Suncor Energy Inc (SU) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Suncor Energy Inc.

second-quarter results conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions.

(OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded on Thursday, July 24, 2008 at 7:30 a.m.

Mountain time.

I will now turn the conference over to John Rogers, Vice President, Investor Relations.

Good morning, everyone, and thank you for listening in to our second-quarter conference call.

I have the usual suspects with me today.

Actually, Ken Alley and Rick George are in remote; they are up in the Fort McMurray location.

So Rick and Ken are up there.

And in the Calgary office with me is Maureen Cormier, our Corporate Controller; [Greg Friedan] and [Tim Maw] from our Controllers department.

We are going to follow the normal pattern.

Rick will give his introductory comments.

Ken also.

I will give you a bit of insight into the outlook.

Then we will turn it over to you to ask questions of Rick and Ken.

So Rick, why don't you kick it off?

John, thank you very much.

Delighted to be here, and Ken and I are obviously in Fort McMurray.

We have had a Board meeting here the last couple of days and got a good chance to get our Board around all of our operations here in Fort McMurray, which has been a great trip.

So listen, we are on to talk about the second-quarter earnings.

We obviously knew, and the market knew as well, that our second-quarter results would be impacted by the turnaround at the Upgrader 1 at Oil Sands.

It was one of the largest turnarounds of work that we have ever completed.

And it did come back a little bit late -- it did take us a number of extra days to bring that unit back on.

And it really was around the amount of work that we found once we opened up the unit, and also the availability of labor, which is certainly very tight in this region.

You know, if you think about it in a two-year context, we had a big turnaround in Upgrader 2 in the second quarter of last year.

So both this year and last year impacted by those turnarounds.

They are a very important part of this business.

It is very important that they get done right, and they are very important in terms of us being able to operate safely as we go forward.

The turnaround is now behind us.

We are feeling very good about that.

We still are bringing the unit up to full production, and so the month of July won't look quite as strong as you might expect.

But what I would say, though, the rest of this year looks extremely good as we line out these facilities.

So obviously, we are not very happy with the production in the first six months of this year.

We do know we have disappointed.

And what I would say about it is, listen, this is temporary.

This is one of the challenges that corporations go through.

It is not permanent.

We do feel like we have this well under control.

We have the right people on the right assets, and we will get this lined out and we will move forward towards that 350,000 barrels a day, which will come the later part of next year.

So we are disappointed on that.

Some of the root causes include a very severe winter.

We did have the restrictions on Firebag, which you would have noted got lifted just two days ago.

We are very happy that that got lifted.

We worked very hard to make sure that happens.

And our track record since the restriction was on has been very, very good.

So I think that all helped us.

Production at Firebag this month will be around 42,000 barrels a day.

We will start -- and have already started steaming new wells.

It takes you about three months to get communications between the well bores, so then you'll start to see it ramp up after that.

And very happy with the production numbers at Firebag.

This restriction order, we are not happy with, but it did give us a chance to fix a number of things, to really kind of steady down on the wells.

We had some downhole problems.

We got all of those fixed, and so very happy with that.

If you look at Firebag, it's one of the biggest SAGD production, if not the biggest, in Canada, at above 40,000 barrels a day and will be ramping up from there.

Really like the reservoir performance; really like the technology, although we are still going up a technology curve there.

So if there's any silver lining around the restriction, it's that.

And we certainly made full use of that cap to the extent that we can.

So the group up here is working very hard.

It is not an easy environment.

It is very busy up in the Fort McMurray region generally.

All of industry is pushing hard up here to get volumes up.

Very proud of the team here in terms of what they're doing and what they are getting accomplished, and so feel very solid about where we are on a go-forward basis.

Just to move on to major projects for a moment, and of course that is a big part of Suncor work these days.

If you'll remember, we did a project we called the MCU, the Millennium Unit.

It was a CAD2.3 billion project.

And virtually it is complete now and it was on time and on budget.

Not something you can say about a lot of these projects.

So very, very proud of the major projects group and what they've done with that.

That is a very tough project because it's right in the middle of the operating plant.

I know the operation [guys] are glad to have that work mostly behind them and those guys out of the essential operational parts of it.

Our Millennium Naphtha Unit, which is about a CAD650 million project, is 30% completed, and is targeted for a mid-2009 completion.

The CAD850 million Steepbank extraction plant project, engineering is essentially complete.

Construction about 30% complete, and it is, again, targeted for 2009 completion.

At Firebag, the sulfur plant that we are putting in that will handle all of the sulfur from all six stages, the engineering is 85% complete, construction about 30%.

And it is targeted, again, for a 2009 completion.

So a number of these smaller projects, other than Voyageur, are going to be done here in the mid to the latter part of 2009.

Again, it will be a great milestone for us to have those behind us.

With regard to Voyageur itself, the product is split into two pieces.

The Upgrader, the engineering is 70% complete and construction is about 5%.

We are in the field doing deep undergrounds, a lot of piling work.

We have already done one of the largest concrete pours on the project in terms of the coker structure, and so the Voyageur product is off to a good start.

Early days, but a good start.

Firebag Stage 3 -- and you have to remember, in this Voyageur project we have 3, 4, 5, and 6 -- Stage 3 is the first one.

The engineering is 90% complete.

Construction is 30% complete.

We are targeted to have first oil at the very end of 2009.

And so you'll start to then see those stages ramped out about a year at a time after that.

So I'm very proud again of the project work we're doing.

Very tough environment from a labor availability viewpoint, but we are managing this, I think, as best we can in this environment and very proud of that.

If you think about the other two businesses, natural gas, a very strong quarter.

And obviously, we increased the outlook in terms of performance for the full year, and so very, very happy with that particular operation.

And in the downstream, Refining and Marketing, solid operational results.

If you look at refinery utilization, that looks good.

Obviously, we are impacted by refining margins, just like everybody else.

You can't escape that.

Refining margins are down.

We are seeing some demand reduction, and we are certainly seeing margins on gasoline in particular down.

If there's any bright light to any of that side of the businesses, diesel margins hanging in pretty solid, and Suncor is a large diesel producer, if you look at oil sands and our two refineries together.

So if you take a look at it, really good results with one exception and that is the operational results in oil sands.

I can just tell you this is a big focus of Steve Williams, our Chief Operating Officer, our entire team.

And I think we -- I am absolutely convinced we are turning the corner here and you'll see much better results as we head into the last six months of this year.

So that's kind of on an operational basis.

Ken, over to you.

Thanks, Rick, and good morning.

Rick covered it pretty well.

Clearly, the financial results reflect the planned turnaround and the impact on production at oil sands.

That was offset by very high crude prices, so I mean, that continues to be the story here as we go forward.

Rick talked about that offset some of the production shortfall from the turnaround.

A good performance from the natural gas business.

I'm pleased to see that performance.

You go to the downstream business, Rick talked about the softening of gasoline demand and margins clearly impacting that business year-over-year.

Clearly, masked to a certain extent by the change in accounting to FIFO, so inventory gains are showing stronger results from the downstream than we would see if we were on a LIFO basis.

I think that really gives a true picture of what's happening to margins on the downstream.

Given that we had the turnaround, cash flow was pretty strong at CAD1.4 billion, and capital spending very much in line with our expectations.

So overall, the balance sheet is about where we thought it would be at this stage of Voyageur expansion.

So we feel very good about our ability to finance that project and all of our capital spending going forward.

We did take the opportunity to put some long-term debt on the balance sheet in the second quarter, really to finance Voyageur, but it is really part of building out the overall capital structure of the corporation going forward into what will be a very much larger corporation once we complete Project Voyageur.

So overall, the balance sheet is about where we expected it to be and in good shape.

John, I think I will just pass it over to you now.

Great, back to Calgary here.

The only thing I was going to comment on was the outlook.

It is on page 3 of the release.

Obviously, we did adjust the production outlook for oil sands, given our year-to-date production.

I think everybody, with us publishing monthly production numbers, knew or anticipated we were going to change that range.

240,000 to 250,000 is the range that we are now predicting we'll come in for the year.

It will be a build through the year.

We would expect that we would exit the year at 300,000, so we're kind of building from July through to the end of December with an exit in the range of about 300,000.

The mixes, as it is stated here in the realizations, are a little better than I think we had originally anticipated, with WTI@Cushing off about CAD2.50 to CAD3.50.

Cash costs really just [fall out] of the production numbers in the neighborhood of CAD35 to CAD36.

So probably see something like CAD31 to CAD32 in the second half of the year.

Natural gas production in the range of 210 to 220, as Rick mentioned, just up a little higher.

We've seen some really good performance out of that group, and chose to update the guidance for the year.

So really that's all I was going to comment on.

What we would like to do now, Joanne, is open the lines for questions.

Again, Maureen and Greg and Tim and I would like to answer your detailed modeling questions after the call when we can give a little more time, a little more consideration.

So if you have any strategic questions you'd like to put up for Rick and Ken, we would be happy to entertain them now.

So over to you, Joanne.

(OPERATOR INSTRUCTIONS) Brian Dutton, Credit Suisse.

Yes.

Good morning, Rick.

I think you've made it pretty clear this year that your key priority is improving the reliability of the base business and operational excellence.

Along that line, could you remind us of the issues that you've been facing at extraction?

And with the turnaround now behind you, have those issues now been resolved?

Brian, yes, a lot of our problems at extraction have been around our handling of sand, and we have had a couple of instances, particularly early in the year, where we actually plugged off one of the major plants there with sand and very heavy production.

Funnily enough, as a direct result of having very rich ore in one instance, where we carried -- that rich ore carried over a lot of sand into the second part of what we call Plant 4, where we actually plugged it off with sand.

So a lot of the issues that we had in the first quarter particularly, and then the second quarter, we feel like we got a real bead on, whether that's erosion in our tailings lines or whether it's plugging off Plants 4.

So a lot of terrific work.

And it's not just one thing.

There's about eight different items that the extraction plant has been working on in terms of continuous improvement to make sure that we get that done.

I feel very good about that.

In fact, if you look at that, that is not the limiting factor over the last several weeks and so coming out of the turnaround.

And they did a lot of work on the extraction plant in the turnaround -- feel pretty good about where we are with that.

Having higher volumes from Firebag going into the plant will help, I will say that.

I mean, we are probably 20,000 barrels -- a little lower than we would've expected at Firebag -- would have had full liftoff by now, maybe a little bit lower than that.

And that would have helped you ride through some of the extraction plant problems.

So as we ramp Firebag on up continuously, that will take a little bit of the pressure off the extraction plant.

Also taking in petrochem volumes, which starts later this year, into the plant, that means you then have two mines, two extraction plants, Firebag and Petro-Canada, all feeding the plant.

All that should help steady off in terms of feed into the plant.

(technical difficulty)

[Gil Alexander], [Darfield] Associates.

Could you give us an idea what your cash operating cost per barrel will be once you get to 300,000 barrels?

We would expect it to be somewhere in that CAD27 a barrel range when we have sort of steady-state production at about 300,000 barrels a day.

I thank you very much and good luck.

Zubaida Mirza, CIBC World Markets.

(technical difficulty)

John, can you hear us?

Yes, we can hear you.

And I'm going to have to correct your previous answer.

It's probably CAD27 when we get to 350,000.

Brian Singer, Goldman Sachs.

I wanted to focus on Firebag.

Could you discuss, I guess, as you remediated the sulfur issue, if there are any larger takeaways, either for Firebag or just more broadly for SAGD in terms of sulfur management and timing of some of these sulfur issues?

Sure.

So what happened to us was when we did all the core hole drilling across Firebag and did all the sampling as a result of that, we did not see any significant amount of sulfur in that.

So at one point, the decision was made that we didn't actually need sulfur handling.

Then when we started steaming -- and this just shows you, this is a very young technology -- I'm talking about the industry in general in terms of SAGD -- when we started steaming, then we got a completely different kind of reaction underground in terms of producing more sulfur than we ever projected from the reservoir modeling.

Now, that is not actually a massive problem, except that we just didn't install the facilities to handle that.

And I mentioned, those facilities are being installed and will be complete by the second quarter of 2009.

Again, that sulfur pipe that we're putting in will handle all six stages.

So it is still not a massive amount of sulfur, but it's enough that it caused an odor problem.

So don't think about this as a highly sulfur reservoir.

It's just more sulfur than we actually designed in the facilities.

But if you look at Firebag overall, listen, our average well is over 2000 barrels a day.

So this is a great reservoir.

It's got a great caprock, in the beginning stages of this, and very little water.

And if you look at well production rates compared to any of the other SAGD projects, we are more than double, sometimes triple or 10 times what other SAGD producers are producing per well pair.

What I would say is every reservoir is different, and so you cannot generalize this across all of the industry, because the thicknesses, the amount of water, the overburdening you have, the pressure of that reservoir, is different in absolutely every single case.

So you cannot generalize about any of this.

We're still very happy with our reservoir, very happy with the well performance.

It looks very solid.

This is just one of those adjustments very early in the stages of a 9 billion barrel reservoir development.

And again, feel very confident about where we are going with this overall.

If you look at Firebag over the last three, four months, it's been very solid, very steady operations in terms of production.

Great.

And then secondly on costs, could you give us an update, just, I guess, given higher steel costs and maybe some update on where the labor market stands in terms of labor cost inflation, what that potentially could mean relative to what you already have locked in for Voyageur?

That is a great question.

So we still see -- continue to see -- you are asking really Voyageur on the construction on a go-forward basis.

And we still, subject to inflationary rates which far exceed anything you read on any other industry that I know about, we certainly would be seeing inflationary rates on materials in the 7% to 10% rate.

So that is hard and we put in the initial estimate.

We're not giving up on it yet, I can tell you that, and we certainly have quite a bit of equipment ordered on the Voyageur Upgrader already and certainly on Firebag Stages 3 and 4.

We are probably more impacted in terms of that in terms of stages 5 and 6 on Firebag than anything, because we have so much of the material ordered.

So it is still an issue.

And I am not announcing a number except to say, listen, there's plenty of pressure on the inflationary front.

On the manpower front, we were really impacted this year by the turnaround.

We put a lot of those resources on a human basis over onto the turnaround.

That has been moved back.

Again, very -- relatively pleased with both where we stand on engineering and the fact that we have engineering pretty far ahead of construction both at Firebag, at the Voyageur Upgrader site.

And very early days, but very pleased with the progress we're making there.

So just know, inflationary pressures, absolutely.

One way to look at this is of the CAD20.6 billion project, we already have CAD4 billion spent.

So you are 1/5 of the spending way through.

At the end of this year, you will probably be closer to CAD7 billion spent of the CAD20.6 billion.

So we are heading there, I can tell you that.

What does help us a little bit is Firebag being staged in four different stages, and the fact that you will have the first stage and the production from that coming out in 2010, and then it will come on in stages.

So that is actually helping that somewhat.

And of course the big piece then is, of course, the Upgrader.

But if you walk up on that Upgrader site, which I did recently, you would be very impressed with the amount of activity going on there already.

Thank you very much.

(OPERATOR INSTRUCTIONS) Robert Plexman, CIBC World Markets.

Good morning.

I had two Firebag questions, Rick.

First of all, just wondering if there is any risk that the government could reimpose the restriction between now and when the sulfur plant is completed.

Also, wondering if the restrictions at Firebag have had any impact on your ability to start commissioning the MCU, if there's any relationship there.

Okay.

Thanks, Rob.

What I'd say on the second question, none -- no restrictions at all in terms of starting up the MCU at all.

No actual tie at all there.

On the other, you've got to remember, what this controller was about was about odor, odor exceedence.

And so this is not a safety issue, it is not an environmental issue and it is not an operational issue, save the fact that we had more odor coming out of the plant than is allowed.

And we have had, except for one upset in January, we have had virtually no exceedences since December of last year.

So as long as we can keep in that operating mode, then we should be able to keep our license.

Listen, I think we have learned our lesson, is what I would say to this.

We will not be tolerant of exceeding those limits.

And the temporary fix we put in has worked extremely well.

We do not see why that can't work very well all the way until we get this sulfur plant done.

So listen, it is an operational issue.

You can always have upsets.

But what I would say is we would not sacrifice short-term daily production over that odor issue.

The odor issue is one that we feel like we have under control, and as long as we are very careful with that, we shouldn't have any further restrictions on that.

Thanks, Rick.

Ryan Todd, Deutsche Bank.

Good morning, gentlemen.

A question for you.

I know the past couple of years have been pretty heavy on the turnaround side and operations have been a bit rough.

Going forward, I know there will continue to be a certain amount of turnarounds in normal operations.

What do you think is a reasonable target utilization rate in terms of versus total capacity for the oil sands operations going forward?

That is a good question.

I mean, you have the capacity, obviously, but you are always going to have various issues, catalyst replacements, or other issues.

I think -- because of the fact we have two upgraders going to three upgraders, we will have the maximum amount of flexibility.

And you've got to remember, every three years, potentially four, if we can stretch it that far, you have to take these things down for between 30 and 60 days to do the correction.

Outside of that, a normal run rate would be certainly in the 90% of your kind of nameplate value.

Now, the trouble with this business is that is not a steady-state number and -- but some utilization in that 90% range should be something that you should target for.

And that is certainly where our budgeted numbers would look at it.

You know, one thing we could say, too, is the production numbers that we do put out are with our anticipated utilization rates, so they are not the maximum production.

They are our anticipated utilization rates.

Okay, great.

Thanks.

That's very helpful.

And then one more, I'm sure.

I know you get asked this all the time, but refinery valuations, very, very cheap out there.

In terms of refining and acquisitions, any interest on anything?

Specifically on -- maybe you can't comment on this -- but on Frontier's refineries, would you anticipate any sort of antitrust issues down in the Rockies regions?

Or do you think if you were interested you would be able to do something like that?

I'm not going to make a comment on any specific companies.

I guess I've been talking about this some time.

We continue to look at downstream assets.

It has to really be asset-specific.

And if you'll recall, we bought the Denver refineries before the big run-up in refinery margins.

I think we got most of that margin and fuel, [grade] about the timing of that.

As I said -- and we are right through the middle of the peak refining margins -- that they looked way too high for me and we did not pull the trigger on anything.

So for us, it is a very patient game and it's about asset fit.

So it has to fit with us and production coming out of oil sands.

Continue to look at individual assets; not very interested in companies at the current time.

What I would say is with increased ethanol production and with demands dampening, as I would put it, then I don't know that I see refining margins roaring back anytime soon.

So this may be a game of patience as much as anything.

But I am really happy with the two refineries we have.

I would sure love to have a couple refineries, which I am not going to identify on the phone.

But it's a price/value issue for Suncor, not a real drive to be in the downstream.

And so I think that's probably the best way that I can put that.

I don't want to talk about specific companies or specific assets for the obvious reason.

Great.

Thanks very much.

I appreciate it.

Paul Cheng, Lehman Brothers.

Good morning, gentlemen.

First, John, before I forget, after the call, can you or someone send me, whether e-mail or phone call, a stock-based compensation by segment and also the FIFO inventory gain for the downstream?

Sure, we will be happy to do that for you.

Thank you.

Rick, I know it's still early, but I think you have indicated that after Voyageur you are not sure that the building upgrade in Fort McMurray or even in Edmonton or anywhere in Alberta, that makes sense going forward.

So wondering, have you guys thought to contemplating beyond Voyageur that what is the growth plan for the company?

Or that is still too early?

Good point, Paul.

No, it is not too early.

No, no, in fact we are working very hard on that.

We have a number of options in terms of what we're looking at.

One is a mining project we call Voyageur South.

There's further expansion possibilities in Firebag.

We have also a mining opportunity which we call -- which is located just north of Firebag.

So we have got three or four different projects that have the potential to do that.

Probably the most likely, and we're still working on this, would be what we call Voyageur South, which is just south of the Voyageur Upgrader.

This would not be -- the one thing I would say about that is what we are looking at is a mine using completely new technologies throughout, a lot of which we are developing currently.

So those plans are there.

One of the reasons it's not too early to start talking about some of that is because we are getting to the point where to get environmental permits to do a project is moving out from probably 36 closer to some other number.

And I don't know where that number ends, but we are certainly well beyond 36 months just to get environmental permits, not to mention engineering and construction to follow.

So it is not too early.

I do want to keep our organization very focused on the here and now, both in terms of operational excellence, driven by Steve Williams, but also on the major projects we have.

So we have a lot on our plate.

But I will tell you, in the background we are working on those issues of where it is next.

I think what is different is if we have 500,000, 550,000 barrels a day of upgrade capacity, then our ability to take a little bit more risk in terms of producing heavy oil or bitumen and selling that to the market is a different issue than it was if you are at 250,000 barrels a day and then take bitumen at 100,000 barrels a day.

So you have a little more flexibility.

I think the other thing that is changing in the market is if you look at supply issues and production drops in Mexico -- and I think Venezuela will follow -- then what we are also seeing is a lot more pull on Canadian crudes coming out of the Gulf of Mexico.

So if you think about it logically, if you have coking capacity either in PAD 2 south of Chicago or in the Gulf Coast that is short of heavy, the better option may be to go with the heavy that you can get down into those marketplaces rather than build your own upgrader.

And certainly, Suncor is one that has the flexibility to do both.

That's the good news.

And you can probably take a little bit more risk about what's happening.

We do a lot of work -- and I know you do, too, Paul -- around what is going to happen to light/heavy differentials.

It is hard -- it is not an easy call, but what I would say, given what I know on a worldwide basis, including what's going on in West Africa and the Middle East, I would probably bet on lower light/heavy differentials on a go-forward basis.

Hard to call five years out, but that's certainly something we're looking at.

I actually agree with you.

I think the light/heavy differential is coming down.

Rick, how big is the Voyageur South mining?

Are we talking about 100,000, 200,000 or what kind of --?

I don't think we've actually gone public with that.

I would just say right now it is in that 100,000 to 200,000 range.

We have not actually set a number and gone public.

But you can expect later this year that we will be a little bit more definitive about that.

Okay.

And another question.

You're talking about -- I think the earlier question about acquisition of refinery, I think that patience is the virtue in maybe that better payoff.

But before we even think about acquiring assets, what is the possibility or the potential that (inaudible) you can organically to expand you to take in more -- even more of the sour crude or the heavy oil there.

Is it economic at all?

Heavy oil is a little bit of a problem since you'd have to add cokers; that is a big investment in what is a relatively small market.

So I don't really necessarily see running a lot more heavy than we do today.

We run a little bit of heavy down there now.

And we have an asphalt plant that obviously takes a lot of that heavy.

But continuing to look at is there an opportunity to change that refinery into producing more diesel versus gasoline than it does today.

It has some flexibility, but not a lot.

And so I don't think there's a lot of potential for that.

I'm very happy with that asset, and if you look at its cash flow, particularly in the first six months, it shows you very solid, even in the environment we find ourselves in.

But I don't see a really big opportunity there to change it to, let's say, add cokers or something that makes it large on the scale of Suncor.

Also, Rick, you earlier mentioned that the severe cost pressure that are still facing -- you guys are facing in the industry.

Any update or changes that you look at in terms of the CapEx for this year, as well as the guidance for the next several years?

No, nothing for this year.

In fact, our projections of over CAD7 billion to our capital, we look to be on track with that, or maybe slightly under, but it's just a timing issue more than anything.

So not on that.

You will see a higher capital budget out of us in 2009, and really that's around Voyageur.

And that's an issue of timing.

2009, early 2010 will be our peak spending years in terms of Voyageur, and as you get into late 2010 and '11, that is where you will have most of the materials bought and you will actually be finishing up a number of the projects.

So the peak comes here in 2009, early 2010.

Then after that, a ramp-down.

But no real change in terms of the profile we expect on the next couple of years.

I think previously the guidance is around in the CAD8 billion for the next two years.

Is that still on the ball park okay?

Paul, it's John.

It's probably more on the 8 to 9 range for the next two years.

Okay, perfect.

Final question, I think that when we're looking at the new production guidance, the fact that when you look at the first six months, and then obviously that you have to rebudget downward.

But that appears that it also means that you are revising the second half of the production guidance downward.

Is there -- given that you think most of the problems that are facing in the first half is already behind you, is there any particular reasons causing the second half revision?

Rick, do you want me to answer that?

Sure, John.

Paul, not really.

I think we had looked at the Firebag restriction and felt we would be short of bitumen for quite some time.

And the control order is now behind us, but it is going to take, as Rick mentioned, three months of steaming before we begin to see some incremental production.

So a lot of this has to do with the shortage of bitumen.

And as we build that bitumen up -- and we now feel that we are probably 12 months behind where we wanted to be.

So we will be at 350, anticipated 350, sometime in the second half of next year, which backs everything into this year.

So we would expect to exit this year at 300, which is probably lower than we thought we would be, say, 12 months ago.

But I think as our operational experience has unfolded, this is where we kind of think we are.

So we are probably 12 months behind, but I think we had anticipated this a little while ago.

Okay, thank you.

William Lacey, First Energy.

Gentlemen, just two quick questions.

We have seen producers start to get more and more involved in what I will call the midstream running the pipelines, or at least owning equity on the systems.

Rick, what is your thought as far as the strategic importance for you guys getting the whole Gulf access, what have you, about owning steel on that particular segment?

I think you've got to be careful.

Certainly we are looking at all of that, and I think the strategic advantages I see for Suncor involve the size and scale of our operation, the amount of diluent that we have available, and the fact that we are in both upstream and downstream.

And we certainly are taking positions on pipelines on a go-forward basis.

Actual ownership is a different issue in the sense that if you look at historically, the returns are much lower than we have in other investment opportunities.

So you have to be really careful.

It will be strategic for us.

It will be around having the right storage in the right locations, some other assets that are very important.

I'm not saying we won't take a position on pipelines, but they will have to be something where we think we have a distinct competitive advantage.

It won't be a wholesale kind of let's take an equity position in a pipeline for a long period of time.

Now, what I would say is virtually -- most of the pipelines we're taking a look at taking throughput rights on those.

But actual equity ownership is -- again, if you look at our return on capital numbers, those projects look pretty low.

So a better choice for us may be to return cash to shareholders than do that.

Great.

Second question.

I know you have dealt with this one before, but just your flexibility on your production output; obviously, diesel pricing is pretty strong.

Just how much flexibility you have in sort of tweaking your output towards a bit more diesel, what have you.

I would say limited.

There is some flexibility at Sarnia in Denver, but not massive.

Here, it is just keeping that diesel hydrotreater up and running and turning out the diesel.

So I did a back-of-the-envelope calculation the other day -- because we don't necessarily think about it in these segments -- but we would produce about 100,000 barrels a day of diesel between Fort McMurray and the two refineries, something close to that.

So it's an important part, but our flexibility in terms of massively increasing that is somewhat limited without putting in significant new capital.

Thank you.

Gordon Gee, RBC Capital Markets.

Sorry, I might have missed a bit of your prepared remarks, but is it possible for you to give a number for what your LIFO/FIFO adjustment is for the downstream?

That is actually right in the statements, Gordon.

Yes, sorry.

I'm just out of the office.

I don't have access to the PDF.

179.

Okay, thank you very much.

Gentlemen, there are no further questions at this time.

Please continue.

Thanks, Joanna.

The one thing I wanted to elaborate on just for a second was around our cash costs.

And we certainly do expect to be in the CAD27 range when we are at the full capacity of 350,000 barrels a day.

When we're at 300,000, we're going to be at more like CAD30 to CAD31, in terms of cash costs.

So again, as we move towards that 350,000, we think our production base does support about a CAD27 cash cost.

With that, just wanted to thank everyone for listening in.

Again, Maureen, Greg, and Tim and I will be available in my office for your detailed modeling questions, and other than that, everybody have a good day.

Thank you.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for participating.

Please disconnect your lines.