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Suncor Energy Inc. (NYSE:SU)

Q2 2013 Earnings Call

August 1, 2013 9:30 AM ET

Executives

Steve Douglas – Vice President, Investor Relations

Steve Williams – President and CEO

Bart Demosky – CFO

Analysts

Mark Polak – Scotia Capital Markets

Mike Dunn – FirstEnergy Capital

Paul Cheng – Barclays Capital

Kyle Preston – National Bank

Jeff Lewis – Financial Post

Ben Hobratsch – Argus Media

Jeremy Van Loon – Bloomberg News

Phil Skolnick – Canaccord Genuity

Greg Pardy – RBC Capital Markets

David McColl – Morningstar

Menno Hulshof – TD Securities

Carrie Tait – Globe and Mail

Operator

Good morning, ladies and gentlemen and welcome to the Suncor second quarter 2013 financial results conference call and webcast. I would now like to turn the call over to Mr. Steve Douglas, Vice President, Investor Relations. Mr. Douglas, please go ahead.

Steve Douglas

Thank you, Marcus, and good morning to everyone. Welcome to the Suncor Energy Q2 shareholder call. With me here in Calgary are Steve Williams, our President and Chief Executive Officer and Bart Demosky, our Chief Financial Officer.

Please note that today’s comments contain forward-looking information. Our actual results may differ materially from expected results because of various risk factors and assumptions described in our second quarter earnings release as well as our current Annual Information form. Both of these are available both on SEDAR and EDGAR and on our website suncor.com Certain financial measures referred to in the comments are not prescribed by Canadian Generally Accepted Accounting Principles. For a description of these financial measures again, please see our second quarter earnings release.

Following our formal remarks, we will open the call to questions, first from members of the investment community and then members of the media.

With that, I'll hand over to Steve Williams.

Steve Williams

Good morning and thank you for joining us. For the past few quarters, I’ve been talking to you about Suncor’s focus on operational excellence, capital discipline and profitable growth. And I’m pleased to say that our efforts are paying off. So let me start with operational excellence.

In the second quarter, we successfully completed the largest maintenance turnaround in the company’s history. This involved a complete shutdown of the unit one upgrading complex to carry out preventative maintenance and significant plant improvement. We now expect to extend our runtime between major turnarounds from 4 to 5 years and will be able to run at higher rates of throughput. We did this work without a single loss time injury, a peak workforce of 3400 people working over 3.5 million hours with no time loss to injuries.

Our environmental performance was also notable. We reduced our sulphur dioxide flaring emissions by about 95% compared to our previous best turnaround performance. Productivity, safety and environmental care, these are all outcomes of operational excellence.

We also completed major planned maintenance at Firebag in the Steepbank mine and at the Edmonton refinery and again we achieved excellent results in terms of productivity, safety and environmental care.

In our E&P group, a routine underwater inspection detected a broken mooring chain at our Terra Nova offshore production facility. It’s one of nine chains and does not impact vessel safety, integrity or stability. However, we will extend our planned full maintenance in order to fix the broken chain. At the same time we’ll conduct proactive preventative maintenance on all the other mooring chains.

So with our major maintenance for the year complete in Oil Sands and R&M, we’re well positioned to run reliably for the remainder of the year. Our Oil Sands facilities have been producing at record rates the past few weeks and our refineries are operating at near capacity. As part of our Q2 release, we have updated portions of our guidance but made no changes to production or cash costs. We anticipate that our total production for the year will fall in the lower half of the guidance range. Obviously, this implies strong production through the second half of the year. And that’s exactly what we are expecting.

Turning to capital discipline, I’m pleased to report that we remain on track with our previous commitment. We promised to return cash to shareholders in a very meaningful way and we’re doing just that. Our second quarter dividend payment reflected the 54% increase we announced in April. And we repurchased and cancelled almost 10 million more Suncor shares during the quarter. We have also promised to invest prudently to optimize our existing assets and profitably grow our production. And again, we are keeping our commitments.

Our growth and optimization initiatives are moving forward according to plan and we’ve been able to reduce our planned capital spend for 2013 by over 4% to $7 billion. That reflects optimization of scope, timing and budget on various capital projects. It also reflects our commitment to execute our strategy while staying within strict capital budget guidelines.

That leads me to profitable growth. In our last call, I announced our plans to add 100,000 barrels per day of new Oil Sands production through de-bottlenecking and expansion of existing assets. Some people questioned our ability to deliver these new barrels. Today I want to reiterate my confidence in this growth plan. These new barrels are low risk, high return and very real. In fact we’ve already begun to unlock new production capacity.

With the commissioning of the hot bitumen pipeline and blending facilities we’ve taken the first significant step to de-bottlenecking our Oil Sands facility. Now whilst the logistics involved are a bit complicated to explain, I want to underscore the importance of the hot bitumen pipeline and blending facilities. We have the ability to import diluent to blend with Firebag bitumen for shipment to market. And this is a significant development. Shipping Firebag bitumen straight to market and bypassing the upgraders allows us to ramp up bitumen production from our mine to feed the upgraders. At the same time following our U1 turnaround maintenance we are upgrading bitumen at record rates. The result of all of these is a step change in oil sands production. We are still finalizing the numbers for July but I expect that when we post oil sands production in a day or two you will see a monthly record of approximately 390,000 barrels per day. And keep in mind we’ve accomplished this despite losing over a million barrels of production in the first half of the month due to a third party pipeline constraint.

So production is trending in the right direction and we debottlenecked our internal logistics to sharply increase the volumes we can produce and move from our oil sands facilities. But what about getting up production to market, it seems to be a prime concern for industry and the investment community. Now we are certainly supporters of improving the industry’s access to multiple markets. But for Suncor, access to markets is simply not an issue. We have ample market access to handle both our current production and our future growth.

So let me just say that again. For Suncor, access to markets is simply not an issue. We have ample market access to handle both our current production and our future growth. By the end of 2014, Suncor expects to be in a position to ship over 600,000 barrels per day to our refineries and other globally priced markets across North America. And that will accommodate both our increasing production and our profitable trading business and it will continue to [ensure] us maximum netbacks for our oil sands production. By the end of this year, we expect to ship heavy barrels to the US Gulf Coast via the new Keystone XL pipeline.

At the same time we plan to begin shipping western crude to our Montreal refinery. This will increase both our integration and our profitability. In short, we are set up for steady profitable growth. One part of our growth plan I know is a great interest to the market is the Fort Hills mine project. I am not in a position to make a definitive announcement on Fort Hills today but I can say that we are making excellent progress on the project and together with our joint venture partners we continue to target a sanction decision later this year.

Well construction of Fort Hills is expected to represent no more than 15% of our capital budget in any given year. I know that it is a major focus for our shareholders. So I want to emphasize once again that we will only move forward with the project if we are fully confident that we will delivery strong returns for our shareholders. And of course, we also have a large number of sanction projects that are already in slide and are steadily moving forward. These include debottleneck projects at MacKay river, rail facilities to deliver western crude to our Montreal refinery, expansion of existing production at Hibernia and White Rose as well as production from Golden Eagle and Hebron projects.

As I said before, we have a slate of attractive projects in the queue that are expected to deliver production growth of about 8% annually over the next several years. And we expect to accommodate all of them with an annual capital budget of 7 to 8 billion. Operational excellence, capital discipline, profitable growth is a virtue of circle and it’s a mantra that we often repeat as we move this company forward and drive long term shareholder value. I am going to pass over to our chief financial officer Bart Demosky to share his perspective including a little bit of the deeper dive into our Q2 results.

Bart Demosky

Thanks Steve and good morning everyone. As the second quarter demonstrated the continued stability and strength of Suncor’s integrated model producing operating earnings of 934 million and cash flow from operations of 2.25 billion. And our return on capital employed after we adjust for major projects in progress and the impact of Voyageur rose this quarter to 12.5%. During the quarter we took advantage of shrinking crude price differentials to achieve a very healthy oil sands average price of over $84 per barrel. On a company wide basis, our integrated model allowed us to capture a full 99% of global prices.

With North American oil prices having strengthened considerably we have adjusted our pricing assumptions upwards for the second half of the year. And this is good news as it means increasing revenues, particularly as we ramp up production in the second half of this year. But it will also result in an increasing tax burden. Consequently, we have updated our guidance to reflect higher cash taxes for the year.

As expected, our Oil Sands cash operating costs per barrel rose, largely as a result of the impact of the planned U1 turnaround. We came in at $46.55 for the quarter and now stand just under $40 year-to-date. However, looking at the run rates we’re currently achieving and our expectations for the remainder of the year, we still anticipate that cash costs will fall within the upper half of our guidance range of 33.50 to 36.50 per barrel for the year. Most importantly, if you consider our production capability, which is now in excess of 400,000 barrels per day and the extent to which our operating costs are fixed, you can quickly realize that we can deliver a unit cost well below $35 per barrel. And that’s consistent with our target for the remainder of 2013.

Our in situ operations are an important part of the Oil Sands cost equation. At $16.70 per barrel, they were down by almost 20% versus the same quarter last year. And we expect this trend to continue as Firebag ramps up to its 180,000 barrel per day production capacity by early next year.

I have to say I’m quite pleased with the results in light of the number of challenges we successfully managed during the quarter. It was certainly not business as usual and so just a few things I want to walk you through and to consider.

As Steve mentioned earlier, we successfully completed significant planned maintenance at both our Oil Sands and Edmonton facilities. These were large capital projects involving thousands of workers and taking a significant portion of our production assets offline for a lengthy period of time. Third party power generation and pipeline outages further reduced our Oil Sands production by over 3 million barrels in the quarter. And the key issue there was the devastating flooding we have in June in Alberta, which resulted in the closure of two pipelines. This forced Suncor to reduce Oil Sands production for almost 3 weeks.

In E&P, our production in Libya was reduced somewhat due to issues in coordinating third party security services. And on top of that, global crude prices in North American refining cracks both declined versus the same quarter last year. Nevertheless, for the eight consecutive quarter we achieved 2.25 billion of cash flow from operations. With our portfolio of production facilities, our deep midstream capabilities and our industry leading refining assets, we were able to mitigate the impact of maintenance and other operational challenges.

The key to Suncor’s integrated business model is the flexibility it provides. It gives us choices and that is a genuine competitive advantage in today’s volatile marketplace. With strong cash flow generation and careful cost management, our balance sheet continues to be rock solid. Our net debt today stands at 7.1 billion and our net debt to cash flow from operations is at 0.7 to 1. In July, we retired a further 300 million of long-term debt and we continue to have ample liquidity to fund all of our capital priorities going forward.

And one of those priorities is returning material cash to shareholders. Our substantial dividend increase and renewed share buyback program were well received by the market last quarter and we believe we are successfully positioning Suncor as a unique growth and income opportunity and the market will reward us over time.

Finally, looking back to our last quarterly call, there are a couple of items that remain open and I did want to address those today.

First, the sale of our conventional natural gas business which was announced in April remains on track to close here in the third quarter. And upon close, we expect to realize a gain on this transaction. Second, we indicated earlier this year and Suncor has been advised about the possibility of a tax reassessment related to derivative transactions from 2007. During the second quarter, we provided the tax authorities with further documentation in support of our position. And we remain confident that our original filing was correct and we will continue to work with tax authorities to resolve this issue. Looking forward, I am excited about Suncor’s prospects. I believe we have the necessary elements in place for us to outperform in the second half of the year and I fully expect we will continue to deliver on our commitments to shareholders.

With that thank you everyone and I will pass it to Steve Douglas.

Steve Douglas

Well thank you Bart and Steve. Just before we go to Q&A, a couple of notes. We have referenced earlier in the call that we’ve updated our 2013 guidance. We’ve decreased the capital spending and we have adjusted the price deck upwards and that’s resulted in an increase in cash taxes, all of the details are available on our website. LIFO/FICO impact was a modest positive of $4 million after tax bringing the total for the year to a positive of $121 million after tax. Our share price rose this quarter resulting in a stock based comp impact of an expense of $45 million and year to date an expense of 81 million. The American dollar rose versus the Canadian dollar resulting in a $254 million after-tax expense to Suncor and bringing the year-to-date expense to $400 million even.

I will turn it over now to the operator for questions. A reminder though the IR team and the controllers will be available throughout the day for detail questions, happy to take those and with that, I will turn it over to Markus.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Phil Skolnick from Canaccord Genuity.

Phil Skolnick – Canaccord Genuity

On the Fort Hills project, is that – it seems like the timing of making decision had been pushed a little bit later in the year. Is that because of the uncertainty around Keystone?

Steve Williams

No, it’s not, it’s purely administration around the timing of the joint venture partner board. So everything is moving exactly as we expected. As I said I hope really clearly we do not have a market access issue. So Keystone we are supporters of it, it is not particularly important to Suncor.

Phil Skolnick – Canaccord Genuity

And could you just explain a little bit more about this SAGD light and what could that mean for Firebag as well?

Steve Williams

All I would say is we have a number of R&D technology type projects which potentially move Firebag forward. Some of them are around the extraction technology itself, so adding solvent to our surfactant and they really adjust the steam oil ratio and make it more economic from an energy consumption point of view. Some of them are around the construction and execution of the construction projects themselves where what you will see us doing is a much more repeatable replicable type of surface facility. And so both of those projects are being actively developed by Suncor.

Operator

The following question comes from Greg Pardy from RBC Capital Markets.

Greg Pardy – RBC Capital Markets

A couple questions, Steve, I know you’ve got a high degree of confidence in terms of hitting your oil sands guidance in the second half of the year, could you talk a little bit about just the impact of this heated line and also what you would peg your oil sands capacity now at?

Steve Williams

Just in terms of the second question first there Greg, I mean we’ve got in the investor pack there a growth program looking forward and the answer to your question is the sum of four or five or six different projects and they change as we go through 2013, ‘14, ’15, ’16,’17 as the impact of those projects are coming on. So there is no easy way to answer that question when I am referencing you to that graph, because – and so for example, Firebag is part of the volume ramp up. The ramp up is progressing on if anything a little bit faster than we expected. We are currently around the 160 mark on Firebag as it’s coming on and we expect by the end of the year to get up to 180. So some of these projects are ramping in at a relatively consistent rate now. So the capacity of the plant is moving as these projects come on.

The good news is that you’ll see – I mean you heard Bart and myself reiterate that we’ve -- in order to get – you’re going to be able to do the math in the next couple of days, a 390 with we left a million barrels on the table with the Enbridge pipeline issues at the beginning of the month. So you’ve got to add a 30,000-35,000 barrels on top of that. So you can see even today, post-turnaround with the facilities and with the bitumen blending facilities on, we are up into the low 400s and you’ll continue to see that grow and that graph is the best view we can give you of that going forward.

Bitumen blending has two, three particular benefits and I’ll just give you a few examples of them. One of them is that we were able to secure a diluent contract into the region. So we now have the ability to bring diluent in to blend with the Firebag bitumen. We also with the hot bit pipeline effectively are able to bypass the upgrader feed tanks. So it has two benefits. One, it means we can now run the mine harder, the second one is and it’s very important but quite complex, is we’re able to improve the feed quality to the upgrader because the resident time is less now we’ve taken the – the resident time is greater now we’ve taken the Firebag bitumen out. So it’s a much better feed quality going to the upgraders. So there are multiple benefits that we’ve been able to blend – bring that line on. It’s operating and we’re very pleased with its performance.

Greg Pardy – RBC Capital Markets

Okay, and just to reiterate. I mean I think in your last call, and I’m shifting gears here a bit. You’d said 7 to 8 billion a year with the expectation for CapEx going out to the end of decades. So even if Fort Hills is upsized I think Total was suggesting that there is still no real change in those goalposts, correct?

Steve Williams

What I would say is Fort Hills and I’ll be a little bit opportunistic here is not material to Suncor. It’s a very important project to us, but it’s about – if we go ahead, it will be about – it will never be more than 15%-ish of our capital budget in any one year. So either as part of our overall capital budget, or as a total piece of the project, because we de-risked it by going to 40% with only the ownership. It’s an important decision, but it’s not really material to Suncor’s future. I hope we have been able to demonstrate to you over last year and with the announcement we’ve made today we have rigorous capital discipline in place, we’re working on the scope of the project, the execution, a number of projects we’re putting in there. And for the second consecutive year, we’ve reduced the number actually to below $7 billion. So you can see the capital discipline in place. I wouldn’t want specifically to get tied to a tight range, because if I got seven or either years out, we may have a major additional project that we want to layer in here. But you have our absolute commitment and our track record is that we’re hitting that range. So if we’re going to move away from that we will clearly signal it to you.

Greg Pardy – RBC Capital Markets

Okay. Thanks Steve and the last one for me is this 100,000 barrels a day of de-bottlenecking opportunities. I think you talked about that on the last call at what 20 to 30,000 of flowing. When do we start to hear – when do you fill in the details on that?

Steve Williams

I mean our plan is to come back with much more detail by the end of this year, but we have said a little bit Greg in that it’s – there is some stuff around extraction, there is some stuff around the MacKay River de-bottleneck and those are the sort of front-end projects. There is some more infrastructure stuff, about 35,000 barrels of it that’s coming on, first all about 215 and then the fuller volume in 216. And in the last two pieces are the MacKay River 2, the expansion project and the Firebag de-bottleneck. So those are slightly bigger projects and we’ll come out with more detail. But we’re already starting to get fairly detailed in terms of the design and the timing of those projects here. So by the end of the year we’ll give you some more detail.

Greg Pardy – RBC Capital Markets

Okay, appreciate it. Thanks very much.

Operator

Thank you. The following question comes from Mark Polak from Scotia Bank. Please go ahead. Your line is now open.

Mark Polak – Scotia Capital Markets

Thanks and good morning guys. Just on the heat bitumen line, I was just wondering, what is the capacity of that? Are you able to run all of Firebag through that, even once it’s ramped up? And then sort of second part to that, just are you running any MacKay River to the upgrader or is that going straight to the blending and storage facilities?

Steve Williams

Sorry, I’ve missed the second part of your question there, but I’ve got the first part. Immediately it’s 80,000 barrels a day and that’s a mix of coolant and diluent limits but we’ve progressively moved that on. So it will not be the constraint to our operations. And the second part of your question was?

Mark Polak – Scotia Capital Markets

Just whether you’re running any MacKay River through the upgrader or if that’s going straight to market as of when…

Steve Williams

We have a choice, so depending on our bitumen balance on the day we can put that to market or we can put it to the upgrader. So that’s part of the flexibility of the operation.

Mark Polak – Scotia Capital Markets

Okay, thank you.

Operator

Thank you. The following question comes from Mike Dunn from FirstEnergy. Please go ahead, your line is now open.

Mike Dunn – FirstEnergy Capital

Yeah good morning folks. I think Steve, you might have personally answered my first question but just trying to do the math around run rate July volumes. I think if you were about 390 for the month and that was impacted by 30 to 35,000 negatively, so you’d be sort of 4, 420, 425 through the remainder of July. Just wondering, those upgrader run time was pretty strong. It’s well sort of for July and then I’m thinking about fourth quarter no planned downtime that we know of fingers crossed that could also be a really strong quarter for production, is that’s correct. And then I have second question after this.

Steve Williams

Okay. Yes, so just in terms of upgrader you’re also going to see a record performance. The net result of the unit two turnaround we did and then the unit one turnaround we’ve done this year is the facilities are in excellent condition. We have also – we’ve been transparent but it’s been quite in the background we’ve also taken the opportunity to rebuild our hydrogen facilities over the last couple of years at those turnaround. So both primary and secondary upgrading are in excellent condition and we really are starting to see the utilization creep up. That’s why you’ll hear a very confident tone in our speaking today because for all of headline numbers you can see, we can see three or four, five numbers behind those and they are very encouraging. So not only would I expect to see a strong finish to the year, but we don’t have a major turnaround for 34 months now. So you’re going to see us have the opportunity to start to perform on a monthly basis on a quarterly basis and put some real annual numbers on the doors next year as we go into it as well.

And one thing I would remind you of is we do have a unit two vac power – we don’t call it a major turnaround for a number of weeks in the third/fourth quarter. So you’ll see a small planned reduction but nothing material. You’re going to see both volumes and because of the fixed variable costs ratio, costs be impacted. So volumes will come up and costs will come down. And that’s why we have been confident to stay within the guidance even though that means we’ve got to really perform in the second half.

Mike Dunn – FirstEnergy Capital

Okay thanks Steve. And then second question, with your CapEx budget modifications, the E&P division saw a bit of a reduction in spending. Is that just related to timing of spending on some of your major offshore projects? Thanks.

Steve Williams

Yeah that’s all it is. It’s just timing and what we will do is you’ve seen us do it a few years now. If we get the timing advantage, we’ll keep taking advantage of that. So if you actually look over the last few years by timing adjustments you’ve seen effectively that sort of percentage, maybe even a bit higher slip from one year to the next. So that’s part of the capital discipline.

Mike Dunn – FirstEnergy Capital

Sure. Thanks Steve, thanks everyone.

Operator

Thank you. Our following question is from Paul Cheng from Barclays. Please go ahead. Your line is now open.

Paul Cheng – Barclays Capital

Hey guys. Good morning. Steve, do you have a rough number of what is your [win] obligation for your Sands operation?

Steve Williams

We don’t have an actual number but it’s largely immaterial for us. For those who are not familiar really it’ a piece of regulation that’s in the US around gasoline blending. We think that the overall impact is largely immaterial and down $10 million, $15 million range because of our ability to blend and what we would have to – what we probably have to purchase. So relative to the sorts of numbers that you have been seeing in the industry it’s very low.

Paul Cheng – Barclays Capital

$10 million to $15 million, you are talking about for the full year right, not per month?

Steve Williams

For the full year yes.

Paul Cheng – Barclays Capital

And Steve, you talked about Fort Hills, can you give us any update about adjustment?

Steve Williams

The only update I would give on Joselin is – at minimum it’s moving backwards. So we are taking a strategic review. I don’t see us running two mines in parallel in terms of the execution phase. It’s really any significant time. So at absolute minimum that project is going back and the fastest I would say of sanctioning that project would be probably in the 2017 range and that would take first oil back to 2021-22 and that’s the best case. So you can start to push it significantly back up in your models.

Paul Cheng – Barclays Capital

I think – we will be very pleased about that. And on the Firebag five and six, are we now officially that – have you guys decided what you’re going to do with the Firebag, you’re going to continue debottleneck and use the existing infrastructure from – or just extend or that we’re really going to have an individual project going to be – or has that been signed yet?

Steve Williams

Not fully decided. The options are still there but most probable case is that the plan is that we will get up to it, it’s on 180 designed by the end of this year beginning of next year. The debottleneck I talked about is a significantly reduced type project relative to the full stages. And we anticipate that sort of first oil in the 2017 timeframe and that’s going to put 20, 25,000 barrels a day on to that facility. It’s a very significant resource pipe, so we have a lot of options after that. It could be – the best case used to be additional stages that is much less likely now, much more likely we will do modifications to existing stages in order to have a more economic project. And you will see us applying there in Louis, in Medo, Mckay river, this replication strategy where we have a fairly vanilla simple design and then we keep laying down the same facilities and you will see the cost -- capital costs associated with it come down significantly.

The other reason we keep – to selectively drive to do with technology question earlier on, we do have significant potential technology moves forward. So we want to have the capital projects where we can go and take those at commercial level.

Paul Cheng – Barclays Capital

Steve, I know it’s a way too early in the process but any rough idea that how much is the CapEx saving per daily flow of production payroll, I think that the Firebag we are looking at 3 and 4 combined it’s probably about 45, 50,000 per daily barrel – and rough estimate that how much is the saving may look like?

Steve Williams

You are right to your point it’s too early to be specific because we still got lots of questions to answer but suffice to say it’s a significant move in the right direction, if it’s sold and surfactant technologies work, because the energy input is materially reduced. But it’s too early to say specific numbers.

Operator

Our question comes from David McColl from Morningstar.

David McColl – Morningstar

It’s good to see some comments pertaining to market access in the release and just want to talk about that a little bit. So if I am reading between the lines and what’s I think becoming far less so comments on the call this morning, it would appear that Suncor is not directly exposed to the Keystone XL project. So I guess for those listening to --- that need to be over the head few more times, can you just confirm in a less subtle manner it was in the context of that 600,000 barrels of capacity, that in fact that is the case? And I’ll probably have a follow up. Thank you.

Steve Williams

Okay. Suncor is absolutely aligned with its industry partners about the need to get Oil Sands and Western crudes to as many markets as we can and not be subject to the risks of a single market. So we are actively engaged in pipeline to the west, the energy pipeline that’s been announced this morning by TransCanada to the east. We are also actively engaged in Keystone, both Keystone South and Keystone North. Keystone South will be operational by the end of the year and we have the capability at that point to move volumes all the way from Oil Sands, up from Western Canada down to the Gulf Coast. So we are actively involved in all of those projects. We are not dependent on any single project. So we already have in our – contractually tied up in our capability to have the volumes to handle all of our products and all of the foreseen products. So in the future it enables us to optimize the market, to make best use of it and to have robustness by getting it to all of the markets including on into the international market. So we’re part of the project, we’re supporting it but we are not dependent on it.

David McColl – Morningstar

Okay great. So I guess the follow up there then it’s just the timing for the 600,000 barrels. I’m just thinking about this in the context of your kind of North American onshore portfolio. Should it be looking at this as a case of as your production continues to increase the capacity for lack of a better phrase I guess the capacity for the pipeline system as far as you are concerned should be able to increase kind of lock step with that. In other words, we really don’t see any issues coming up, whether it’s in kind of 2014, 2015, it should be smooth sailing aside from various issues that can happen with third party outages?

Steve Williams

Yeah, you’ve nailed it from a Suncor perspective. We don’t have a takeaway issue today and we don’t foresee a takeaway issue for Suncor going forward. We would prefer and we support that access to multiple markets but it’s not critical either today or to our extraction plans.

David McColl – Morningstar

That’s great. Thank you very much.

Operator

Thank you. The following question comes from Kyle Preston from National Bank. Please go ahead. Your line is now open.

Kyle Preston – National Bank

Thanks. Good morning guys. I’ve got two questions here. The first one just on your integration of Western barrels to your Montreal refinery. Can you just confirm how much that’s – how much capacity you’re going to have there and also whether or not that’s going to be strictly Suncor barrels you’re shipping there?

Steve Williams

Yeah, so we have multiple ways of getting connection into the Montreal refinery. We are in the process of constructing some rail import facilities and some of those we anticipate being operational at the end of this year. So the very early you’ll get to that sort of 10, 15,000 barrels a day number. The refinery’s ability to take the crude after that depends on the quality of that and the import facilities can get up beyond 20 and up into the 30,000 barrel a day range and maybe slightly beyond. That’s the first part which is available very early to us and it will just depend on the economics of using inland crude versus international crudes. We are also part of the line 9 reversal project and we have enough volume on that line to be able to fill our Montreal refinery. It’s early days, we’re working very closely with the Quebec government, with the employee unions and with the environmental groups who are interested in that. And everything to date is very positive that that line will go ahead. But all of that is not that – that’s about making additional money in the refinery. So we produce about – we process about 50 million barrels through the year on that refinery and that enables us to take advantage of the differential between international crudes and inland or Western Canadian crudes.

So that’s not part of – so that’s an upside in our R&M business and even further improves the integration of our business. That’s not necessary for us to get the products away from Oil Sands. The volumes we are talking about, we already have the capability of getting it away from oil sands. So while it’s a very attractive project to us it’s not essential in Terms of market access.

Kyle Preston – National Bank

And my second question just pertains to your share buyback program. As you look forward and start to achieve your 8% growth targets, I mean is just buyback program something you would continue to run or is that going to be dependent on market conditions, share price?

Bart Demosky

It’s Bart here. So let me just take that one and – as we look at our strategy that we have for returning cash to shareholders it’s a very key priority for us. Consistency is a key part of that as well and if you look at where we have come from just about two years ago to now we’ve grown our quarterly return of cash to shareholders by about 100%, we are running at about 600 million a quarter right now. Now part of that is a result of some quality pricing that we are receiving but we are growing our production and growing our cash flow and growing are earnings. And so there is opportunity to continue to grow the return of cash to shareholders. It will come in both the form of dividends and growth there but as well as buybacks. So long as we have the free cash to do that. So that will definitely be part of the strategy.

Operator

The following question comes from Menno Hulshof from TD Securities.

Menno Hulshof – TD Securities

I will start with a question on turnarounds. You mentioned on a couple of occasions that you have no major oil sands turnarounds until 2016 but there is a turnaround at U2 this quarter, which isn’t considered major. So how should we be thinking of your definition of major turnaround and would it based on weeks of downtime or impact of production or something else entirely?

Steve Williams

Yeah normal we will be specific – so you don’t have to do much interpretation if you like. So normally with our guidance we've already accounted for the turnaround. For example, the Unit 2 turnaround is a three and a bit week shutdown, doesn’t shut the upgrader down itself and it will reduce sort of – 50, 60,000 barrels a day, that’s sort of number. So not material to the overall production there. But normally we are very specific of that. If there are going to be turnarounds like that we will define them, we will define the duration and the impact on the actual number is reflected in the guidance.

Menno Hulshof – TD Securities

I’ve have got a question for Bart on the timing of the resolution of your dispute with the CRA and then as a follow-up to that, is it sort of all or nothing situation on the $1.2 billion tax bill or you think you could end up somewhere in the middle?

Bart Demosky

Hi Menno, well the process can take a long time when you get into dispute with the CRA. I think the things I would emphasize -- reemphasizes is that we’re absolutely confident in our position. The claim never would have occurred unless we were absolutely confident. So in spite of how long it might take our view is it will be resolved favorably for Suncor and its shareholders.

Between now and when resolution ultimately occurs, as I said I think on the call when we announced this, we may be in a position if the CRA does move forward that we have to post some cash collateral to fight our position, and that would be half of the $1.2 billion, so $600 million. If we did have to post that though, it will have no impact on our return of cash to shareholders or our other strategic and capital plans we’ve already accounted for.

Operator

The following question comes from Carrie Tait from Globe and Mail.

Carrie Tait – Globe and Mail

Can you talk about the Energy East pipeline and if you are signed on as a shipper?

Steve Williams

We support the project and we are part of the action this morning.

Carrie Tait – Globe and Mail

When you keep speaking about why you don’t have a market access problem, can you expand a little bit more on all of the reasons why you are not setting about pipelines like Keystone?

Steve Williams

We are – part of Suncor’s long-term strategy has been integration and what I would call sort of the infrastructure and the pipeline systems. So we have been a major player in that world for a while. We have been actively managing, we have a trading and logistics department whose sole job is to make sure we don’t restrict the operation unnecessarily. So we’ve been very active. We are a – we have been supporters of all of the existing lines. We are also supporters of these new lines. So we’ve been very active in getting the product to market and getting the diluent in to Fort McMurray. So as the problems have become clear over the last couple of years, we just been very active out there, making sure we can secure access because it’s very much part of our integrated model. And so the guys have really just performed very well. They have recognized the need for pipeline, the need for tankage. We have 10 million barrels of storage Mid-Continent as well and it just recognizing the issue and addressing it in our trading department and logistics guys have done a very good job.

Carrie Tait – Globe and Mail

So it was more like being one step ahead rather than turning to relying much more on rail or something like that, do I understand that correctly?

Steve Williams

We actually are – within our logistics and transportation department we have significant expertise on pipelines, we have significant expertise on rail, we also have significant expertise in the marine world and we use all three of them. So part of Suncor’s strategy is a balanced mix of all three of those transportation modes.

Carrie Tait – Globe and Mail

Okay and my second question is why is Joslyn going backwards?

Steve Williams

Right now I don’t find the project quite as attractive as Fort Hills and so we’re looking at ways to improve it. So it’s a quality resource with the potential to mine. The economics are not standout attractive to us at the moment. So if you remember, we put Fort Hills through a process of making sure all the partners have the opportunity to get the best design to extract the resource in the best way to get the returns. And that’s significantly improved the Fort Hills returns. We now want to put Joslyn through the same process. So ourselves particularly and Total are working to see if we can improve the economics because as they stand at the moment they are not so attractive to us.

Carrie Tait – Globe and Mail

Do you feel as though going through the Fort Hills process will get Joslyn to the same level?

Steve Williams

It will definitely improve the returns at the projects, the base quality of the asset it not quite as good as Fort Hills. Fort Hills is the next best industry mine. If you look at the combination of the quality of the ore, and the size of the reserve, it’s a 50 year project with very good quality ore. So it was always from a fundamental point of view going to be the industry’s most attractive next project. Joslyn is a little bit further back and so we still have the work to do on it.

Carrie Tait – Globe and Mail

Is it something you want to keep holding on to if it doesn’t add up for you’re right away?

Steve Williams

It’s a quality reserve, it’s just a question of making sure that we have the very best design of project and the timing is good. So yeah, we are very happy with it.

Carrie Tait – Globe and Mail

Okay thanks for taking the time.

Operator

Thank you. Our following question comes from Jeff Lewis from Financial Post. Please go ahead. Your line is now open.

Jeff Lewis – Financial Post

Hi thanks for taking my question. Just winding back again to Energy East, can you talk about the commitments and what sort of terms you signed up for and secondly, are you more interested in the export piece of that project, given your plans for online nine and railing crude to the Montreal refinery?

Steve Williams

I mean I can only give you answers generally for commercial reasons. So no I wouldn’t’ talk – we are a significant potential user of the Energy East line. Not appropriate for me to talk at this moment about volumes but we’ve been working very closely from the outset with TransCanada on the option and I would just reference you back to my general comments which are Suncor’s support getting these crudes into the international market. It’s very important as the industry continues to steadily grow that we have access to multiple markets so that we can realize the full potential of it for Suncor and for Canada itself in terms of getting the value of these resources. So yes, we are supporting it and part of that is to get it to international waters.

Jeff Lewis – Financial Post

Thanks.

Operator

Thank you. The following question comes from Ben Hobratsch from Argus Media. Please go ahead. Your line is now open.

Ben Hobratsch – Argus Media

Hi, thanks for taking my call. I just had a couple of questions on the market access strategy, I see you have this slide in the presentation. You show 30,000 barrels a day to it looks like Vancouver, Puget Sound. Is that current space you have on say Trans Mountain or is that something else altogether? And then my second question was the idea of the coker at Montreal, is that dead or is there any sort of update there?

Steve Williams

So the first one, yes, you’re right. It’s the Trans Mountain line and of course we can export crude or products on that line. So there is flexibility in that routing. In terms of the Montreal coker, it’s an active project that we’re looking at developing. It depends on your view of the future and we’re hardening down on our view. We can execute that project at a relatively low cost compared to a full project because the design was completed and a lot of the major vessels were already constructed before the project was put on hold. So they – over in Montreal being protected from the environment with nitrogen blankets on them. So we have a project which we could execute relatively quickly and relatively at a low cost. We haven’t sanctioned that project yet. We are waiting to see the conclusion on the line nine reversal which is an important part of that and then we’ll actively consider the project after that.

Ben Hobratsch – Argus Media

Thank you very much.

Operator

Thank you. The following question comes from Jeremy Van Loon from Bloomberg News. Please go ahead.

Jeremy Van Loon – Bloomberg News

I was just wondering if you could talk a little bit about the partnership with Total. I think when you announced the cancellation of Voyageur you mentioned that there is some consideration of working together on other projects but you open up the possibility of doing other things. I’m just wondering where that is right now.

Steve Williams

I mean the relationship with Total is very good. Of course the Voyageur was tough decision but we made it in close contact with each other. We came to the same conclusion. So the relationship is very strong. I as a matter of routine meet up with [Christoff] and talk about our opportunities. We are very keen together between the two of us also with [tech] who are the third partner in Fort Hills to keep a high quality relationship as we move through to the potential sanctioning of Fort Hills. So all of that is working very well. We are having very healthy conversations about the timing, if Joslyn were to go ahead. We haven’t taken it much further than that. So there are other possibilities but we are looking at getting some success on the board. So it’s a good relationship we will continue to talk but no, no plans in any other projects yet.

Jeremy Van Loon – Bloomberg News

And just one other question, just looking at the oil differentials that have come in quite a bit in the last month or two, I’m just wondering to what extent is that playing into overall decisions about strategic direction or are these things just too short term to feed into that?

Steve Williams

A couple of comments. They are short term because these capital projects are long cycle projects. So we’re looking 5, 10, 15, 20, 25 years out. And that’s the economic basis for the projects. I would say there is a bit of – and the Suncor model, one of the reasons we like the integrated model is in the short term it’s very difficult to be – to accurately predict the differentials are going to be. The beauty of the Suncor model is that we make the money whether it’s upstream or downstream because of the integration. So it strongly underscores the importance of the integrated model we have. The one thing I would say is and it’s – one swallow doesn’t make a spring – it does indicate what we were saying which is the market will work, the differential will start to move as access becomes available. So we have seen particularly the light heavy differential close, which is saying that market is working. Now of course that was; our view is that in the long term, that will continue to happen and that’s why we believe upgraders in Alberta are not justified.

Steve Douglas

And operator with that, I think we’ll wrap up. I don’t believe there are any further calls.

Operator

That is correct Mr. Douglas. I would now like to turn the meeting back over to you sir.

Steve Douglas

Thank you very much Marcus and thank you to everyone who joined us today. Just a final reminder, the IR team and controllers will be available today for detailed questions on the Q2 results. Thanks again and with we’ll sign off.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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