This morning, Suncor held an investor conference call to discuss the decision announced late last night that it would proceed with the development of the Fort Hills mine – a joint venture with Total and Teck. Everything associate with this project is huge – it’s expected to produce 180,000 barrels per day and to cost 15 billion dollars up-front to build. This morning, CFO Bart Demosky laid out Suncor’s financial analysis for the project, and stipulated that their internal analysis found an internal rate of return of 13% – respectable for an oil sands mine.
Here are the basic assumptions Suncor stipulated behind that figure (costs are per bitumen barrel):
- Oil prices of $100/bbl (Brent) and $95/bbl (WTI)
- Bitumen prices at 60% of WTI
- Operating expenditures of $20-24/bbl, in today’s dollars
- Sustaining capital expenditures of $3/bbl
- Up-front capital costs of $84,000 per flowing bitumen barrel, or $15.1 billion including cost escalation and contingency
- Invested 650 million total to-date, not included in IRR calculations
- Canadian dollars at 96 cents US
- Royalties of $11.50/bbl
I took these numbers, dropped them into my oil sands model, with the following assumptions:
- Oil prices of $100/bbl (Brent) and $95/bbl (WTI), AECO-C gas at $3.50/GJ, all increasing at the rate of inflation.
- Canadian dollar at 96 cents US
- Bitumen prices at 60% of WTI, which implies a $25/bbl differential between WTI and Western Canada Select, a 30% blending ratio, and a $6/bbl premium for diluent over WTI (differentials increasing with inflation) .
- Operating expenditures of $20/bbl, increasing with inflation.
- Sustaining capital expenditures of $3/bbl, increasing with inflation.
- Up-front cash capital costs of $84,000 per flowing bitumen barrel, or $15.1 billion, spread over 5 years
- I omitted the 650 million total to-date in capital expenditures, so it’s properly not included in forward-looking IRR calculations, but I added it back in for royalty and tax purposes so that the expenditure is properly counted against project income
- Debt used to finance 50% of up front capital expenditures at a rate of 7%
- Production horizon of 50 years, with cumulative bitumen production of 3.2 billion barrels.
- Build time of 5 years
Using these figures, I can’t replicate Suncor’s IRR – I get 10.2% (after-tax) to their 13%. Here are my results, in 2013 dollars per barrel of bitumen:
|Capital and Debt Costs||$/bbl||8.68|
|GHG compliance costs||$/bbl||0.03|
|Free Cash Flow||$/bbl||12.08|
So, my royalty numbers are higher than Suncor’s, which should indicate that the project as I’ve modelled it has higher net revenue. I’ve taken account of Alberta’s oil sands royalty regime, federal corporate taxes (standard Class 41 CCA), Alberta’s SGER maintained ad infinitum. Despite this, I get a lower after-tax IRR.
I know of a few other people with similar figures. So, people of the internet, what am I missing?