Suncor Energy (TSX: SU) (NYSE: SU) and joint venture partners Total (NYSE: TOT) and Teck Resources (TSX: TCK.A and TCK.B) (NYSE: TCK) have unanimously approved the Fort Hills oil sands mining project. The project is expected to unlock 3.3 billion barrels of bitumen and produce for about 50 years. Needless to say, it’s an important project for all three joint venture partners.
Mining Canada’s oil wealth
The trio will spend about C$13.5 billion to bring this mining project into full production. Suncor is responsible for 40.8% of that capital and will develop and operate the project. This has the company spending about C$5.5 billion, which will account for about 15% of its annual capital budget in the years that the project is under development. Total has the next largest share at 39.2%, while Teck Resources owns the final 20%.
Despite the costs, the companies see positive future economics. Still, all three had to view the project through a cloudy crystal ball as it isn’t even scheduled to begin production until the fourth quarter of 2017. Once complete though it will deliver about 180,000 barrels per day for decades to come. One of the benefits of mining the oil sands is the fact that oil companies can extract about 90% of the original oil in place. That’s three times the oil that producers are easily able to extract from a conventional oil reservoir.
Of the three partners, this project is most important to the future of Teck Resources. It marks the diversified miner’s first foray into oil sands mining, which further diversifies its business away from coal, copper and zinc. While it has a small stake in the project, once the project is fully operational in 2018 it will deliver about 10% of Teck Resources’ cash flow.
Planning for production
One of the issues that has held back oil sands production in the past is lack of pipeline infrastructure. The Fort Hills partners are planning ahead and have signed agreements with Enbridge (TSX: ENB) (NYSE: ENB) to ensure the project’s production isn’t held back.
One of the two projects is a $1.6 billion Wood Buffalo Extension Pipeline that will transport diluted bitumen that’s produced from the Fort Hill project, as well as from Suncor’s other positions in the growing oil sands region. It will ensure adequate takeaway capacity for the region.
A second project is the $1.4 billion Norlite Diluent Pipeline. This project, also developed by Enbridge, will supply the region with the diluent it needs to support the further development of the oil sands. It’s an important complimentary project to ensure that producers can then ship out diluted bitumen through the Wood Buffalo Extension.
The approval of Fort Hills signals that producers see continued growth out of the oil sands. Not only will the partners spend C$13.5 billion on that project, but the addition of Enbridge’s $3 billion in pipeline projects is also a significant piece of the puzzle. These companies obviously see very compelling future returns, as the world’s thirst for oil isn’t likely to abate anytime soon.
More from The Motley Fool
Interested in a top small-cap stock idea from The Motley Fool’s senior investment advisor? Click here to download a FREE copy of “A Top Canadian Small Cap for 2013 — and Beyond.”
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.
Fool contributor Matt Dilallo does not own shares of any companies mentioned. The Motley Fool has no positions in the stocks mentioned above at this time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.