There are growing signs that Syncrude’s woes are far from over. The problem-prone oil operation is now suffering from another prolonged outage. There are growing signs that major partners in the operation, Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Imperial Oil Ltd. (TSX:IMO)(NYSE:IMO), are incapable of improving the facility’s reliability and turning the operation around.
The latest outages couldn’t have come at a worse time for Suncor and Imperial Oil. The marked appreciation in the value of crude means that now is the time they should be focused on boosting oil output from Syncrude, but because of the outages, production keeps falling. The facility has production capacity for 350,000 barrels of oil daily, but after a transformer blew, Syncrude was forced to cease operations. According to Syncrude, sources production could be offline for all of July, which means that it won’t be upgrading bitumen to synthetic crude.
That is bad news for Suncor and Imperial Oil, which own 59% and 25%, respectively, of the business. For the first quarter 2018, Syncrude was responsible for 142,300 barrels daily of Suncor’s production and 65,000 barrels daily for Imperial Oil. The loss of that production will have a marked impact on earnings, because, unlike bitumen and Canadian heavy crude, known as Western Canadian Select (WCS), synthetic oil trades at a slight discount relative to West Texas Intermediate (WTI), which, for the first quarter, came to around US$2 per barrel.
Nonetheless, the impact may be offset by a range of factors, including the outage freeing up pipeline capacity for the transportation of heavy crude, which will assist in reducing the discount applied to WCS.
You see, because of easing pipeline capacity constraints, the discount applied to WCS has fallen significantly in recent weeks. A week ago, the discount was as high as US$24 per barrel, but it has since then dropped to US$20 and could keep falling. Growing pipeline capacity and crude by rail are helping to fill the gap and should contribute to the discount easing over the remainder of 2018.
That — along with higher oil prices, which see WTI trading at over US$72 per barrel — will ease the financial impact of lost production from Syncrude on Suncor and Imperial Oil.
Suncor stated that part of its rational behind its 2016 $6.9 billion acquisition of Canadian Oil Sands and then purchase of additional stakes in the Syncrude business was that it gave the company sufficient control to implement changes aimed at reducing costs and boosting reliability. While Syncrude has demonstrated that it is a valuable asset, it remains plagued by mechanical failures and outages that have led to claims by some industry insiders that its reliability will never improve.
That, however, shouldn’t deter investors from boosting their exposure to Canada’s premier oil sands companies, Suncor and Imperial Oil. Both have high-quality assets, diversified production, and relatively low operating costs, which offset the risks posed by their ownership of Syncrude.