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Suncor Energy became Canada’s largest integrated oil company after its 2009 merger with Petro-Canada, a blockbuster deal that included additional acreage in western Canada’s oil sands, as well as refineries and a portfolio of international upstream assets. The energy behemoth operates three primary business segments: refining and marketing (60 percent of 2011 revenue), oil sands (28 percent), and international and offshore (12 percent).
In the past, our investment thesis for Suncor Energy has focused primarily on the firm’s oil-weighed production mix and potential to grow output significantly from its assets in Canada’s oil sands, an operation that accounted for 46 percent of the company’s 2011 net income. Suncor Energy’s presence in the Alberta oil sands dates back to the 1960s, when the firm pioneered the first commercial-scale mining operation.
Oil-sands deposits contain bitumen, a heavier hydrocarbon that must be blended with a lighter product such as condensate or processed into a synthetic crude oil before entering the pipeline network for delivery to end-markets.
Producers extract the bitumen in one of two ways. Shallow deposits of the viscous hydrocarbon (about 20 percent of Canada’s reserves, according to the Oil Sands Developers Group) can be exploited via pick-and-shovel mining. Oil sands located more than 80 meters (about 260 feet) below the surface require in situ production techniques that usually involve pumping steam into the formation to increase reservoir pressure and heat the bitumen until the hydrocarbon can be pumped to the surface.
In both instances, the extracts undergo processing to remove water, sand and other contaminants from the bitumen, after which the output is diluted with lighter products or upgraded into synthetic crude oil for transport to the marketplace. Much of these diluents come from gas-processing plants in western Canada and Enbridge’s (TSX: ENB, NYSE: ENB) Southern Lights pipeline in the Midwest US, though additional import capacity has been proposed.
In the near term, Suncor Energy will continue to benefit from rising in situ output at the Firebag project, the first phase of which came onstream in 2004 and the second stage of which flowed first oil in 2006.
Suncor Energy’s oil-sands segment posted record quarterly production of more than 340,000 barrels of oil equivalent per day in the three months ended Sept. 30, 2012, driven by infill drilling at Firebag 1 and Firebag 2, as well as a faster-than-expected increase in production from the third phase of the project.
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