Suncor Energy Inc (SU) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Suncor Energy's Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. John Rogers, Vice President of Investor Relations. Please go ahead, Mr. Rogers.

Thank you, Jenny, and good morning everyone. And welcome, as Jenny said, to our fourth quarter conference call. I have Rick George, President and CEO, with me, and Ken Alley, our CFO. We'll follow the usual format. Rick will kick it off with his introductory remarks. Ken will make a few brief remarks. I'll talk a bit about the outlook, and then we'll open it up for questions. So Rick, why don't you take it right away.

Thank you very much, John. And I'm delighted to be here this morning with you. And obviously you guys have received the release on our fourth quarter and year-end results.

And I'm pleased to announce the 2005 earnings of $1.1 billion, roughly, and cash flow of 2 billion. And by all accounts, I'd have to say the year was mixed. We certainly had our share of challenges. We also made some progress in some areas, and I'll talk about those more in just a moment. But, you know, I'd say we're not completely satisfied with the year as we have it in the rearview mirror here.

Obviously, commodity prices kind of dominated the horizon. The average realized price was US$45.60, which was 13 percent higher in 2004 versus 2003. Production from our base operation in Oil Sands faced many challenges. And although we were within four percent of our original production target, we did not meet the Suncor standard or our own expectations in terms of our goals. I know we're going to do a lot better in the future, and that's something that's a big, key issue for our leadership team.

The one area that doesn't seem to receive much attention was WTI in the forties, but I assure you that it is front and center is our cash operating costs. We basically held the line this year with cash costs at $11.95 Canadian.

The other-- other than the [inaudible] challenge, I'd have to say that I'm very encouraged with the response of the Firebag project, and the reservoir particularly has performed very well. And, you know, we have every expectation that it is going to achieve it's full potential. And, you know, you'll continue to see, once we get the plant line back out, you'll see it kind of moving towards its full potential. In the meantime, we would expect Firebag to kind of hover around the 17, 18,000 barrels a day, and that's more of a diluent limitation than it is anything. So, after we get the plant fully up and operational, then you'll see the Firebag reservoir take off.

Some of the individual wells there are performing even above expectations. You have some in the whole range from just starting up to doing very well. So-- but the Firebag project itself, from my viewpoint, looks very, very good.

Now, the fire in-- it was actually January 4, 2005, was very unfortunate. I will say that I'm very glad that we had no one injured or hurt in that incident. And I'm also extremely proud of the organization in the sense of how they've responded to the challenge of this. I mean, we've got people who are obviously working full-time, around the clock on both the cause but also on the repair of this equipment. And I'm very proud of how the organization has come back on that.

Now, once we get it back on stream in the third quarter, our production capability will increase, because the vacuum tower is going to be done around that same time. So, our capacity will be up by about 15 percent. Now, this may be late in the quarter, but 260,000 per day, because what we'll do is we'll start up the U-2 unit, get it up and smooth it out, and then we expect to start the vacuum tower very quickly thereafter. And, obviously, the turnaround that we had planned in the fall for the upgrade at number 2 obviously will take place now through this fire recovery time period.

We actually have made-- also made great progress on the construction of Firebag stage 2, and that will be tied and the steam will be started here in the late fall of this year.

All of our capital projects, and this something I'm very proud of, including the vacuum tower, Firebag phase 2, our projects in Denver, and our projects in-- starting in Ontario, are kind of basically on time and on budget. And, of course, that's very important, and that goal I think shows kind of the long-term viability. And, you know, I can't promise that's always going to be the case, but we're working very, very hard to make sure the control of those capital costs as well as control of our operating costs are as good as we can make those. I mean, obviously we are facing inflationary pressures on both fronts, but again, I'm very proud of the job that those major projects groups have done with that.

And one of the highlights of the year was our natural gas business. It had a fantastic year. And I want to personally thank Dave Byler [ph] and his entire team for the magnificent job they did this year. They grew natural gas volumes by some 7 percent. And now the only difficulty thing with that is it brings expectations for 2005, and Dave will be smiling at that one. But, you know, we would expect them to grow volumes by another 5 million cubic feet a day this year. So, they've had just a terrific run and I'm very proud of the work that they've done.

Now, although we've had our share of operational challenges in the downstream, particularly in the first and the second quarters, the last six months of the year, those assets performed very well, and actually, their return on capital numbers were actually very solid for the year.

The expansion work, as I mentioned earlier, at Sarnia and Denver is progressing well. And, obviously, those things will be coming, those units will be coming on, some of them as early as this fall, and many of them will be coming on next spring as we prepare to make sure that we're getting ready to run and produce low-sulphur diesel, and then also improving the ability of both those refineries to run sour production as we go forward, more sour production.

In any operating environment, you're going to be thrown, you know, your share of challenges. In 2004 and the first few days of 2005 were very unusual in the number that have been thrown our way. And, you know, what I will tell you is I think we've collectively got the team together. It's very focused on where we're going here. And I think in the rearview mirror, 12 to 18 months from now this will be seen as a big challenge but one that we've overridden and handled as well as we can.

On a going forward basis, our focus is as follows. Obviously, recover from the fire in a safe and a timely manner. And, you know, what I want to do is the safety of our employees and contractors is number one, and so while we are in a hurry, we're going to do this in a way that minimizes the risk to the personnel working.

Operational excellence in all of our businesses, and this is an ongoing journey. What I would say is that in the next three to five years you're going to see us transform this company into a much better operator as well.

Ensuring that the tying in of the MVU, that's that vacuum unit, goes well, and that we move that production capacity to 260,000 barrels a day, you know, in a reasonably timely period, and that certainly will be in the late third quarter, early fourth quarter of this year.

Ensure that our Oil Sands pitting [?] remains on time and on budget. Ensuring that our Millennium Coker Unit project, which is the next leg of growth, remains on time and on budget. And that we realize our production capacity of 350,000 barrels a day by 2008. And you've got to remember that's 55 percent greater than where our capacity was pre-fire. So, you know, you're going to continue to see growth, continue to see volumes here over time.

And then, of course, finalizing our Voyager plans, which is our growth, post-2008. So, you know, while we're right now in the recovery mode here, we're also very focused on the future.

These challenges are obviously for our organization immense. But I will tell you this, I think we've got the people and also the drive to get this done.

So, with that, I'm going to turn it over to Ken to handle the financial side of this. Ken.

Thanks, Rick. And good morning everyone. I'm just going to make a couple of comments on the balance sheet before I pass it back to John to cover the outlook. And, you know, Rick went through the financial highlights of the year.

I will say that we did-- we were able to take advantage of the strong financial performance this year to further strengthen the balance sheet. Net debt ended the year at about 2.16 billion, so we feel that we're well positioned going into 2005 with strong financial flexibility to progress the plans that Rick talked about as we work to repair the fire damage, and work closely with our insurers to sort out the insurance claim over the course of the year. So, we think the balance sheet is in very good shape going forward.

I think most of you know that the hedge position is down dramatically this year from last year. We still have about 36,000 barrels a day hedged at about $23 a barrel, but that's substantially lower than the hedge position in 2004, and much more exposure to the current commodity price environment. And we have no plans at this point to add any more hedges. So, the strategy is still to use the balance sheet as we go forward and not hedge any of the crude price.

So, with that, John, I think I'll pass it over to you for the outlook.

Okay. Great. Thanks, Ken.

As you probably read in the quarterly, given the uncertainty of the production profile for Oil Sands, we chose not, at this point in time, to put out a production number of Oil Sands. Once we get a little more certainty in terms of when the plant will be coming back, we'll be in a much better position to give you that profile. So, we're just going to hold off until we get the kind of certainty around that so we can give you better guidance. Of course, we will be producing 110,000 barrels a day out of upgrader number 1, which is, you know, one of the reasons that we're so pleased that we have Millennium up and running, because you have the two trains, so if one goes down, the other one continues to operate. So, that will continue to go.

And I think Rick already mentioned that you probably could see Firebag producing in the range of, say, 16-, 17-, 18,000 barrels a day during this period. So, you can choose to use those numbers if you like until we get the plant Millennium upgrader 2, upgrader number 2 back up and running.

We did give you some volume numbers for natural gas, and that's in the range of 205 to 210. So as Rick did mention also, the expectation on the natural gas division is to continue that stellar growth rate. So, they'll-- we'll expect them to be averaging somewhere in the neighborhood of 205 to 210.

So, that's basically the outlook. I'm going to give you a couple of points in terms of commonly asked questions, and then we'll turn it back to the-- to open it up for questions.

The first one is our hedging los. During the fourth quarter, it was about 208 million in cash, and about 133 in after-tax earnings. For the full year, it was about 621 million before tax; 410 after tax. So, those would be the hedging losses both for the fourth quarter and for the full year. Capitalized interested during the fourth quarter was 22 million, and for the full year it was about 61 million.

So, those were the only two modeling type questions I was going to give you, if you like. I was going to remind you that what we prefer to do, and really, I think in the interest of making sure that we make good use of Rick's and Ken's time during this call, if you could keep your questions to simply strategic level. If you have detailed questions in terms of your models, or detailed questions on the financial statements, of course, I will be around after the call, and I think you'll find we're pretty responsive to your requests and get those dealt with in that way. So, please just keep your questions to the strategic level.

So, Jenny, if we could open it up to questions, I think we're ready to go.

Thank you, Mr. Rogers. (Operator instructions.) The first question is from Brian Singer of Goldman Sachs. Please go ahead.

Good morning. Rick, you highlighted cash costs earlier in the call, and I just wanted to get your sense on the outlook for cash costs, not including the natural gas costs, what you see at the pressures there, and there was a little bit of an increase in the fourth quarter versus some of the previous quarters, coming out of base operations.

Yeah. The cash costs this year are going to be a little bit more difficult to track because obviously our production rates are going to be down in the six-month period into the third quarter when we get this thing restarted.

I mean, directionally, we are seeing pressure in terms of, obviously, wage increases and also some of the commodities that we use, you're seeing that kind of pressure. Those would be the primary pressures that we're seeing. I think that overall, long term, where we're kind of heading is we should be able to maintain this in the $12.00 to $12.50 cent range. I will say that what we're working hard on in the background is technology, both in the mining and in the [inaudible] side. We see the kind of largest chance to make a difference in those kinds of areas. But, no real breakthroughs overall.

And, you know, as Fort McMurray continues to be a very, kind of hot area, that kind of inflationary pressure is something that we're very-- we remain very concerned about.

Great. Thank you.

Thank you. The following question is from Peter Best of Credit Suisse First Boston. Please go ahead.

Good morning. I just wanted to ask on the insurance if you could clarify a bit on the business interruption side, in terms of what-- how it's defined, and what you'll recover, like, will it be earnings, or cash flow, or operating profits? And also, maybe just on the timing of payment of that, what you would expect.

Yeah, Peter, it's Ken Alley. Just to clarify, the business interruption coverage is really intended to replace essentially the revenue that we lose when we're out of production. Now, when we say revenue, think of it as revenue less variable costs. So, the insurance policy is designed to generally replace that, and out of the money we receive, we have to pay our ongoing fixed costs.

In terms of timing, I mean, that's something that, you know, we have to work through with the insurers, and we are working very closely with the insurers. As you can appreciate, this is a fairly complex area, and a large operation. So, a lot of things to sort out and work with the insurers. So, I would say it's premature, from my perspective, to talk about the timing of the recoveries at this point. From an insurance claim standpoint, this is very early days.

Okay. Than you.

You're welcome.

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

Hey, good morning guys. Just on the strategic front, I wanted to get your current thoughts on the attractiveness of trying to enter into any additional downstream integrations. You know, is it likely to go forward over the next four or five years the number of available permutations, you know, for joint ventures, et cetera, and certainly in the U.S. Mid-West will be diminishing. Do you have any thoughts on what your current strategy, your intensity level would be on that front?

Andrew, it's Rick here. Absolutely. And we've got a team, a very small team but a team that's looking full-time on that particular issue. And we're looking at the whole range from refinery acquisitions to doing joint ventures with refiners, to the actual assets that we end up building in Fort McMurray. You know, one of the blessings we have is that downstream assets are an opportunity for us, not a necessity, and because I'm very proud of kind of having two refineries that are going to be running significant portions of our own crudes.

And so you're right in the sense that these opportunities don't come up every day, and obviously with refining margins kind of over the last couple years holding higher than many of us would have seen, then the price for these-- some of these assets are pretty dear. So, you know, we're kind of, I'm not saying a bottom-feeder, but we're a very opportunistic kind of looking at this as opposed to, you know, it's a must-do for us. And I think that's the luxury that we have.

And, you know, nothing to announce, but just know that I've got a team of people looking at this full-time, and trying to be creative. It isn't that we actually have to own the whole thing and look at the long-term deals with various downstream players. You know, the deal we announced over a year ago with Petro Canada is a good example of that, where they supply bitumen to us and then we supply a significant higher portion of sour product to their refinery. That was a very-- that was kind of a typical, not typical, but it's atypical, but I would say that's the kind of things we're also looking at the potential of and doing more of that, you know, where basically Petro Canada is now both a supplier to us and a customer. And so those kinds of creative arrangements that I think have been great for, and will prove out to be very good for both companies.

That's the one advantage Suncor has because, you know, we own a hundred percent of our asset base. We can do a lot of those kind of creative things that I think other companies haven't, aren't able to do, and that's something that we'll be very focused on.

Well, that's great. Thanks, Rick. And I guess an extension of that might be, I was just curious what your thoughts are on long-term supply agreements with buyers in Asia or anywhere else. You know, as you look out at the production profile, and as the volumes do build, is there a sense for, you know, how far in time do you want to go out to lock up a home for those long-term barrels? And that, you know, would you be comfortable signing long-term agreements for, say the 2008, 2012 time frame at this point?

Yeah. I mean, we certainly see well into the next decade that there's actually not much of a problem in terms of the market for our crudes. And you've got to remember, we're looking at the whole range from a small amount of diluted bitumen and all the way to sweet. And so we really don't see that as a huge, huge issue.

As far as, you know, crude going to Asia, you know, we think that obviously the largest and the best market for Canadian crude will remain the U.S. Now, you know, what I can't say is that the Chinese won't come in and support a pipeline, and you get crude to the West Coast in a major way. My current view, and it's just a view, it doesn't mean that it's right, is the players that are more likely to do that are going to be people who are heavy players. You know, they're the guys who are producing big-time heavy oil that don't do upgrading. So, we're-- obviously we're watching that very carefully, but with our mixture, we're really kind of [inaudible] ourselves in here to this U.S. market. And with that, our next, most logical big market has got to be California, especially as Alaskan crude goes into decline. And you've got access, once you get to the water, and, you know, you can do that with this [inaudible] expansion of their foothills pipeline. You've got a very complex set of refineries in California that will be looking for crude. That's probably my current kind of ideas about where the most logical next market is.

That's great. Thanks, Rick.

Thank you.

Thank you. The following question is from Greg Pardie [ph] of Scotia Capital. Please go ahead.

Hi. Good morning. Maybe just further to that, Rick, in terms of the third upgrader that you're going to make regulatory filings on this year, could you just comment on what kind of capacity you would be talking about? And secondly, would you be taking, would you be producing a similar slate of, you know, lights, like light sweet barrels out of that upgrader?

Yeah. Okay. So, our current plan on the way that we would file that, and you're right, it will be filed here at the end of the first quarter, early second quarter, and stage one-- it will kind of come in two stages, so stage one will be another 100,000 barrels a day increment and stage two will be roughly, I mean, I'm giving you rough numbers, will be another 100,000 barrels. So, we go from 350 to 450 to 550, kind of in those stages. And our volume will be for total sweet.

Now, what I would say about that is as we look at downstream opportunities, we'll be fine-tuning that as we go forward, and whether we build those hydro-treaters in the initial stage or later on, and it will depend a lot on our view of the market. And we're working that particular issue quite hard. It's, obviously, the only focus for us is return on capital. And, obviously, we will take a view of our risk of putting sour versus sweet product in there. But this thing will be filed as a totally sweet-- sweet upgrading. And then what we'll be doing is optimizing off of that.

But again, the real focus is return on capital, and then we'll take a risk overlay kind of view of that and we're doing some detailed kind of analysis of that, in terms of, because, you know, we don't want a [inaudible] the market. And we're the only player that's really producing this kind of range of products coming out of Canada, particularly producing both sweet, sour and diesel. And so what we'll do is continue to play that as we go forward, and continue to try and expand the market for all of those products.

Thanks. The Colorado refinery is pretty small, 63,000. If you decide to sink your teeth into another refinery, any sense in terms of capacity? Would a couple hundred thousand barrels, is that sort of the area you'd be looking?

It's too early to tell. It's really just all opportunistic. You know, what you've got to remember is you're looking at the Midwest, which tends to have larger refineries, so we-- and we would certainly take that on, especially given our experience. And if you look at the Denver assets, last year had close to a 12 percent return on capital. If you'll remember, when we talked to the market, when we bought that we talked about, listen, our expectation was at least a 10 percent return on capital. And so, you know, I would say that we've done that, operated it pretty well. We know there's lots of room for improvement. Twelve percent return on capital in the first full year, solid. I mean, I'm not saying that that's a huge number, but very solid for our first foray. And that will give us confidence to kind of go on for larger targets.

Remember, the second best market for us is Pad 4, which, of course, is the Rocky Mountain region, and then you're dealing with smaller refineries. So, you know, the size of loan [?] isn't the only determinant.

I would guess the other point I would kind of put in the thought process here is the logistic chains for many of these refineries are getting longer, because if you're a refiner down in the very southern part of Pad 2 or in the Oklahoma area, you've got to start bringing crudes in either from Canada, and that's why you see that reversal of that Embridge [ph] line being supported by refiners, or you've got to start bringing crude up from the Gulf. And so one of the analyses that, obviously, we're going through is to make sure that our logistics chain is as clean as it can, and see if there's any competitive advantage for us in that in terms of shipping crude directly from Canada.

Okay. And sorry, just a last one from me, is your path to five to 550, are we going to see another mine, another major mine in that game plan, or is really just going to be [inaudible] that's going to get you there, given what you've seen so far?

Yeah. That's a really good question. And I think the answer is we've got the options on both. We will continue to work that. We do have one mine option up north of Firebag and that is certainly something that we're doing a complete review on. We've done some more drilling on that this past year. That doesn't show up in any of our reserve numbers and nor should it at this particular point. But certainly another mine option could be one of the things that we will be looking at.

Okay. Thanks, Rick.

Thank you

Thank you. The following question is from Wills Goldberg of Peters & Company. Please go ahead.

Thank you.

Hi Wills Goldberg.

I have a number of points that arose from other questions, but first of all, on the cash costs, with, on the upgrading side, with one unit down, do we look at the cash cost in millions of dollars as being half or 60 percent of previous levels, 70 percent of previous levels? What's kind of-- and if you want to defer this to a spreadsheet discussion later, that's fine.

I'd like to defer it for a long time. I'll tell you, the issue is we're just, you know, a lot of the efforts are geared towards the recovery from the fire. So, you are going to lose some of the costs, Wills. Certainly natural gas usage won't be quite as high during this period. So, some of the variable costs will come down. But on the other hand, you know, you'll have costs in other areas. So, I-- we just can't give you, at this point in time, a real definitive answer in terms of, in millions of dollars, where that cash cost is going to be. Maybe at the end of the first quarter we'll have a better sense of that, or maybe even after a month or two we'll have a better sense of that. It's just very difficult at this point to give you, kind of pinpoint that specific number.

Okay. And on production, just again to be clear, you're looking at 110,000 barrels a day of upgrading. Does that mean that -- and Firebag presumably is going to go into the upgrader, and that, therefore, Oil Sands mining might be as low as 95,000 barrels a day for the first half?

Yeah, Wills, it's Rick here. So, yeah, our position here over the next, into the third quarter is 110,000 barrels from the base plant, and then in addition to that, this 15 to 18,000 barrels a day from Firebag. Those are-- we'll be selling that Firebag bitumen into the market place.

Okay.

Now, as we prepare to bring U-2 back up, and the vacuum tower, then those Firebag volumes will be cut over to the main plant, and really, those Firebag volumes were designed to run in through the vacuum tower. So, this will be a year where you see us move, you know, relatively quickly here in the third quarter from selling that diluted bitumen into the public market, and to moving it in to upgrading facilities. And that was really the whole design around what we were doing. Again, that flexibility is very important.

Okay. And last question is that I understand that the Exxon Mobile line reversal to the Gulf Coast has reached approval with CAP [?] on behalf of producers, or something to that effect. And along with the spearhead reversal, does-- has that sort of opened up the horizon of where Suncor is looking for refinery options and bitumen marketing?

Yeah, well, we're not looking in the Gulf Coast. That I will commit to you. I think both of those lines [inaudible] are very good pieces of infrastructure. And, my own view, and again, this is opinion, not fact, is that the crudes that are likely to move to the Gulf Coast are going to be heavy, and again, we're not really a big heavy player. And so, you know, that doesn't-- that's too long a logistics line for me in terms of looking at refining assets.

Now, the reversal, and the spearhead project, of course, that's a little bit closer to home in the sense that that chain is a little bit closer, and that might be a good home for particularly some of our sweet and sour products. It's another very good market. You know, there's very good refining capacity in that Oklahoma [inaudible] region.

So, you know, I think the latter probably more opportunistic than the former. I can guarantee we are not looking at refining capacity on the Gulf Coast. It's not our game, and the logistics chain off of Oil Sands is too far. Again, I'm not interested in any refinery I can't reach with significant volumes from Oil Sands.

Okay.

Not even interested.

Okay. And the last thing is on the insurance. I think to some extent that people are maybe trying to draw a parallel to what happened with the [inaudible] Oil Sands project during start-up and the insurance problems that they're-- that those parties are having on their claims, which partly relates to the question of what was the opportunity loss, given that they were in start-up, whereas your situation is, seems to be more defined. Is that fair to say?

Yeah, Wills, it's Ken Alley here. I mean, I'm sure that each one of these types of claims is unique in its own way, and so I don't think you can make any, you know, direct comparisons between our situation and Shell's situation, or any other company's. I mean, business interruption insurance, you know, is intended to be a replacement type insurance to recover lost revenue less variable operating costs. Obviously, it's a type of insurance that you can appreciate where there is a fair amount of estimation and a discussion with the insurers to come up with the fair replacement of value.

So, we're working that process. I mean, I think it's a given that we do have a track record. We should be able to come up with those estimates fairly reasonably, but it is something that we have to work very closely with the insurers on.

Thanks very much.

Thank you. The following question is from Martin Molino of First Energy Capital.

Hello, Martin Molino.

Good morning, Gentlemen. My question really is what other kind of positives potentially can come out of the January 4th fire incident? Obviously, we've got crude that's now through $47 for the balance of this year. Is anything in the 2006 expenditure profile, can any of that be brought forward, like you bringing forward a bit the vacuum tower?

Yeah, Martin. And I think the real answer is not really. I mean, we're kind of at full capacity. We're obviously constrained by Fort McMurray in terms of the number of beds in the community and the number of things going. There's, I believe [inaudible] got a turnaround coming up, and obviously you've got some other construction projects going on in the area, so we are somewhat constrained by that.

And so I don't really see a chance to advance 2006 work into 2005. What we are trying to do in many cases is move, for example, maintenance that would have happened in the latter part of the year into the former part of the year and take maximum advantage of that. But, you know, our real focus is on both repairing the U-2 and then getting it up and getting it very reliable. I don't really see a huge opportunity to bring a bunch of work forward.

Okay. And given, you know, the hedging strategy you've had in the past, with these relatively high oil prices, does not some kind of protective put program make some sense here?

Yeah. I mean, I think it really comes back to sort of what we've always talked about is the strategic rationale for the hedging program, and that was really to buy protection for the balance sheet during periods where capital spending was significantly above cash flow and the balance sheet was vulnerable. As I said earlier, we think the balance sheet is in very good shape now, and we think, you know, even as we work through the repairs to upgrader 2, that the balance sheet does provide us financial flexibility to continue to pursue our plans. So, we really don't see the need to buy insurance, whether it's through puts or some other structure, to protect the balance sheet during this period. And we're comfortable, I think, with the exposure to the crude prices going forward here.

Fair enough.

Thanks, Martin.

Thank you. The following question is from Paul Chang [ph] of Lehman Brothers. Please go ahead.

Hi. Good morning, guys.

Hey Paul.

Rick, with the-- over the past several years that we have seen continued rising in costs, and I think that you guys have also acknowledged that, so with what you see today, in order for you to get a full cycle [inaudible] return of say 12 percent for your Firebag or the Voyager expansion project, what kind of [inaudible] or price environment that you may need?

Yeah. Where we are is we still believe that we can deliver a 15 percent return on capital at a $28 crude price. And so we certainly are not on the table of needing very high crude oil prices to justify these project. In many of them, we have advantages because we're not a greenfield site. We're taking advantage of infrastructure we already have in place. And obviously, our growing track record of being able to bring these projects in on time and on budget is something that we're very hard in terms of concentrating on.

You know, Paul, another way to look at that is if you look at installed capacity on a dollars per barrel installed capacity, you look at our Project Millennium, or the vacuum tower, or any of these projects that we have going, you'll see that they are significantly below some of the other projects. And that's really, you know, once you've put that capital in, that's what really drives your return on capital. So, that's why you see us so focused on these projects, trying to keep the size down to a minimum, and then also trying to control them the best we can.

So, you think that a 28 WTI, you've still got about a 15 percent return on [inaudible]?

Yes, that [inaudible].

Do you know what may the full cycle [inaudible] return may be under that price scenario?

Paul, I'd probably have to check on that for you.

Okay. Secondly, Rick, I don't know, have you guys, I mean, why not [inaudible] strategy that either you're going to upgrade it on [inaudible] the upgrader, or that you are going to maybe to looking at acquiring some downstream [inaudible] to do the process on the downstream side. Have you taken a look on the agreement between [inaudible] and [inaudible] and that do you think that that may be another avenue that you would consider that instead of outright own the facility, maybe form some kind of alliance or joint venture with a U.S. downstream refiner and one of their facility and then processing the crude, the bitumen down there? Or do you think that that's really not advantageous for you, given you have more experience than [inaudible] on the downstream side, you can actually-- better off doing it yourself?

No, I wouldn't say that we see it as doing it ourselves is the only way. That's what I talked about before, the creativity part of this is looking at those kinds of deals with refineries. And we're certainly open to that. We're in discussions with a number of parties. I would just say they're kind of very difficult to put together, because what you're doing is you're trying to create value and decide how to share the value. Sharing that value is the tough part of that equation.

Everyone wants a hundred percent, right?

Everyone wants the whole pie, if you know what I mean. And so, you know, listen, we're working it hard. And, you know, I would say everybody is talking to everybody kind of thing. But, you know, I think sharing that is the more difficult piece of that. So, it is possible, and we certainly-- listen, to the extent that we know we're in a very heated environment in Fort McMurray, to the extent that you know you could do construction outside of there, you could hydro-treat outside of there, and that's a little bit of our plan around both Denver and Sarnia, then obviously that makes a lot of sense.

So, you know, stay tuned. We're looking at things. I mean, the one other thing to put in your equation is diluent. So, if you're a heavy oil producer in the very northern part of Alberta, you need diluent. And, of course, we're one of the largest, you know, potential suppliers of diluent. So, you know, that's all kind of the mix in terms of our value creation.

Again, all of our interest is focused really kind of on return on capital. That's really kind of where we maintain our focus, more than, you know, being inflexible, or, you know, not looking at this thing from both angles.

A final question. I mean, with [inaudible] for the start-up for several months now, close to about a year, is there anything that you learned from the Firebag reservoir that caused you to be maybe more cautious, or that to make you say "Oh, it's better than I thought?"

No, I think I would say, really kind of on the expectations as far as the reservoir, I think what we have learned is that the water handling up on surface is something that we still have a ways to go on the learning curve. You know, we had the shutdown, and that was a real water quality problem. And, you know, a number of the other operators have had similar water quality problems. So, I think what it is, it's kind of a learning curve issue in the industry generally. And we tend not to have as much experience as we're going to have in terms of cleaning up this water before we put it back through steam gen. So, there's a learning curve for that.

If there's any surprise, it's that, I think. And again, we're working that issue particularly hard. But no, not really any surprises other than that up-hole [?] kind of challenges.

I see. Very good. Thank you.

Thank you.

Thanks, Paul.

Thank you. The following question is from James Smith of Walter Scott. Please go ahead.

Hello. Good morning. Jimmy Smith. I heard what you said to Martin's question with regards to the hedging or whatever is done for the balance sheet. Looking at the balance sheet, I didn't really see a great difference in the balance sheet, but I guess that's your view. I would have thought that with higher prices is that you may have been more inclined to actually take some protection on the oil price.

Yeah, Jimmy, it's Ken here. I mean, yeah, I think, you know, we've been quite consistent on this in terms of how we've looked at the hedging program, and it really hasn't been about speculating or trying to pick the commodity price or play that commodity price cycle because, frankly, we're not very good at that and that's really not our game. So, really, the level of prices really doesn't dictate the hedging strategy. It's really just that, you know, strategic direction to protect the balance sheet.

Okay. Thanks. My second question is when do you think-- I'm not very familiar with insurance, but one of the bits of insurance claims I am familiar with is Exxon Valdez, and it seems they're taking forever, if it's ever going to actually get paid. When would you expect to receive the money from the insurance company? Would it be this year, 2005?

Yeah. I would say that it's probably too early to say how the, you know, how the cash flow from the settlement will work out. I mean, you can appreciate, there's a-- there is a process here, and we're really just starting it although we're working very closely with the insurers and we have been working with them, you know, really, right from-- from right after the incident. So, it's a question of putting together the claim, discussing that with the insurers, finally adjusting and settling that claim, and then working out a reasonable payment period. So, there's a process to go through here, and I can appreciate that everyone is concerned about that because they've seen other experiences.

And I guess I would say that-- I reiterate that I don't think everyone's experience will be similar, so I'm not sure there's a read across here. We will have some things that are unique to Suncor, I'm sure, but you know, I'm quite comfortable and confident that we can work this through with the insurers.

Okay. And my last question is--

[Inaudible] right now.

--Rick, is that you said, correct me if I'm wrong, that Suncor would be a better company in five years [inaudible]. What is it that's going to be better, and why does it need five years?

That's a good question. The only thing I was talking about is the continuous improvement on the operating excellence side of our business. You know, I'll give you an example. The last two years, we were really focused on safety, and we're starting to see much better safety statistics. We are also putting in an [inaudible] ERP program across the company. That will help us on things like maintenance, and also data, and also supply team management side of our business. And so that will take, you know, that will take us another, really, a couple of years to realize the full benefits from that. We will also with Voyager then be working on a third train of upgrading assets. Again, that will lower the risk overall of the company in terms of-- in terms of events.

But what I'm trying to describe is this is a journey. This is not kind of, okay, I'm going to give you a quick fix, because this is not like that. This is getting to be a sizeable company. We've got-- have some things that we've been working on very hard to correct to make it a much better operating company. And those kinds of things do take time. [Inaudible.]

Well, what's the costs of all that for, i.e., for example, do you-- does that mean [inaudible] you become less entrepreneurial, less sharp at the margin, able to adjust?

Jimmy, I hope not. Okay. I hope not. I think you'll-- a good example of that is, you know, two-and-a-half, three years ago, we formed this major projects group, and that's been a very big issue for us in terms of being able to control costs. What I would say is that we are going to value very good operating skills. And so, you know, I think it's kind of comes from, you know, remember, 1992 when we went public, we were a $1 billion in Canadian terms. Today, we're 18. There's a real growth curve to that. And I think what we're learning is we've got to cherish good operating skills as well as we do good growth skills.

And so what-- I think what you'll see as kind of, as we go forward, is to try to kind of have two centers of excellence, one on the growth side, on, you know, the construction, capital, control side, and then really focus on the operating side. And I don't want that to sound like an excuse about where we are. I just will say that it's a rapid growth. That's kind of what we value, what we paid for, and that's what we got. And what I see is going to [inaudible] we have that, but we also really have a focus on operating excellence.

And, again, I'm not promising, I never promised a rose garden, I never promised instantaneous results. What I'm just saying is those are things that I am going to be working on.

And my last, last question, is you reclassified 420 million barrels of oil. What exactly does that mean for me?

It's Ken here, Jimmy. Really, this is following as a number of companies that have heavy oil and bitumen assets, following SEC guidelines that require, you know valuation of reserves at a point in time. And at the end of December, you know, what we saw was a period of, you know, very high, very wide light-heavy differentials, and as a result, you know, we reclassified proven reserves from Firebag to a probable [?] category. No financial impact this year. It doesn't change our business. It doesn't change our business model. In fact, we upgrade all of that bitumen, or the business model is to upgrade that bitumen to higher value products.

So, it's really following the required accounting rules. It doesn't change our business model. And it doesn't really impact our business.

No impact. Okay. Thank you.

Thank you.

The following question is from Barbara Batansky [ph] of Dujardin [ph] Securities. Please go ahead.

Thanks. The question was actually related to Firebag on the operational side. I think it's mostly been answered. I just wanted to just follow-up on the reservoir performance that you're seeing there. Are you still quite comfortable with the energy requirements or the steam requirements there, and that your steam oil ratio targets there are maintained?

Yeah, Barbara, it's Rick here. The answer is yes. I mean, we do have some wells that are performing very well, and if you look at the steam oil ratios on those individual wells, they're kind of heading down towards that 2.5 times, 2 to 2.5 times, and we think we can get those down to 2 times. This does take time to build up. And, obviously, some of the wells that we're just bringing on aren't at that point. So, if you look at the overall average of steam oil ratio, it's still relatively high, but it is dropping.

Now, it won't drop as much through this next six-month period because we're not able to ramp up. We're dealing [?] with short. But we're still kind of on that track in that 2 to 2.5 range, and really believe we can do that. We're seeing individual wells that are certainly moving towards that kind of a range.

Barbara, our target continues to be 2 to 2.2 long term.

Thanks. And just a follow-up question to clarify, on the volume, very small volume of bitumen, diluted bitumen that you're selling into the marketplace now, as you move forward here through the rest of the decade, that component of bitumen that you will sell will be maintained very low, or is that expected to increase at all?

Yeah, we do not see us being a large bitumen producer. We'll be selling it really kind of on the margin. The real intent here is that we were running those bitumen assets to keep our upgrader full. Now, if we have either issues where the upgrader has maintenance or some other issue, then we'll have opportunities to sell some bitumen. We always try to kind of bring the bitumen on in a little bit ahead of where the upgrading capacity is, so you may see periods where we're selling a little bit of bitumen, but, you know, that's not the value-add. The value-add that we really see the value for our shareholders is in upgrading.

So, there's not-- I can just tell you, on our current plan, it varies year-by-year, really almost quarter-by-quarter as we go forward in terms of how much bitumen. But don't expect us to be a large bitumen seller. That's not-- first of all, the margins aren't there in a huge way, but that's not how we see how we really drive value.

All right. And then just now while you're second upgrader is down here, you said that you would not be selling any bitumen into the marketplace. Is that sort of definitive, or are you going to be looking at the spread and then maybe opportunistically selling some bitumen when you can?

Yeah. Now we are selling that Firebag volumes into the market, and we'll continue to do that until we get the upgrader number 2 up in sight of starting up the vacuum tower. So, for the next six months you're going to-- you can assume that we're selling 15 to 18. We don't really have enough diluent to do more than that. And, of course, you've seen the wide light-heavy differential, so there's not really a case for that, if you know what I mean, because we're selling-- if you look at the spread on the other direction, if you look at the spread of synthetic or light to WTI, that's gone the other way in terms of you've got about a-- at one point here it was a $3.50 premium on synthetic. Now, that won't last for long, but-- so, you know, diluting that with bitumen doesn't make a lot of sense at the current time.

So, you know, it's more that, listen, we're very tuned to the market on an hourly, almost a minute-by-minute basis. I don't really see us expanding bitumen production beyond that already described.

Great. Thanks a lot.

Thank you.

Thanks, Barb.

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

Hey guys. This probably falls into even a Blue Sky strategy question, but, you know, in looking at North America and the kind of refining margins we're seeing in California, I mean, if one were to make believe and believe that say the last three or five year rolling average margins there are sustained, and you look at the costs that you tend to experience building an upgrader in Fort McMurray, have you ever looked at the possibility of actually just building a greenfield plant, full refinery or upgrader, say at the end of the gateway pipeline, and then just supplying the California market by tanker as opposed to a strategy where all the upgrading is concentrated in Fort McMurray, or some derivative of that, partial upgrading at Fort McMurray, partial upgrading and refining elsewhere?

Yeah. [Inaudible] to say is we're looking at all options. I mean, putting one on the coast of B.C. at the end of the gateway probably is not the most logical of choices. But, you know, I would say this, we're looking at all the options. And it's really where do you knock out the carbon? So, where do you put those cokers? And then, second to that is, okay, where do you put the hydro-treater or taking the sulphur out and to get it to that light sweet product? And again, we're looking at that whole range. Certainly, California is a market that we're interested in. I'm not saying that interested in purchasing a refinery, but interested in as a marketplace per se. And I think that eventually some Canadian crudes will end up there.

Great. Thanks.

Thanks, Andrew.

Thank you. The following question is from Robert Plexman of CIBC World Markets. Please go ahead.

Good morning, Rick. I have a couple of questions. One more diluent question. You mentioned in your opening remarks that the diluent supply was a limiting factor, and you talked about it a little while ago with Barb. Can you quantify, because it seems to suggest then that without that limitation, Firebag might be running a lot closer to that 30-, 35,000 barrel a day rate?

And also, a related question to that is potential exposure to diluent going forward. I mean, when you bring on, I presume this summer when the upgrader and the vacuum tower come on, then you're self-sufficient, but when you get to Firebag's second stage, will-- is the company self-sufficient in their diluent supply to handle that, those volumes, if you decided to put them into the market? And so that's the-- we'll call it the first question.

And second one for John. I know it's difficult to give guidance for 2005, but can you update us, John, on the capital spending? I seem to recall a number like annual spending $2.3, $2.5 billion to get the plan done, you know, each year of this decade. Is that still a good number?

Yeah. I'll answer that, it's real quick. It's about 2.5 this year, Robert.

Okay.

Yeah, we're not seeing a big change in the capital budget at this particular moment. If there is later, we will adjust that.

All right. Back on the diluent issue. Now, when we start cutting this into the plant, or when we switch the type of diluent that we put in, and so-- and you've got to remember that at that point you'd have both upgraders running-- we do not see any diluent limitations in terms of, because you know, our plan is to run this bitumen through our own plant.

Now, we could look at and will look at opportunistically then selling bitumen on top of that, but only when we're very comfortable that we have plenty of capacity to keep our own, our own upgrading assets full. And we've done a little bit of that in the past. Even pre-Firebag, periodically we would sell some small amount of diluted bitumen. Now, that was actually mined bitumen. And so with that kind of flexibility is something that's on our horizon.

But, by the way, I would not model that because, number one, where these light-heavy differentials are going, and also then it's really a matter of, you know, our supply in terms of we would not, for example, leave upgrading capacity empty and sell diluted bitumen in the market. That will not happen. And we will be pretty cautious, because, you know, when-- at the tail end of this year, we were up to 260,000 barrels a day of output at that plant. That's a fair amount of diluted bitumen produced each day. So, you know, you've got to watch how that balance happens very, very closely.

So, I think the [inaudible] that diluent is not a problem internally to us. It's an opportunity to sell diluent to other parties. And secondly, I would not model a lot of bitumen sales beyond that.

Okay. And can you clarify, regarding Firebag, how much is Firebag production is basically left in the ground because of the restriction on diluent right now?

Okay. So, you know, if you look in December, we produced, I think it was 18,000 barrels a day of production from Firebag. We would have expected that to slowly climb up to the 30,000 barrel a day range at the end of the year, heading to 35. Now what will happen is this thing is going to kind of get plateaued [sp] for this end of the third quarter, and then we'll be able to start ramping it up. So, you can just kind of look at that delta between a very slow ramp-up and a very steady ramp-up from 18 to the low 30s, and into the third quarter, and then that kind of delta wedge. I don't have the calculation done, but it's pretty straightforward in terms of what our expectation was.

But I take it then the ramp-up then is more dictated by market conditions rather than anything technical? I mean, I mean, are you basically saying you could be there if you wanted to?

It's more limited by the diluent that we have to send up to Firebag and then ship it to the market in this intervening period.

Okay. Thank you.

[Inaudible.]

Thank you. The following question is from Louis Gagliardi [ph] of John S. Herald. Please go ahead.

Good morning, Rick and John. Quick, I just wanted to clarify Paul's point. You said you could-- you think can achievable target of say 15 percent return on capital at US$28 for WTI?

Yes, it is.

Okay. All right. Great. And just-- just kind of maybe an update, is there any news on the royalty issues regarding the insitu [?] production from last year?

It's Ken Alley here. No, there's no update on the discussions with the province on royalties.

Okay. Great. And the hedging program, now, basically what I understand is that it's being wound down, and that there will be some hedges still in place in '06, but after that it's basically the program would end.

That's correct, Louis.

Okay. Thank you, gents.

You're welcome.

Thank you.

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

Yes. Good morning. Two questions. First, on downstream integration. Rick, you were talking about that as an advantage between Oil Sands and your downstream business. How is that downstream integration being impacted with the incident at Oil Sands and with respect to Sarnia?

Okay. That's a good question, Brian. So, if you look at current market conditions, and I don't think this is going to last through this whole kind of period into the third quarter, but synthetic is in relatively short supply in Canada and into the Midwestern part of the United States. So, we've seen spot prices for sweet synthetic at $3.50 over WTI. Because that Sarnia refinery-- it does not impact, there is no impact on Denver, but because our Sarnia refinery runs light sweet, and is really designed around that synthetic crude oil, you'll see that the profitability that Sunoco will have will be impacted, particularly, I think, here in the first quarter.

And, now, that's kind of a two-edged sword because although we will be losing margin at that refinery, we'll be getting it from the synthetic we are producing from upgrader number 1. But that is something that you should kind of take a look at and have an expectation around.

So, have you, like are in a force majeure position with your other supply agreements that you have in place?

With our other customers we have, we are in a force majeure position, absolutely. Now, what I would say about this is we still remain very concerned about the customers. You know, this is painful for a number of those, and so we're not feeling really terrific about putting them in a force majeure position, and so want to make sure that we're doing all we can for those customers.

Okay. Great. Thank you. And second question, and not to flog this insurance issue to death, but once of the concerns out there, running into is the questions, you know, [inaudible] environment, how quickly would Suncor run up against the 1.15 billion of property and business interruption insurance that you have mentioned previously. But in looking at note 13 of the press release, there's a comment in there that there's an additional 700 million of insurance in place. So, am I correct in saying that you have close to $2 billion of insurance now?

No, Brian. I'm not quite sure where you're picking that up, because that would be included in the total 1.15 billion.

Okay. So that is part of the 1.15--

That's right. So, there's nothing in excess of the 1.15.

Okay, because there is some-- there is a comment in there saying in addition to the primary insurance coverage policy--

I think that's just intended to show that there are-- there's layers of insurance in effect within the 1.15 billion--

Okay.

And so there's a $700 million layer above a primary layer of 200 million for business interruption, and 250 million, all U.S. dollars, for property damage. So, the total policy limit is 1.15 billion, and I want to be clear about that.

Okay. Great. Thanks a lot.

You're welcome.

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

Thank you. Rick, in the past you guys have provided a bit of guidance around what you expect the sweet-sour spread to run. Recognizing that you are still going to be producing 110,000 some-odd barrels a day, can you give us a sense on where you think that's going to fall out this year?

Leslie, we could probably give it to you in general terms for the next six months, or whatever time it takes to bring back U-2. It probably will be in the range of two-thirds sweet, one-third sour, which is where we were on U-1 before we began to bring on U-2. So, we will be able to bring a little bit of hydrogen over from U-2 over to U-1. So, we think we'll probably be in that range.

So, what would that translate into in terms of dollars per barrel spread from light sweet?

I will have to get back to you on that. I haven't don't that calculation.

Okay. Second question, again, apologies, but this is around the insurance. Do you guys have any concern, or should we have any concern that there's going to be a fairly material ramp-up in your policy rates, or at worst, difficulty in renewing your policy?

Leslie, it's Ken here. You know, it's hard to say at this point. I mean, I don't, you know, the insurance, our total insurance program costs right now is in the kind of $20 million range, so it's a large amount, but it really isn't material to the company going forward. So, from a premium standpoint, you know, I wouldn't be overly concerned about, you know, where premium levels go in the future. And, obviously the type of coverage is something that we and other industry players will work out in the future. So, I wouldn't be overly concerned about that at this point.

Okay. Thank you.

You're welcome.

Thank you. We will now take questions from the media. (Operator Instructions.) The following question is from Ian McKinnon [ph] of Bloomberg News. Please go ahead.

Hi gentlemen. Sorry, I jumped in a little late. I was on PCA conference call. I'm just wondering, have you guys actually determined the cause of the fire yet? I'm sorry if I missed that.

Ian, it's Rick here, and the answer is we feel like we're getting closer to an actual knowledge of what it is. The investigation is continuing. And I don't want to kind of jump out ahead of that. You know, we are looking at those learnings and then trying to make sure that across the rest of our operations that the system or systems that were likely impacted are not a problem in our other operations. But what I want to do is wait until our investigation is totally complete, we get all the facts in, and then we'll certainly let you know. I would say we're getting closer, but not really in a position yet to give an exact cause.

Any idea of when you might be in that position?

We'd hope to be sometime in the next couple of weeks.

Okay.

It is an important issue, but-- and we are proceeding with that as quickly as possible. But I don't want to draw conclusions before the team has brought in their [inaudible].

All right. And Ken, this is a question for you. This follows-up on someone else's parallel to the Valdez. Is, I know you say it's early, but is it possible it might be years and years and years before Suncor actually sees any money for the insurers?

Yeah. I wouldn't anticipate that. [Inaudible.]

Okay. Thanks very much.

You're welcome.

Thank you. The following question is from Ben Tepletts [ph] of Platt's. Please go ahead.

Yes. Good morning, gentlemen. I got here rather late. I'd like to discuss with you certain things around the fire. I understand you have declared force majeure. Can you fill me in? When that was? On what products? To whom? That sort of thing?

No. We're not discussing those kinds of issues in terms of-- for commercial reasons and competitive reasons. But obviously, our concern is to do the best job we can through this difficult period for our customers.

So you can't say when it was declared?

Well, it was declared shortly after the fire.

How are you making up supplies? In other words, to what extent did you have inventory that would carry you forward, or are there other ways that you can make up for the shortfall?

The inventories are very small here. I mean, it would have been a couple of days. So, you know, we've got inventories in the pipeline systems all the way down the system, but, you know, inventories are --

Yeah.

--[inaudible] all these companies are kept relatively small.

Yeah. So, is there any other way to make up for it?

No. Get this thing back up and running. That's the [inaudible]--

Yeah. Uh-huh. Uh-huh. What was the impact on the company in terms of sales and profits, or has that already been discussed?

Yeah, we're not giving and forward projections, and the fourth quarter results were published this morning.

You know, the cause of the fire, we talked about that. Is this cold weather hampering the repair problem? Earlier it had been.

Yeah. You know, we're in the middle of winter, so would we be more productive if this happened in July? Absolutely. But again, we're quite used to working under these conditions. Fort McMurray, at the first part of this week, at the end of last week it did warm up quite a bit and so we made progress there. But, you know, we've got a long winter ahead of us here. We've got at least another eight weeks of winter in normal conditions, and we're used to working in those conditions, but it does make it more difficult.

Finally, what are the products coming out of the fractionater [ph]?

Out of the fractionater [ph]? I mean, what I would say is this, at Oil Sands we turn out about six or seven different products, all the way from diluted bitumen to diesel. And again, we continue to do that, just in much-- in smaller volumes than we did with both upgraders operating.

Yeah. Okay. Thank you, folks.

Thank you.

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

Great. Thanks, Jenny. And thanks everyone for listening in. And if you, as I say, if you have your modeling questions or need some clarification on the financial statements, give me a call at (403) 269-8670. Other than that, have a great day. Thanks. Goodbye.

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.