May 15, 2021 1:36 AM

Suncor continues to sink sums into Syncrude oil sands, how soon will they be stuck in the quicksand?

Suncor Energy Inc. has announced that it will take over operations of the Syncrude project next year. The announcement comes during a seeming return in value in the oil and gas sector following vaccine trial results, but during the context of a global slide away from gas and petroleum products. Clearly, Suncor thinks the black gold is a secure enough pathway, but are they headed into a quagmire?

/ Published 6 months ago

Suncor Energy Inc. has announced that it will take over operations of the Syncrude project next year
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While the world, and markets, celebrate the now repeated news of promising vaccine results against COVID-19, in a board room somewhere Suncor executives are no doubt celebrating the latest step in their decades long process to acquire the Syncrude project. The energy giant has announced that it will take over operations of the project, which it is a majority investor in, over the course of 2021. The move comes at a key juncture for the oil and gas industry in Canada, but is it the right moment to invest?

Suncor’s success is built on oil sands, so Syncrude is a sure bet?

The move is hardly a surprising one, ever since they bought out the first Murphy Oil Corp shares in the project five years ago. Then last year, followed that up with the takeover of Canadian Oil Sands which gave them the few remaining percentages needed to become majority stakeholders in the project, taking it from just 12% in 2016 to over 58% today. 

Given that the Syncrude project is one of Canada’s (and the world’s) largest producers of synthetic crude oil from tar sands (the raw material Suncor already specializes in working), the takeover of the operation is hardly a stretch. In fact, the two are close neighbors with (according to the Suncor press release) family members working for both! 

The primary motive seems to be an enduring belief from Suncor management that they can improve on, and benefit from, profitability in the Syncrude project. Their release mentioned 300 million in cost-saving synergies, though to what extent this might include personnel reductions is not clear. 

While the finalization is dependent upon the other minority owners accepting the process, every indication seems to point to a smooth transition next year. But will 2021 bring the profitability they hope? Or will it be another disaster for oil and gas companies?

Short term outlook for Suncor and Syncrude oil sand synergies

The moment might seem right for this sort of move; share prices are still recovering from the covid-19 based crash in spring, but have not yet risen to prior heights. The pressure for cost reductions and efficiency is thus particularly strong. The appeal for more fluid supply lines and reliable production and refinery processes may have helped motivate the takeover, but will it be enough to offset Covid-19 difficulties?

While some investors were still betting on oil in the hope of a reelection victory for the US president, most had already subdued their expectations in the anticipation of the Biden victory, even before the vote made it seem inevitable. Now that it has been formalized (and agencies have begun to ease the path towards transition), Biden’s win is likely to dampen enthusiasm for oil and gas companies. The democrat has made his plans for rapid energy restructuring to tackle climate change a priority for the new administration next year. With oil sands being a favorite target of environmental activists and complaints, Canada’s producers, including Suncor, might have good reason to worry. 

That said, despite the possibly glum news out of the next White House administration, Suncor stocks have not plunged. Their rise since the March low has been steady if slow. In fact, Suncor share value jumped earlier this month: when the news first emerged that vaccine trials were showing strong signs of success. The signs of an eventual end to the pandemics constraints on the sector was enough to bolster companies across Canada’s crucial but embattled petro-chemical sector, though they have since stabilized, still below their initial pre-covid values. 

Thus 2021’s impact on the industry remains uncertain, tied up in the interplay of larger political and economic questions. 

Long term outlook for oil sands should worry Suncor, but how much?

Regardless of the immediate future, however, the longer-term outlook for oil sands, and Suncor synthetic oil, is dire. Canada has yet to formalize its commitment to 0% carbon-neutral emissions, though it is in the works. The rise of electric vehicles and customers’ increasing distaste for even such fundamentals as plastics is not to be taken lightly. 

While this change has a sense of inevitability, some regulators and oversight agencies point out that the transition will be, at best, a slow one. In fact, the latest of Canada Energy Regulator’s Energy Futures reports indicates that demand for fossil fuels will continue to grow until roughly 2039. Helped along by finished pipelines and the inherent difficulties in adjusting the transportation and energy sectors. 

Perhaps this is enough for Suncor. Doubling down on their current area of expertise just in time to benefit from the post-COVID surge. Trying to scrape enough profits out of a knife-edge margin industry to reinvest in assets elsewhere, that or they are gambling on a greater petrol dependence and retention. 

Investors will have to judge Suncor’s strategy for themselves

Either way, investors will have to make their own choice about whether to follow along and bolster the project in the hopes of winning out in the short run, or cut their long-run losses now by bowing out as many have already chosen to do. The deals’s practical details on employment, costs, revenue, and timing are all still clouded, so an educated guess is impossible, but a gamble can always be made in the short run. Only time will tell to what extent Suncor’s will pay off.

(Featured Image by The Interior DC (CC BY-SA 3.0) via Wikimedia Commons)

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