarter? Thanks.

On the middle area gas, Greg, you're correct, we have been negotiating that since we were awarded the rights back in the spring, and we are still making progress on that. There is still some last, some final details that are outstanding that we are in discussions with the National Oil Company and the Minister on those items. The question about staying in Syria, I mean, this is still a pretty substantial production base for us, if even though it is declining, and we do have the Block 2 exploration block, which we are quite interested in, and in fact, are starting a program on this winter. So, there are other opportunities in Syria, although, the middle area gas project is one that we see as being particularly attractive. Gord, I don't know whether you have that breakdown, or whether we had it in our release, the third quarter Terra Nova, Hibernia volumes?

Right. Greg, Petro-Canada share of Terra Nova production in the third quarter averaged 30.2 thousand barrels a day, and Hibernia was 41.3 for a total of 71.5.

Okay, thanks very much.

Thank you. The following question is from Leslie [LaFave] from The Ontario Teachers Pension Plan. Please go ahead.

Thank you. Ron, just wondering if you could comment at all on what sort of reserve replacement rates you are hoping for this year?

Are you asking about western Canada in particular, Leslie or?

No, corporately.

We haven't really tried to put together a corporate picture at this stage, because, as you know, we have had quite a bit of activity with the acquisitions and all, and it is always a little risky to even suggest any numbers that haven't been totally vented. But, on the western Canada side, I would expect, you know, given the kind of progress we have had so far this year, that we will come in pretty close to what we were last year on a strictly program basis. So, in around the 80% range. That would be excluding the Prima acquisition.

Okay. Thank you.

Thank you. The following question is from Andrew Fairbanks from Merrill Lynch. Please go ahead.

Good morning, guys. A couple of questions on some potential longer term opportunities. Ron I, I was wondering if you could give us an update on the potential reactivation of Hebron, how that potential project looks? And also, any update you can give us on the northern Kuwait oil fields.

On Hebron, Andrew, we are still negotiating the joint operating agreement that would allow that project to proceed, so, it is still being worked on at this point. And there is still, I would say, one or two outstanding issues, none of which are super critical at this point so, I'm optimistic that we will see that come forward here in the next couple of months. On northern Kuwait, not much new to report on that. This -- the -- the issue is still before the parliament in Kuwait. We, as you know, we have been qualified as one of members in one of the three consortia that are -- that have been accepted as qualified bidders on that project, but at that stage, status is unchanged.

Very good. Thanks.

Thank you. The following question is from Mark Gillman from Benchmark. Please go ahead.

Guys, good morning. I had two questions this morning. Ron, I wonder if you could give us, if you have any, particular thoughts regarding implications of EnCana's decision to divest its Buzzard interest as part of its restructuring program. The second question relates to the LNG relationship with TransCanada. I'm curious, I guess, as to a bit more specifics in your agreement there. In particular, whether you will go ahead with this project on a speck basis if it can't be back -to-back linked with a specific supply arrangement, and what it actually means to you in terms of your supply obligation for that terminal?

On the EnCana sale, Mark, I'm not going to comment on what their strategy might have been in doing so. It is no secret that we find that asset Buzzard, in particular, to be very, very attractive. So, quite frankly, we are happy to have Nexon(ph) as a partner in that. I think Nexon has the capability to be a good operator. They have got some good experience offshore.

And the LNG question, Ron?

LNG question, the question was whether we would go ahead without a supply?

Yes, and the extent to -- exactly what your obligation to supply the facility means, I guess I'm a little bit confused as to the nature of the agreement that you have as a foundation for this project. Are you actually going to own 50% of this terminal from an equity standpoint? How does all that work?

The way that is set up is we are 50/50 owners in the equity and the project. TransCanada is the designated operator. Our obligation is to supply the gas and to market the gas. And that is -- so, we have 100% of the throughput rights, if you want to think of it that way. The question of whether we would go ahead without a supply or not, the fortunate thing is that we have about a 2 year period here to work our way through the approval process, in which time we would expect to be able to line up a supply for this particular project. So, you know, in two year's time we will have to make that call, but I would expect that by then we will have supply lined up.

Okay, Ron, thanks a lot.

Thank you. The following question is from Wilf Gobert from Peters & Co. Please, go ahead.

A couple of my questions have already been answered, so, I will turn to Oil Sands. Can you just give us a little expansion on how things are going at MacKay River, both in terms of the water quality? And secondly, when you think you might reach the project capacity?

The water quality issues we are really quite pleased with the progress we have been making on that, Wilf. Since June, since the beginning of June, in fact, we have had our water quality totally under control, so, we have been able to operate the co-gen well within specifications. Of course, the plant did come down for the five week turn around, I mentioned, and the co-gen came down at the same time. But, to the extent that both the upstream and the co-gen plant were available, the integrated project has been running quite well. I would say that from a reliability point of view, we have gotten things well under control at this stage. And certainly, with the capital improvements that we made during the turnaround, by putting in some additional heat exchangers and putting in some deoiling equipment, which was the big problem with water quality, we should be able to sustain a very high level of reliability, and that is what we are counting on in our business plan for 2005. So, your second question was?

When do you think you might get to the -- I think it is 30 or 35,000 barrel a day level?

We are actually -- we are actually changing our strategy here a little bit, Wilf. One of the things that we are not sure of is, what the ultimate capacity of this plant is. We know that we have spare steam capacity, because the co-gen basically duplicates and actually exceeds a little bit the four steam generators that we started up with. So, we have spare steam capacity. We are not sure what the water handling capacity will be since we put in this additional equipment. So, what we are doing in our 2005 budget, which you will hear a little bit more about in December, is we are advancing the next pad that we were planning to add about two years out, and starting work on that next year. So that we will -- we will ultimately have more reservoir capacity, we expect, slightly more, than what we think the plant will do, and that will allow us to -- to -- to basically kind of stress test the plant, if you like. But, more importantly, ensure that we can always run flat out from the plant's point of view, and even look for opportunities to be bottlenecked, if they do exist. So, we kind of changed our strategy a little bit there in terms of making sure we have got over capacity on the reservoir side. Now, the question of when will we meet -- it's relevant to the question of when will we meet full capacity here, because in bringing on those additional -- bringing on that pad early, one year earlier, and doing some of that drilling in 2005, we are actually going to have to take a couple or three well pairs off for about two or three months, because the new wells are in a fairly close proximity to those wells that are already steamed and over pressured, so that from a safety point of view we need to shut those down. There is probably going to be a little short-term pain here for long-term gain, if you want to think about it that way. We can be more explicit about that when we talk about '05 volumes in December, and we have the plant all put together and we understand what the implications are. But, essentially, that is what our thinking is.

Okay. And just buy extension, I haven't read through all of the press release, maybe it is in there, but could you tell us what the steam oil ratio has been doing for the last two or three months?

We haven't actually put that number in there, Wilf, and I don't have one in front of me. But, the last time we looked at it, it was running to our design rate of around 2.5.

Gordon, if you have more up-to-date number, I would appreciate here hearing that later, thanks,.

I will follow up, Wilf. One little comment, Ron, you mentioned the five week turn around at MacKay, it was actually a five day turn around at MacKay.

Yes.

Okay.

The following question is from William Lacey from FirstEnergy Capital. Please go ahead.

This is Steven Paget, actually, and my question is, would Petro-Canada be interested in selling its 12% share in Syncrude if it were to get a reasonable metric for it?

We (technical difficulty) it sits very well with our drive towards increasing the mix of long life assets in our upstream portfolio. It is very closely integrated, as you know, with our Edmonton refinery. We process all of our Syncrude entitlement there. So, it is an asset that we see a lot of value in. It has expansion capacity. It really has all the attributes that we would be looking for, so, it is not something that we'd be looking to sell.

William Lacey here. A couple of quick questions for you. On the -- first, on the LNG, I was wondering if you could maybe give a little more clarity as to what sort of hurdles we should be look for over the next 6-12 months, and with your $660 million capital costs that you have outlined right now, sort of, how comfortable you are with that number? And secondly, on your share buyback, one of the comments that you made is that you will continue to pursue this as long as it is value adding. I was wondering if you could give a little bit more clarity as to the benchmarks you are using to reference that against?

On the LNG, William, a couple check points, first of all, the agreement that we have with Gascon(ph) is for a study that should take us about 6 months. So, at the end of 6 months we should have an understanding of what a commercial arrangement and the viability of that would look like. On the regasfication side, we are basically looking, as I said, at about a two year permitting and approval process. You will see check points along the way, obviously, as we file applications and we get initial reaction, but I would say that so far we are quite pleased with the -- with the kind of reaction that we've got from the local community. In fact, it's been the very heart of this particular project. The 660 number is very early. We haven't done any real --

Okay. Still there?

Yes.

Can you hear me all right?

Yes. Sorry, broke off a bit there.

Did you get what I was talking about, William?

Not the 660, no, you were just starting on that.

Well, the 660 is basically a very rough number. We haven't done any of our own front end engineering on that at this point, so it is more a like alike number. And, your question about the NCIB, there's always a few factors that come into play there, one of which is, what other alternatives do we have for investing our capital? As I have always said, we are looking for good opportunities, and so that the NCIB basically competes with other good projects that we might seem but I would say that at the kind of prices that we are seeing these days certainly on a relatively basis, from our point of view, it is pretty good value to do the repurchase.

Ron, just following up on your LNG comment, Ambridge, obviously, is running to some hiccups as far as their regasfication facility, and I was just wondering why you think your facility sort of has an upper hand, with respect to the permitting and ultimate success?

Well, I'm not sure that we would consider ourselves having an upper hand, William. I can only say, that in absolute terms, we seem to be getting a pretty good reaction from the local community. Our site is much more remote than the Ridaska(ph) site, which is closer Quebec City. And, that seems to be the issue for that particular project.

Perfect. Thanks, very much.

Thank you. The following question is from Martin Molyneaux from FirstEnergy Capital. Please go ahead.

Ron, apologies for getting on a bit late here. But, in terms of refining and marketing, I guess my question is, how did October look, and are you more back on track to be kind of a 30 million a month contribution that you were in the first half of 2004?

Well, Martin, of those two factors that I mentioned, the heavy oil product margin, is continuing into the fourth quarter. Because, the same fundamentals that are -- that drove it there in the first place are still there. And in effect you have got very high crude prices. You have got most of the incremental crude coming on the market as heavy crude, which has widened the spread, and, as a consequence, refiners are choosing to run heavy crude, and that is putting a lot of asphalt and heavy fuel oil on the market. And, because we have a disproportionate share of the heavy end of the barrel market in eastern Canada, we tend to be disproportionately hit with that. We see that pretty much continuing into the fourth quarter, and what I indicated in my remarks is that, from our own perspective as we wind down Oakville we will be running light crude in the first quarter in order to meet the sulfur specks, because we don't have the desulfurization equipment there. I think we've indicated in the past that we are going to run one of the two trains through the first quarter, just to make sure we get through the ice situation in the seaway through the winter. So, that -- so, from our own product point of view, that factor will diminish, but in the marketplace it looks like it is hanging in there. The other factor was the LIFO effect on inventory, which will, indeed, reverse itself, because, we preferentially pulled down heavy crudes in the third quarter, which, because of the mix effect, has a negative impact, but, as we pull down the lighter crudes out of the tanks in the fourth quarter and the first quarter that will reverse itself. So, I guess the answer to your question is, we will probably, if I were to make a prediction now, for the fourth quarter we won't get back to the -- we won't quite bet back to the running rate because of that heavy product spread situation.

Great, thank you.

Thank you. The following question is from Brian Dutton from UBS. Please go ahead.

Hi, Ron. Just continuing on the downstream discussion there. You mentioned in your opening comments that forward on margins or profits were squeezed. We saw them come down from, I think it was 15 million down to 7 million, and you cited that there was intense competition. Noticed that your gasoline sales were down 3% year-over-year. That's not the trend we have seen from some of the big other national firms. So, I was wondering if you could, one, comment on the trend that we saw in the quarter on your gasoline sales, and second, how that is impacting your ramp forward profitability?

This is largely in greater Toronto area, Brian, so, you're probably seeing this out on the street. But, what is actually happening in the marketplace is, the market is not growing that much, and as a consequence, if you are an individual marketer and you start to see your sales go flat, or even decline, because the market isn't growing, you start to think that you might be losing market share, and the answer to that is to lower the price. And, so, that kind of psychology is what is causing a lot of the price competition in the greater Toronto area in particular. And, I haven't actually compared our sales numbers against others, we do look at our market share, and we know that we are pretty much holding our own there. So, that that is not a particular concern to us. We know that we are pricing competitively in the marketplace, but it is a situation where because -- because of the market situation, you're going to continue to see pretty -- very intense price competition, and this is going to be a tough business for the next little while.

Is there a knock on effect then on your Sea Store sales?

No. Oddly enough, as I indicated, our Sea Store sales, I think I said they are up 13% and out same store sales are up 9%. So, the fundamentals of the business, things that we really can control and drive, are actually continuing to perform very, very well. So, while the margin is always a concern,, we are driving the things we can control, and I'm particularly pleased with the kind of results we have had on that one.

Okay. Great. Thank you very much.

Thank you. The following question is from Mark Heim from Orion Securities. Please, go ahead.

Hi, Ron. I was wondering if you could comment at all on the ongoing EPSA-4 round in Libya, and if you see your guys as having any competitive advantage with respect to some of the competition give than you guys are already a qualified operator in Libya? And, in general what the competition has been like, and what you have seen from the U.S. nationals?

We are interested in a couple of blocks from the EPSA-4 round, and I think they did publish some information that our name is on the list as a qualified operator. Of course, we've got, through our Veba presence, a long history in Libya, so we understand a lot about the geology, and the fiscal terms, and how things work, and the players in the game, so, I think that gives us a slight leg up over the American companies that are just getting back into it. But, I wouldn't underestimate the competition. It is a very attractive place to be, and there's a lot of companies see it that way. So, we will just have to see how this unfolds. It is going to be a competitive tender for the EPSA-4. It will be very transparent, so, we'll just have to see what the results look like.

Now, would this be incremental to, essentially, I believe, bids are going to be announced somewhere around the second week of February. Would this be incremental capital for 2005 if you were successful above what you guys are planning to release on December 20th?

Typically, Mark, there is an up front bonus payment associated with these, as well as a program element that you commit to, so, there would be some incremental capital in 2005, if we were successful.

Is this more longer lead? Or do you see that this could actually translate to pretty quick activity over the next couple of years, and even translate to maybe some volume accretion by the end the decade?

Libya is blessed with a pretty good infrastructure. They've got three major basins in that country, all of which have infrastructure connections into them. So, while it's not like the western Canada basin, where you can turn around things in months, it is certainly not several years either. I classify it as more medium term.

All right, thank you very much.

The following question is from Robert Plexman from CIBC World Markets. Please, go ahead.

Good morning, Ron. I have two more questions on the downstream. First of all, can you tell us what impact rising steel and labor costs is having on the projected expenditures for the Edmonton refinery project? And secondly, looks like you're going to keep Oakville open a little bit longer and -- and is that going to have an impact on the operating costs in the early part of next year?

On the steel question, Robert, we are not -- basically our project at Edmonton is on track, both time and on budget. So, if there are impacts of steel costs per se, we are -- we are based to offset those in other areas, and in total it is still very much on track. With respect to Oakville, it will -- it will basically be earnings neutral through the first quarter. Because we are -- we are having to run light suite crude instead of the normal diet there.

Thank you.

Ron, just, Gordon here. Just jumping in on while we were talking about the downstream, just following up on Brian's question about retail gasoline sales. If you look at our retail gasoline sales quarter over quarter, they are actually up very slightly, so the retail sales are holding nicely in the marketplace. The -- where we have seen a little bit of weakness was through our wholesale channel where we have had a slight reduction of gasoline sales, I think in part due to the fact that we are working towards an eastern Canada consolidation, but, the retail sales are actually up quarter over quarter. Back to you, operator.

Thank you. The following question is from Tom Ebbern from Tristone Capital. Please, go ahead.

Following up on the MacKay River questions earlier. The comments that you are not quite sure what the capacity of your water handling, and can we take that to be that with the -- with the additions or in picture to the previous problems that your belief is that the capacity is well in excess of the 30,000, and that with the incremental acceleration of the next project that you would anticipate filling up that volume with that? In further, with the expansion or that next phase, can we take that to understand MacKay River will be the one that is expanded in fueling that next phase of growth, versus additional development or development of Meadow Creek?

On the water handling capacity, Tom, we just don't know. You know, the maximum that we have actually run on a daily basis there is 23,000-barrels a day. It was designed for 30. But we haven't really tested that. So, the idea of -- that I mentioned, from a strategy point of view, is to give us the ability to really test that and see if there aren't some low cost de-bottlenecks we could make that might even give us a little more capacity. That is really unrelated to where the next project would be. We still have a winter drilling program to gather some more information both at MacKay River and Meadow Creek, to help us determine which, where we should site the next project. So, the next project would be a complete expansion -- a complete new project, if you like, with its own facility. So, independent of the existing MacKay River, but perhaps seeing some synergies if it were a MacKay River expansion.

Just so I understand, when you said you are accelerating the drilling of the next phase, that was still with respect to the original 30-35,000 barrel a day phase from MacKay River?

Yes, that's right. The number is really 25-30,000, not 30-35 . Original design was for 30 on a stream day basis, which would equate to, sort of, 25-30 on an average basis.

Okay. Thanks very much.

Thank you. This concludes the financial analyst question and answer session. We will now take questions from the media, please press star one at this time if you have a question. The first question is from Moira Baird from The Telegram. Please go ahead.

Hello, good morning, Mr. Brenneman. I'm wondering if you could provide a little bit more detail on the reasons for the extended turnaround at Terra Nova.

Those were principally mechanical issues that we encountered when we went to start up the facility. It was taken down originally for some routine mechanical work and to fix the crack that we had in the flare cup(ph). And, as we started to bring the facility up we encountered some problems with the gas compression. So, without gas compression, we are unable to inject into the reservoir and we have to flare, and the CNOPB has some limits on the amount that we can -- that we can flare, which means that we have to cut back production as long as we are flaring. And so that -- the repairs on the compressor equipment, in particular, is what took us to that limited rate through to about the middle of October.

If I can have a follow-up question, the riser valve that was mentioned. What was the problem there.

This was an issue with a connection on a couple of the risers that come up from the sea floor and connect into the FPSO, which are now behind us. So, those are -- those are essentially fixed up, but really, the critical path item was the repairs to the compressor equipment.

So, you should be back to full production for the month of November, I take it?

Yes. In fact, we are running in around the 165,000 barrel a day range, today, so, it is actually running quite well.

Okay. Thank you.

Thank you. The following question is from Ian [Makinen] from Bloomberg News. Please go ahead.

Hi, there. Just to clarify. Did you guys actually bid on Buzzard stake? And then on strategy, north sea, where are you going there?

We are in discussions and bidding competitions on a number of projects at various times, Ian, and we really don't comment ton that. So, I can't say anything more than what you might have read in the newspapers. And the question about the north sea was?

On your strategy, just because like Nexon is going in there, Canadian Natural is in there, Talsmon(ph) in there, meanwhile, here's some of your large competitors such as Exon-Mobil are exiting. On a long term, what are you guys trying to do in the north sea, and how important or what is the rank of the opportunity there versus a Libya heavy oil in Canada, take your pick?

First of all, we are a significant player in the north sea. We produce about 50,000 barrels a day of oil equivalent there on both the Dutch and UK side.

I'm aware.

And, we see being able to sustain that production from our existing assets, as well as some small add ons, some projects that we are bringing on over the next couple or three years here, out through at least through 2007 at this stage. And then, of course, on top of that, we would have the Buzzard production on in late 2006. So, it is an area that we -- we particularly like. It is a very high netback area. It looks a lot to us like the east coast of Canada, in terms of kind of profitability and cash flow it can generate. We don't tend to rank our areas. They are kind of like our kids, we like them all.

Follow-up question, just one more. In terms of coal bed methane, what are yoir plans of using some of the expertise you got from Prima in Canada, and how that plan progressing?

Prima is doing very well for us. Still early days in terms of transferring knowledge and technology up to Canada, but we do see, particularly it's not so much in the coal bed methane in the early days, but more the unconventional expertise that we have in the Denver-Julesburg basin, and the kind of play extension that we branched out into recently into what we call the deep(ph) classics(ph), which are in the four foothills area of Alberta. So, ultimately, there will be some opportunity there, but at this stage, pretty early days to say how that might work out.

Thank you. Once again, please press star one at this time if you have a question. The following question is from Patrick (indiscernible) from Globe and Mail. Please go ahead.

Hi, there. Just a quick question or two about the feasibility study in Russia. I'm wondering what role, if any, does the affect(ph) LNG proposals have on this? Is that the possible term (indiscernible) for what would be coming out of St. Petersburg?

That is the idea, Patrick. What is particularly appealing to Gazprom, in this case, is the ability to bring gas into the North American market through Canada, which is a lot more economic than it is taking it into the gulf of Mexico, for example, because the actual voyage is about ten days shorter, so, if you do the math on the netbacks they see a lot better price Canada than they do through the Gulf of Mexico. That an important ingredient in the connection here.

One point, I think you talked about sort of being interested in more than one regasfication facility on the east coast of North America. Is that still in the cards, or are you thinking that Quebec facilities sort of the best go there?

We have some discussions going on on a couple of other opportunities, Patrick. It is still early days and not clear whether they will come to fruition or not, but we still remain interested in more than one LNG project.

And might one of those be on the Gulf of Mexico coast, then?

It would more likely be on the Gulf of Mexico, right.

And, then, just one more final question then, on the Stockman field, is that sort of prime candidate for the supply into St. Petersburg, or is it lower down on the list?

It is a two-Stage strategy. The initial gas would actually come off the grid, so it would come from existing production in Russia, and that is why the St. Petersburg location is important because it is actually connected to the grid. That could subsequently then be replaced by gas coming out of Stockman. That is part of the thinking here.

Thanks a lot.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ritchie.

Thank you, operator. And, once again, we were glad that you could all join us, and thank you for your interest in the Company today. If there are any further investor questions you can contact my colleague, Derek De Leon, or myself. And, media, you're welcome to follow up with Helen Wesley. Thank you, and have a good day.

Thank you, gentlemen, the conference has now ended. Please, disconnect your line at this time. We thank you for your participation and have a great day.