February 1, 2012 / 6:33 PM / 6 years ago

Suncor aims to nip inflation fears as profit rises

CALGARY, Alberta (Reuters) - Suncor Energy Inc (SU.TO), Canada’s largest oil sands producer, said on Wednesday it is not concerned about a renewed round of inflation for new projects in the region, even as costs rise for its rivals.

The company, which reported a jump in fourth-quarter profit of more than 10 percent earlier on Wednesday, moved to ease fears that a flurry of new investment in the oil sands would spark another round of the hyper-inflation that plagued the industry prior to the 2008 financial crisis.

Rick George, who is retiring in May after serving as Suncor’s chief executive for 21 years, said inflation is not imperiling the company’s multibillion-dollar plans to boost output to more than a million barrels a day by 2020.

“I feel this cycle is very different than the 2005 to 2008 cycle,” George said on a conference call. “I think the industry in general is showing more much more discipline ... And in addition to that we are not seeing material costs for equipment, pumps, compressors, valves, escalating at the rate we saw in that last cycle.”

Cost inflation was a huge problem for the oil sands sector during the last development boom, triggered by the run to $147-a-barrel oil.

Operators scrambled to boost output from the world’s third-largest crude reserves, but there were only so many skilled workers to go around. Labor and material costs skyrocketed and construction costs for the huge projects soared by half or more.

Fears that costs might again spiral higher have been one of the factors behind the weak performance of Suncor’s shares, which have dropped 17 percent over the past 12 months.

Those worries were further stoked when Imperial Oil Ltd (IMO.TO) said in December that the cost for its 345,000 barrel per day Kearl oil sands mine had jumped by 25 percent to more than C$28 billion ($28 billion).

However, George said Suncor does not expect the company’s current expansion plans, which include two new mines and an oil sands upgrader as part of a joint venture with France’s Total SA (TOTF.PA), to face the same inflationary pressure.

“Some of the numbers that you’re seeing, for example on Imperial’s Kearl project, look extremely high to us. Those look really way out of range,” he said. “Our current estimates are significantly below those they’ve announced ... We’re not seeing those kinds of numbers.”

George said Suncor and Total will make a final decision on whether to proceed with their slate of projects early next year.

PROFIT RISES

Suncor, Canada’s largest oil and gas company, earned C$1.43 billion, or 91 Canadian cents a share, in the fourth quarter, up from a year-earlier profit of C$1.29 million, or 82 Canadian cents, as oil prices strengthened.

Operating income, which excludes most one-time items, rose to C$1.42 billion, or 91 Canadian cents, from C$808 million, or 52 Canadian cents, in the fourth quarter of 2010.

That just beat the average analyst estimate of 90 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Suncor said production from its operations in Canada, the North Sea and elsewhere averaged 576,500 barrels of oil equivalent per day, down 8.5 percent, but oil sands production edged 0.2 percent higher to 326,500 bpd.

The production drop reflected the sale of non-core assets, operational outages and lower output from Libya, Suncor said.

The company pulled out of its Syrian operations in December to comply with European Union sanctions, declaring force majeure for its Ebla field.

However it is again producing oil from its fields in Libya after shutting operations down last year in the early stages of that country’s civil war.

Though it has yet to return more than a handful of employees to the country because of security concerns, Suncor said its Libyan partner had restarted three of five oil fields and production has ramped up to 35,000 bpd.

Suncor’s cash flow, a key indicator of its ability to fund new projects, rose 20 percent to C$2.65 billion, or C$1.69 per share, from C$2.13 billion, or C$1.36 a share.

Suncor shares were down 18 Canadian cents at C$34.35 at midday on the Toronto Stock Exchange.

($1=$1.00 Canadian)

Additional reporting By Cameron French in Toronto and Sruthi Ramakrishnan in Bangalore; editing by Rob Wilson

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