Suncor Energy Inc (SU) 2005 Q1 法說會逐字稿

Good Morning ladies and gentleman welcome to Suncor Energies first quarter results conference call. I would now like to turn the meeting over to Mr. John Rogers, VP Investor Relations.

Good morning everyone and thanks for listening in to our first quarter conference call. As usual, I have Rick George, President and CEO in the room, Ken Alley, CFO, Brenda Cherry, our VP Controller and Rob Dawson from our Controllers group also.

We’ll follow the usual format. Rick will give a bit of an overview in terms of the business. Ken will give you an overview in terms of the financial performance. I’ll deal with a few detail questions and then we’ll open it up for your questions.

So Rick, why don’t you take it away and give us a bit of an overview.

Thanks John and good morning to everyone and welcome to the Suncor call. It’s been a long time since I reported earnings of $98 million. So that’s not necessarily a good then, but that’s kind of where we are. The one thing I would say, of course, is the overshadowing issue is the fire we had on January 4th and obviously very evident in the first quarter results. What I can tell you is that the rebuild is very much underway and what we’re expecting here is that we’re going to back up at full production rates of 225 thousand barrels a day in September. So everything looks like it’s coming along. We’ve got the fire damage removed we actually have the tower apart and going back together, the tower that received the major part of the damage, and even the predominant amount of the structural steel is back place and we’re starting to work on the piping that had to be replaced, so it is coming along. It is good to see good weather up North and so we’re making great progress. And even though that is obviously a very difficult thing for us in terms of dealing with it though the middle of winter which was not easy, also the amount of manpower we’re spending on that particular project wasn’t something we had planned to have this year.

I think if you take a look at the long haul basis of Suncor, we’ll look back on this as a significant event, but not something that is going to derail our strategy and our overall goals. I’ll talk a little bit about that more in a minute.

Insurance coverage will offset a good deal of this loss and Ken Alley is going to update you on that more in a moment. Where I want to focus my time with you this morning is on our growth plans. What I will say is that as has been the case here for a number of years our strategy remains very solid. Our plans are underway. We’ve got a lot of activity in this company. I will tell you, the fact is that as I go around this company, it almost seems more like we run a construction company than it does run an oil company at times. We are very much on our way with those capital plans as we go forward.

One page I would refer you to is page 11 of our report to shareholders in the first quarter. That actually has a new bit of disclosure there around these capital projects in some detail. Now you’re going to see that every quarter and I think that’s a very thing. It gives you a complete update in terms of our cost estimate, the amount of money that’s spent to date, the total money spent to date, because many of these projects go over a period of years and also the status of the projects. And so I think that’s a very good disclosure.

Just to kind of summarize what that looks like, and again we’ve got a lot of projects going on across this company, but the Millenium vacuum unit which is the next leg of growth which will take our production capacity up to 260,000 barrels a day is about 90% complete. The plan is to bring this on line as quick as we can after we start up the U2 Upgrader. So call that starting to commission run it in October/November kind of timeframe.

Stage 2 of Firebag, which is of course the 2nd stage of Firebag which will have capacity of 35,000 barrels a day of bitumen. It is 70% complete with construction and we have steam scheduled in the ground later on in the third quarter, start of the fourth quarter of 2005.

We have also, as you saw during this last quarter, submitted an application for our 3rd Upgrader. This is a project we’re going to call Voyager within Suncor. You’ll start to see us use that terminology. We have filed for regulatory approval for that which, of course, is about a 2 year process. A couple of things that makes this unusual. This will be our third Upgrader train. It does include an application for coke gasifications. This would be one of the first uses of clean burning coal technology in Canada. It has been used around the world and obviously in some refineries in the U.S. That will also – when we do get that installed – and that may not come in the first leg of this Voyager project, but would be one of the things will be a good offset for us against natural gas costs overall. So that’s something that’s in there as well. What is in that Voyager application is a full light suit case as far as the regulatory application going forward.

We will file a separate application with regard to stages of the Firebag and potential [debog meching if mines] to fill that plant.

The desulfurization projects at both refineries are on schedule and on budget. That work is progressing quite well. As you know, we have to have these desulfurization projects done at both our Sarnia and our Denver refinery by the middle of ’06. The Denver project is a little bit ahead of the one in Sarnia, but both of them look like they are track to get that done. And so that looks pretty good.

So basically our capital programs, and there is some stress. We do have some labor availability problems in some areas, and obviously we are still facing some inflationary pressures in the northern part of Alberta that the rest of America is not experiencing. But given those couple of challenges, basically these capital programs are on time and on schedule. We’re under control. Not a perfect world, but feel pretty good about where we are. And I give a lot of that credit to our major projects group. We formed this group about 3 years ago. We pre-invested in people basically to have the capacity to do that, and I’m very proud of that. And certainly with this peak amount of activity going on, it feels a lot better than it did when we through Project Millennium.

So listen, the priorities for this year are pretty clear. Obviously recovery of the fire and a safe return to reliable production in the 3rd quarter, towards the tail end of the 3rd quarter is obviously job number 1. We are focusing in on operational excellence at the Oil Sands, but also at our two refinery sites and across this company, and there’s lots of activities going on with that. Including our continued work on what we call our Journey to Zero which is our internal safety program. We are continuing to work, as you can tell, on our growth plans and our budget going forward. That’s the Voyager application. It’s how we’re looking at feeding bitumen into this plant.

And so Suncor’s overall strategy and overall arching goal here is to get Suncor up into that half a million barrels a day plus range by 2011, 2012 is very much on track. So, I’m as optimistic and confident about where we are and where we’re going as I have ever been and feeling good about that.

Having said that, the fire is a predominant issue for this year. So what we’re looking for is getting this incident behind us and learning by it, making this one of our causes for getting Suncor to be even more reliable in the future. That’s something that we’re going to working hard on as we god forward.

So I’m going to turn it now over to Ken Alley, our CFO, who is going to speak to you about the financial nuances of the quarter.

Thanks, Rick. And good morning everyone. As Rick said, I mean there was no real surprises in the results for the quarter. I mean clearly earnings of $98 million and cash flow of $294 million reflects the significant impact of the fire. As you know there are insurance programs in place to substantially mitigate for the loss for concerns of the property damages and the repairs to the equipment, as well as business interruption to recover the loss during the period.

We have been working very closely with insurers to estimate the loss, work through the process of working through interim payments on the path to the final settlement to the loss. And we are very pleased with the progress we have made to date. We did receive our first interim proceeds on both the property damage program and importantly on the business interruption program. So in total we received about $85 million Canadian of proceeds. So, pleased so far.

I will say that it is early days, and a loss of this magnitude it does take a while to settle the loss. Our focus here is to continue to work with the insurers, work towards a schedule of interim payments. I can’t give you a detailed schedule of those interim payments at this point, but I think it’s safe to say that we’re well underway with the process and confident that ultimately the cash flow and final settlement will be received.

In the interim period, as we work through the loss, the balance sheet will carry us through in terms of funding our capital spending programs, and that balance sheet is very good shape. Debt will rise. You saw in the first quarter debt increased to $2.5 billion dollars and that was expected as well. And we expect to see debt continue to rise as we work through the rebuild, bet the plant back up and running, and we see the insurance proceeds. But we’ve got more than enough financial capacity to fund our capital spending programs. As we bring the plant back up, as we receive the insurance proceeds, we will pay down that debt and we will emerge from this incident with the balance sheet in very good shape. And we’re very confident that we have the financial capacity to fund our growth plans going forward. And as Rick said, we much see this as a short term setback and nothing that has any impact on our long term plans or strategy.

So, with that John, I will pass it back to you.

Great, thanks Rick and Ken. I’m going just going to spend a minute trying to anticipate maybe some of your detailed questions and then we can get on with the Q&A period.

The hedging losses for the quarter were about 108 million in cash and about 65 million after tax. So that would be hedging losses. The capitalized interested is about $26 million during the quarter. You’ll notice on the P&L there is a project start up line. That has nothing to do with Firebag 1 that’s now in our cash operating costs. That will primarily be the start up costs for the MVU, the Millennium Vacuum Unit, that we’re bring on this fall. So that would be the costs associated coming into that.

Now the tricky part, I’m going to try to explain what when through the insurance proceeds account during the quarter. Funny enough there were only 4 entries that actually went through. So I’ll try to give you an indication. In total there were $63 million as a revenue item that went through. But let me try to tell you what when through there.

The first thing was have to do is we have to write off the amount of the net book value associated with fire damage, and that was about $81 million cost that went through that account. So that would be about $81 billion associated with a net book value of the assets that were destroyed during the fire. We also had about $51 million worth of fire damage that was an expense. And that would be items such as fire fighting and all the other things that happened during the January period to contain, control, and recover from the fire. So those would be about $51 million in expenses. So the total of the two expense items that went through the account where $81 million for the write off of the net book value and $51 million for the fire fighting and all of the other recovery that we have to take place.

Under the insurance accounting, we are actually allowed to accrue up to the amount of the property damage. So we actually accrued $123 billions during the quarter to offset that. So for associated with the $81 million and $51 million we actually accrued about 123. Ken mentioned we did receive some money during the quarter. There was about $73 million in business interruption proceeds that were received during the quarter.

So those four entries actually added up to net revenue of $63 million during the quarter, and that’s what you see in the revenue item there.

So hopefully that will give you a bit of a insight in terms of how we are accounting for the insurance at least in the 1st quarter.

I’m now going to turn it over to you for questions. But once again, I think this is a tradition for Suncor in respect for Ken and Rick’s time, please do not ask detailed model questions during this call. [Inaudible] and Rob and I will be around right after the call, as we always are, to answer all your detailed questions associated with the quarter. So if you could restrict your questions to Rick and Ken to strategic only, I think it will be a much better use of everyone’s time.

So, Jennine, why don’t we open it up to questions?

Thank you Mr. Rogers. We’ll first take questions from the analysts, followed by questions from the media. [OPERATOR INSTRUCTIONS] The first question is from Brian Singer of Goldman Sachs. Please go ahead.

Good morning. Obviously the fire contributed to higher operating costs per unit, but if it is possible to take a step back, could you just give us your thoughts on labor tightness, labor costs, and overall operating costs and if all at you’ve seen them change in the last three months?

You know, I think when we talk about labor shortages, we’re not talking about operating costs there; we’re talking about the construction side of our business, and that would be on various projects. At any one point in time, we could be short of pipe fitters or electricians or some other-- Primarily this is a problem in Alberta. We have not experienced those kinds of problems at either refinery.

In terms of operating costs, we have the normal kind of labor, if you will, wages inflation. Which if you look over the last 2 to 3 years, it’s been in the kind of 4% range. We obviously have also issues around, like every company around medical costs that are continuing to rise, and those kinds of overhead issues, I would call them. The only thing on the operating side, of course. Particularly in oil sands but also through refineries, natural gas prices increased -- have increased through this, and of course, that contributes significantly to higher operating costs. Now, for Suncor, that’s something we have naturally hedged because we gain with those higher gas prices because we produce significantly more than we consume. And you’ll see that that results in higher earnings and cash flow from our natural gas business, but it does drive operating costs. Nothing unusual on the operating side. I would say kind of business as usual there. We have been, sure -- we inflationary product pressures on steel but that’s come off a little bit here lately, also on some of the other mills and other supply issues, but nothing that is causing great alarm. I think what we’ll continue to see here in Northern Alberta, though, is that with all of these projects, and sometimes it’s hard to realize, but the current spend rate in the industry in Northern Alberta is something like $6 billion Canadian. So the fact that is a very small region, or is a town of now 55,000 people. You have a two-lane highway that leads from Edmonton up there, and you’re spending that as an industry close to $6 billion. That’s just a lot of pressure on the entire infrastructure. That’s the kind of deal, the overall pressure we’re facing.

Brian, the one thing that would notice is in the cash operating costs of the quarter, is the natural gas prices, I was going to deal with that. The natural gas prices, the actual price for barrel seemed a little bit high. There are really two things. One is we actually use some of the off-gas, the coker gas, from our cokers. One of our cokers was down. U2 was down so we lost the gas from that. We actually had to buy them in the market, and we’re actually running both [hiker treaters] during the quarter, so we’re utilizing gas there. So, it looks artificially high during the quarter, but that’s an anomaly for this quarter.

And, just very quickly, you may have said this before, but just wanted to see – - Do you get any insurance repayments for any of the impact on the lower refining margins that may have been caused by the fire?

No, Brian. It’s Ken Alley here. Most of the insurance proceeds are focused on the direct loss of the oil sands production.

The following question is from Amir Arif of Friedman Billings. Please go ahead.

Just sort of following up on that cost pressure for your new expansion project. Are you guys doing anything to sort of mitigate any future cost potentials such as locking in your seal prices, or fixing the cost with contractors? Can you just expand on that a bit?

It’s Rick here again. Good to talk to you. Sure. Listen, we’re taking a whole series of steps. We are obviously very engaged with a number of contractors who have been on our projects for the last half a dozen years and will be for probably the next 10 years. We have some choice agreements. We also have obviously stepped up in terms of our sophistication in terms of our buying power as well. We’re trying to do this in much smaller projects and all of these projects now are Suncor-led, by Suncor employees and managers, which also means we’ve got a lot more control. But, I will say that overall you’re still finding that overall issue of how busy this region is. One side comment, I mean if you remember, Suncor was the binary company in this, and we were kind of out alone. I will tell you this, I feel like the herd is kind of running up behind us here. So you’ll always have that feeling. I think - - one thing I would say is that we have a very strong organization that has been stable and has been with us a long time, and with a lot of contractors that have been with us a long time, we intend to play that card very hard in terms of being hopefully under control delivering these products as good as we can.

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

You’ve been making some investments here on the clean fuel side notably this week you made an announcement on the ethanol. What kind of returns do you anticipate from these projects?

That’s a great question, Brian. So listen, you know roughly speaking, and this is a very rough number. You’ve got to remember all of these ethanol projects across North America and Europe are -- they do get some government help in terms of tax relief or other subsidies, but what we would expect with that investment is kind of a 15% return on capital. Now I would say that our investments in wind power do not have that kind of a return to them. What we would expect even with the government help you get there is we would be high single digit, 10%, return on capital kind of numbers would be a good number for those projects.

But again I think we’re taking a very long-term view of those windpower projects because it’s something I kind of believe in, not necessarily that they’re great - - going to be great in the next two or three years, but in the long haul, for us, it’s also a kind of a bit of natural hedge on energy costs overall and electricity prices, and ultimately, tied back to gas. So, for us, this is a long journey. And I wouldn’t do a lot of investment at that kind of rate, but with a small investment in this developing technology, which I love the technology, I think it’s a good bet for our shareholders.

The following question is from Louis Gagliardi of John S. Herald. Please go ahead.

I have three quick strategy questions. On the incremental 35,000 barrels a day that’s going to go from September to December, that’s all in C2, right?

Yes.

And the -- on the production capacity increase at 350,000, by 2008, that also is all in C2, right?

Primarily.

Primarily. Okay. How - -I’m trying to get a feel for what bitumen and mining expansion production capacity you could see between the end of this year and 2008? And that’s what’s kind of confusing right now.

As I mentioned Louis, the primary increment is going to be coming out of Firebag, and if you remember, we have 3 and 4 phases approved each at 35,000 barrels a day, and we’re just kicking off Phase 2 now, which will get us up to 70,000 barrels a day at bitumen. There can be a small amount an incremental amount coming out of the mine, and we always have a bit of extra capacity that’s coming through that. But also you’ll have to remember once we get to 350,000 barrels a day, part of the feed stock will be the deal that we did with Petro-Canada. I’m thinking now December of 1993, if my memory serves me - -

2003.

Ken Alley. 2003, not that long ago, seems longer. That would be the primary source of the feed stock. So it kind of goes back -- if you remember our strategy is all around making sure that we have options, both mining, both in situ, and both third party processing. That’s the way we’ll continue to go forward.

Okay. So.

Louis, if you’re trying to do barrel-for-barrel -- I think I’ve mentioned this quite a few times. If you’re trying to do barrel-for-barrel of bitumen and associate with barrel-for-barrel of synthetic output out of the upgrader, it’s going to be a really, really tough job to do that, if you’re trying to match bitumen barrels with your upgrader barrels.

Okay. So in other words, if I asked you by 2008 what is the production capacity of bitumen mining, you don’t have a number.

We will have production capacity by 2008 to support 350,000 barrels a day including the amounts of bitumen that we’re receiving from Petro-Canada, yes. But I can’t give you the actual bitumen barrels, no.

Okay. You’ll be in New York on Monday. We’ll talk a little bit more. I don’t want to hold up the conference call. Thanks a lot, though, gents, I appreciate it.

The following question is from Paul Cheng of Lehman Brothers. Please go ahead.

How – the status on – to [inaudible] 350,000 barrels per day by 2008. Can you give us some kind of a benchmark, what kind of construction or design work, and what percent over there?

Yes. Okay.

Also be great if you can tell us -- give us some constant in terms of -- Is there any particular one or two issues that you think -- you need to look at in more [inaudible] to ensure that everything is going to be moving according to the schedule?

Yes, Paul. It’s Rick. Again, if you go back to page 11 of the quarterly, you’ll see there - - That really is the project we call the Millenium Coker Unit, or in there it’s referred to as the coker unit. And that is that $2.1 billion investment of which we’ve spent about $500 million to date. We are in the field, in fact, the coke drums are already manufactured and we’re working from the foundations as we speak. They’ll be actually lifted into place in September. Listen, that’s early days. It isn’t just these cokers. I mean, we have a whole set of offsets, utility off-sides. We have also a sulfur plant that goes in with that and a lot of other modifications, so it’s broken down into at least three major component parts. We have had to pull a little bit of labor off of that to accommodate the fire rebuild, but nothing else on the horizon. The engineering is about 85, I don’t have the exact number, 85, 88% complete is the number I remember, but it’s in that high range, close to 70 to 80% complete. Construction has already begun. As I say, we’ve already spent 25% of the funds already. So that will be the major focus for us, and if you think about it, as the Firebag Stage 2 comes off as we finish the vacuum unit and we finish the fire rebuild, you’re going to see a lot of our activity and labor go into that Millenium Coker unit project. And, of course, right behind that, we’re doing a Co-Gen unit out at Firebag as well, so that’ll be right behind that as well. But, no, I’d say, you know, it’s early days still, I mean it’s a big project. It’s $2.1 billion overall. But everything right now looks like it’s okay to me.

Rick, the past, the procedures that you guys do, I mean, this is huge project and multi years. Once that you decide to go ahead, do you lock in all the procurement at the beginning of the project or that you allow yourself perhaps to fluctuate on the, on the raw material costs steel and everything?

Yeah, I mean I think we tend to, we would lock in some special cases, and we’d try to get hard contract bids on what we can, but a lot of that’s going to be as the market is when you go to buy that. To tell you the truth, I think that’s a very difficult thing because, you know, it’s very difficult to predict the future, and so, a lot of that, and of course, you don’t know, also you don’t know exactly the size of the bulks and exact material needs until you finish or largely complete that engineering work or get significantly along with it. So, we do try to lock in with long-term contracts and take a look at ways to mitigate that, but I would say we do not over-lock in right at the front end of the project.

I think that you may have mentioned earlier that -- for the gas and fire, the technology has been here for some time, but that has some reliability issue, and you the economic has not been proven that good in the past. Is there anything that in particular have give you the confidence that you guys are doing any proprietary research that leads you to believe you will be able to make it work?

Well, I would just say this Paul, that I, you’re right in terms of, listen, it is working at a number of spots around the world if you look at Eastman, for example, and Tennessee. In Kingsport, Tennessee they have theirs up in the 90% liability range. When, when we do install this, and exact timing around that is still up in the air a little bit, what you will see is we will not put this in the center of our plant, but it will be on the outside. [Indiscernible] the synthetic gas or hydrogen off this plant and into our base operation so that we can turn back on natural gas. So one thing that would concern me is that, that we have no backup system, if you will, so when we actually do try to bring this on, the way I would see it going, is this would be a substitute for natural gas. They could always bring on a hydrogen addition using natural gas if you do have reliability issues. We’re still working through the economics of it, I will say that. My own expectation here, you see governments around the world, but especially here in North America in both the U.S. and Canada, solidly behind clean burning coal technology. And when they talk about clean burning coal technology, that is gasification. So, I think the technology that is coming, its still very slow, a few things to be proven without a doubt. And, so, the exact timing that for us is still up in the air. But, but to be honest with you, it is a good long-term option for us. We have, as you know, an abundance of petroleum coke and if we can find a viable substitution for natural gas that would be a big benefit for us for a long period of time. That’s really what we’re trying to drive behind.

Sure. Rick, I think that I asked enough questions, just one final one. On the gasified, is the gas that you generally going to be used primarily for your coking process, or is it going to be used to generate steam for your [Sect] B? Or is it both?

Yeah, I think our current plan would be primarily we would use it as hydrogen. So you can take this, this gas that comes off a gasifier and, basically, you’re taking that long hydrocarbon chain, you’re stripping out the seal to and from, CO2 which come off, and can come off as a pretty pure hydrogen stream, which of course, we use for upgrading not just [indiscernible] but across our whole unit. So, what we see is primarily a substitute for hydrogen.

I see. Very good. Thank you.

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

Good morning. A couple of questions. The first is on your light synthetic price. It looked unusually low. Just wondering, was there something happening on the differential for the light week that drove that price down?

Tom, are you talking about the overall realization?

No, you had I think $45 a barrel for you light sweet price, that’s post hedging, but even including.

Yeah, well, it actually was, our sweet actually had a premium, which was rather unusual I think in the quarter of almost 2-2 ½ bucks over WTI.

Okay. Second question, with respect to Firebag, can you give us an update in terms of how its performance is coming in terms of anticipated ramp up, SOR and so on?

Yeah, sure, Tom. The, we’ve had the, the Firebag unit down for about two weeks here in April on a planned maintenance outage that we have planned. We had a series of issues that we need to go in and do maintenance and steam is going back in the ground as we speak. So April will be a very weak month with regard to Firebag. But as you saw in the first quarter, a little bit, averaged a little over 18 thousand barrels a day from that. And we’re still going up a learning curve without a doubt. We have some wells that are very close to the 2 to 1 steamwell ratios, and some that are not there yet. You’ll see a fairly slow wrap-up through the year. We’d expect to exit the year somewhere close to 30,000 barrels a day and continue to ramp from there. We are looking at a number of things, including a gas lift and mechanical lift to help these wells. These are, these are very large wells. So, we have some wells that are producing over 2000 barrels a day and, and, if you think about it, total volume, they would be producing about 6000 barrels a day if total volume was used to bring the steam back up in the form of very hot water and then send that back to the steam, steam system to go back down the hole. So, what I would say is we’ve had a couple of mechanical learnings to go through here, pretty much on schedule, in terms of what we would’ve expected in terms of ramp up. The ramp up may be a little bit slower than we initially anticipated, but the actual wells flow extremely well in terms of where we see those. And, we’re still anticipating a 2 to 1 steam/oil ratio. It may take us well into 2006 or 2007 to get that from both stages 1 and 2. But, but you know, overall the performance of the wells has been very good.

Has your experience here, I know it’s still early days, caused you to rethink, you know, what rule [indiscernible] in getting up to your half a million barrels a day?

Yeah, Tom. No, I still say because Firebag as such a huge resource for us, some, you know, 9 billion barrels. I still see that as very key. We are, we will be doing some [deboliking] projects in the mine as well and we will be looking at, you know, additional third party bitumen. But the way I, the way I see this is that we’ll end up here at the end of this decade, or early part of the next decade, as one of the largest upgrading complexes. Certainly in North America, if not the world. What we will have is multiple sources of bitumen. And so, it’s kind of a multiple feed large upgrading complex to the multiple market and that’s still kind of the very much the philosophy. We take a, even today, some third party bitumen into our plant and that varies by month and by market, and by our margin availability. But, you’ll see us continue to do that going forward. And so, you know, as you see a number of players here who end up producing bitumen, no doubt some of that may end up in our upgrader. We’ve got all kinds of options around. Bitumen, feed into this plant.

Thank you. The following question is from Carrie Kelly of West Canadian Pipeline. Please go ahead.

I’m just calling to ask about Fort McMurray and Rick you had mentioned that there are tremendous infrastructure problems there right now with so many projects going on. Is Suncor going to get involved with lobbying the government to, maybe, put back some more of those tax dollars that come from all these major projects?

Carrie, could I just stop you for a minute. Could you identify your organization first, please?

It’s Western Canadian Pipeline owned by Southern Alberta Newspapers. We’re out of [Madison Hat].

Okay, thank you.

Okay, Carrie. Listen, we’ve been working together in a group called The Regional Issues Working Group in Fort McMurray and this is a broad cross section of the Wood Buffalo Region, Ft. McMurray area which includes the City, it includes the oil patch obviously but also kind of all of the stake holders of that region and what they have put forward is kind of a priority list of what really they need for their community to make it better there and they're in need of sewage treatment plant, they're in need of schools, they're in need of updates to the hospital, we're obviously in need of infrastructure on the roads and so we're really working with the community. The way I would think about, is working with the community to try to get those needs addressed and so are we supportive of that? Absolutely. There's obviously a role for government at many levels to participate in that, there' obviously a role for us as well and so I think we are just taking a responsible kind of approach there.

Thank you. The following question is from Jeff Davies of Wachovia Securities. Please go ahead.

I just wondered if you could comment on your interest in additional refining capacity whether through outright purchases, JV-type structures and whether that view has changed in light of where the value of those assets have gone here recently.

Jeff Davies of Wachovia Securities: Jeff you got some smiles here. The deal that was announced this week, that did set some new high water marks on the tide coming in on that one and so, obviously, we have been continuing to work on our downstream integration strategy. We would love to pick up some refining assets. The closer and closer these refining assets get to replacement value, probably a more difficult IC intent of doing that, but if you look at when we purchased the Denver refinery from Conoco for example, we paid what I would consider to be a reasonable cost and if you look, in fact it's quite interesting, if you look at the quarterly results that asset over the last 3 or 4 quarters has generated a 12-14% return on capital kind of number and so have to say, "Listen, that made a lot of sense." So the nice thing about our downstream integration strategy is we're not in a big rush. We're gonna be in this business 50 years and I -- the words I used internally is "Listen, don't rush to get on a subway train if it's gonna wreck. Wait, there will be another subway train coming along." So patience is the virtue here. We don't have to buy another refinery to be honest with you, it's all about—to me it's all about return on capital and it's all about the overall plan and so one way to look at this is, today we have roughly 135 to 140 thousand barrels at every refining capacity, that's a good number if you're at 225 going to 260 and by the time we're at half a million barrels, if you picked up another one that would be a good thing, if you haven't then the market it the market, so I think the one thing I have talked about for a number of years here is the infrastructure and our access to the market is improving and you see that with the pipeline proposals whether it is the Embridge line to the Prince Rupert or the TransCanada line that goes into the lower part of Pad 2 or the reversal of the Exxon line to the Gulf Coast, which will probably be primarily a bitumen line but the market is opening up. So I am not overly worried about it. It all has to be based upon a return on capital evaluation or we wouldn't do it.

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

Just another question on that subject is, do you look at potentially getting some export capacity to the Pacific with Gateway or TransMountan? Would you entertain something even as radical as an Asian joint venture in the downstream with assets in the US moving up to closer to replacement costs?

I wouldn't—I would say it’s not at all on our list, in fact that wouldn't be a priority for us at all. I still see, primarily, our—a market for these Canadian crews is going to be the US. If you would see the Chinese move in with a major investment and pay for the major part of the line to Price Rupert would that open up the Asian market? Absolutely. But I think it would take that kind of a push to make that happen and I would say—I would think that that would be—I don't know what percent of probability that is, but—and we would welcome that by the way, I would be totally supportive of that line going in, the probability of it is hard for me to assess, but for them and us to take that extension and get involved in an Asian refinery, I don't think that's our main business. So, not on the list.

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

I have two questions. The first one is an insurance one and if oil prices stay high, then Suncor could go through that $1.1 billion insurance before the September startup and I noticed in the release, you differentiate between that 1.1 billion of insurance and the additional 700 million, I am just wondering if there are any kind of special conditions on that additional $700 million that you can tell us about. And the second question, another question related to the Firebag, I noticed on page 11 in that table there's no mention of a Firebag 3 although you are talking about projects starting up in 2008 and I am just wondering, is that because with the light-heavy differential, over $19 a barrel, you've—you have to be thinking about upgrading third party volumes rather than putting more capital into a Firebag in the next couple of years? So if you could comment on both of those it would be helpful.

I will take the insurance question first and just to recap, there is $900 million US available for business interruption coverage and you're right, obviously the higher the crude price, the higher the loss would be during the outage period, and I am still rooting for high crude prices, overall that is a good thing for Suncor to base operation and the amount that we recover under the insurance proceeds. But really the BI policy was put in place really to cover this kind of loss, so there's really nothing you need from the BI policies. If that was your question.

Okay.

Rick George. This is Rick on the other question. The reason that the next expansion is in the--is just, I think primarily, because it's not approved by the Board yet. What we're doing right now is engineering on Co-Gen and by that I mean a utility plant basically that produces steamed electricity. The steam, there's global use for that. That's different than ones whose boiler system—the boiler system that we're using right now for Firebag stages 1 and 2. And so that engineered work is continuing and it's something when we get ready to announce and get Board approval, then we would announce that and you know kinda where that is. So, if you think about it the Co-Gen and expansion roughly 20-25 thousand barrels a day leg and the Firebag stages 2/3 which is also—would be the next stage on there, we're stepping up the current design plans and it's very early days would be in the range of 50 thousand barrels a day. So, that's kind of the next steps of Firebag beyond stages 1 and 2.

Thank you. The following question is from Wilf Gobert of Peters & Company. Please go ahead.

I joined the call late so I apologize if this has been asked, but is there an estimate, a rough estimate, yet of fire repair damage?

Our assessment at this point is, if you look at the insurance program, there's $250 million US available to cover the cost of repairs and our estimate would be that that would be ample to cover the repairs for the unit.

If I could ask, do you think it would be like a—do you think the number is 100 million, 200 million or that it will be close to that 250?

Wilf, one of the reasons that we don't want to give the number at this point and time, we're very confident, obviously, that it won't exceed the 250 as Ken mentioned but there still is a few things that we still need to assess in terms of where those costs are and we're getting close but we don't have the final number yet so we're actually, as you can tell, reluctant, but I think with the insurance of course, it won't exceed—that we do not believe at this point and time it will exceed the 250.

Okay. And second part is, has the company had any discussions with the Alberta government regarding the royalty on insurance claims in terms of how that is calculated or are you simply accruing that number based on your interpretation at this point?

It's actually quite clear in the royalty agreement that business interruption insurance proceeds do attract royalties. So we pay the royalties on any business interruption and payments that we receive. So we would recognize the royalties as we receive the business interruption proceeds.

Okay.

Built them into the royalty base expectation for the year.

You've got to remember that business interruption costs has always been in the calculations so the government has participated in that—they thought of the logic of it, you cannot ask them to participate in the costs of the insurance and not the proceeds.

That's right.

Okay. Well just by extension on that, as you go into expansion spending is there a point coming in 2006 or 2007 where you will fall back into a 1% royalty?

No. We are in payout on the base plant operation. If you recall, there's two projects for royalty purposes, one would be Firebag which is separate and then the rest of the operation and it is in payout now and it will not go back to that –deferred royalty base.

Even when you get into Voyager spending?

That's right.

Is Voyager a separate project from the base plant?

Voyager will be separate from the base plant for royalty purposes.

I see. Thank you.

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

Yes Rick, just a follow up on the discussion there that was going on in terms of market development for Oil Sands product, could you prioritize the markets that you're looking at, new markets that you're looking at and could you comment if you've taken any pipeline space now on any of the new projects that are being proposed?

Yeah Brain. It's a good question and the answer is no. We haven't taken any position, but I will say this, because there hasn't been an open period, for example on the [Terastin] expansion to the West Coast, we have given an indication we would be supportive of that with some volume, but the actual open period where you actually make the commitment hasn't occurred yet and that would certainly be on our list in terms of that commitment. I think the TransCanada pipeline to the Mid-West, that was one that, again hasn't come up for firm commitment, we are obviously in discussions and we're in discussions with all of these pipelines, whether it's Terastin Embridge, or TransCanada, so we will be evaluating those options overall. I think if you think about it, the Pad 2 in the Mid-Western part of the United States is always going to be the primary market space for these Canadian crudes. We like our position in Pad 4, the Rocky Mountain region with the Denver refinery, so that's always going to be a bit of a priority for us and we're gonna be continuing to wrap up the amount of our own production that gets to that Denver refinery and I think in the near term, the new market that would interest us the most is, in a near term being 4 to 5 years, so that's near term for us, is that California market because as the Alaskan crude continues into decline and that's gonna be a market that the Canadian crude is eventually going to penetrate. The kind of crudes that we produce here in Alberta, I think would be a good match for many of those California refineries. So that's why you see so much interest in getting a line to the West Coast.

Thank you. We will now take questions from the media. [OPERATOR INSTRUCTIONS] The following question is from Ian McKinnon of Bloomberg News. Please go ahead.

A small quick clarification. In terms of the Denver refinery and your outage in the fourth quarter, do you guys have an estimated cost for the actual maintenance turnaround and then forecast of the impact on the refining units profits in the fourth quarter has a result of that [sugaring]?

I don't offhand Ian, would you mind if I got back to you with that.

That's fine. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Rogers.

Judy, thank you very much and thanks for everyone for listening in. Great questions and for those of you here in Calgary it is our EGM today so we'd be happy to see you there and we do have meetings as Louis mentioned earlier in New York and Toronto coming up, so we'd be happy to see everybody out there. So, thank you very much for listening in. Again, Brenda, Rob and I will be here answering all your detailed questions, so please feel free to call me at (403) 269-8670 and we'll get back to you promptly. Everybody have a good day. Thanks.

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