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Suncor Energy (NYSE:SU)

Q1 2011 Earnings Call

May 03, 2011 9:30 am ET

Executives

Steve Douglas - Vice President of Investor Relations

Bart Demosky - Chief Financial Officer

Richard George - Chief Executive Officer, President and Non-Independent Management Director

Steven Williams - Chief Operating Officer

Analysts

Joe Citarrella - Goldman Sachs

Mark Polak - Scotia Capital Inc.

Greg Pardy - RBC Capital Markets, LLC

George Toriola - UBS Investment Bank

Mark Gilman - The Benchmark Company, LLC

Michael P. Dunn - FirstEnergy Capital Corp.

Paul Cheng

Moira Baird

Brian Dutton - Crédit Suisse AG

Operator

Good morning, ladies and gentlemen. Welcome to the Suncor First Quarter 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, operator. I'd like to welcome everyone to Suncor's first quarter call. This is actually my first call. I assumed the role of VP Investor Relations in March of this year after more than 20 years with Suncor, including operating roles in Refining and Marketing in both Canada and the U.S.

In the room with me this morning, I have Rick George, our President and CEO; Steve Williams, our Chief Operating Officer; Bart Demosky, our CFO; and from the Controllers Department, we have Jon McKenzie and Greg Freidin; as well, we have Jennifer Van Steenbergen, who works with me in Investor Relations.

Please note that today's comments contain forward-looking information. Actual results may differ materially from expected results because of various risk factors and assumptions that are described in our first quarter earnings release and our MD&A, as well as our AIF, which are available on our website.

This morning, Rick, Steve and Bart will walk us through their perspectives on the quarter and then we'll open it up for questions. With that, I'll pass it over to Rick George.

Richard George

Thanks, Steve. I'm glad to be able to report what we see is exceptional operating and financial performance for Q1. It was mostly or primarily driven by reliable production, which averaged just over 600,000 barrels a day, and a strong pricing environment, obviously. Suncor increased year-over-year operating earnings by almost 300% to $1.478 billion and cash flow from operations by over 100% at $2.393 billion. Steve will be providing operational update a bit later in the call, but I'd be remiss if I didn't mention our focus on operational excellence is paying off in improved reliability right across all of our businesses. As a result of the strong execution in both the upstream and the downstream, we were able to take advantage of positive crude prices and crack spreads that achieved record financial results. I'm extremely encouraged by these results and I believe we're well-positioned to continue this exceptional performance on a go-forward basis.

Bart will be going into the details of our balance sheet, but it's obviously looking very strong, something we're very proud of, with net debt to cash flow ratio of less than 1x. With strong cash flows and steady debt reduction comes the ability to return some of that cash back to our shareholders, and we were very pleased yesterday to announce a 10% increase to our dividend to shareholders.

I'd like to spend some time with you reviewing the strategy piece and where we are today. As all of you will remember, we announced our 10-year strategic plan in December, with plans to grow production to 1 million barrels a day by 2020. On March 22, after receiving all the necessary regulatory approvals, we closed the joint venture deal with Total, enabling us to move forward with our various growth projects, which we're very excited about. As we've said before, this joint venture is a key strategic fit for us. It allowed us to free up stranded capital and get our growth initiatives back on track, while at the same time reducing execution risk. We have a suite of projects that we believe will see us grow production steadily over the next decade. There are not many oil companies that can say that. By 2020, we expect our Vision portfolio to be relatively balanced between mining and in-situ production. As a truly integrated company, our anticipated upgrade and refining capacity will have a flexibility to optimize every barrel we produce. This quarter, we completed the expansion of our St. Clair Ethanol Plant, confirming us as Canada's largest producer of biofuels. This expansion reinforces our commitment to increasing renewable energy options in Canada and aligns well with our sustainability strategy as a whole. Our tailings reduction technology, which we refer to as TRO, it also complements our strategy and we're delighted with the progress we're making. Phase 1 of that project, which basically involves the construction of all infrastructure, is on track to be completed early in 2012. With this TRO technology ramp up towards full commercial scale well underway, Suncor's on track to meet or exceed the tailings reduction performance targets set by regulatory authorities.

The next stage of our growth is quickly approaching as our Firebag 3 in-situ project nears completion. We began steaming in April and anticipate oil from this particular phase of Firebag in July of this year. Firebag 4 is also coming along with engineering, nearing completion and construction about 10% complete. We're still anticipating first oil in early 2013 and the contractors who worked on Firebag 3 are largely now moved over, working on Firebag 4, enabling us to benefit from their learnings and capture additional value. Ramp up to full capacity for these projects is expected to be about 24 months after we put them online.

Our other current major projects are also tracking in plan with our Millennium Naphtha Unit and Oil sands 70% completed and scheduled for startup in the first quarter of 2012. As well, construction of our major gasoline and benzene reduction projects in Denver is about 25% complete and scheduled to be started up ahead of the July 1, 2012 regulatory deadline. With these projects nearing completion, our focus is now turning to Voyageur and Fort Hills as we take these projects out of safe mode and begin moving them forward in earnest. On Voyageur, the 2011 work plan has been drafted, approved by Suncor and is now being reviewed by Total. In early May, the first management committee meeting with members from both Suncor and Total will be held. Our Fort Hills teams have been mobilized and the design basis work has kicked off. Both of these projects are scheduled to come online in 2016.

So while the first quarter was an exceptional -- so I'm going to move back now to the first quarter -- it was exceptional on most fronts. We have been faced with some unique challenges, particularly in the E&P division, where political unrest in Libya resulted in a shutdown of our operations and a reduction of some 30,000 barrels per day in our production guidance for 2011. I'm pleased to report that our contingency plans went off very smoothly and we were able to ensure safety of all of our ex-pat employees. We're complying with the various government sanctions that have been imposed and we'll continue to monitor the situation closely until a full resolution is achieved. Our thoughts and concerns continue to be with our Libyan national employees.

As you know, Syria is also experiencing considerable political unrest. Our focus remains on safety of our employees there and we have contingency plans in place. In the meantime, we continue to see normal production from our Syrian assets. In the North Sea, we note that the operator has announced their board approval of the Golden Eagle project, which is expected to see production in the 2014/'15 timeframe. We're still not yet in that position as a number of commercial agreements still need to be finalized later this year. We believe the industry should pursue discussions with the U.K. government on the recent tax increase in the U.K., which we view as an extreme measure.

Let me conclude my remarks by reminding everyone of our key priorities for 2011. We're really focused on those 5 key value drivers, which I mentioned in our last quarterly call. So 2011 priorities: operational excellence across our entire businesses; improving performance of our Firebag in-situ projects; reducing our cash cost at Oil Sands and in situ; effective project execution, particularly on Firebag 3 and then moving to 4; and then implementing the Total joint venture and growth plan. With continued focus in these areas, I'm confident we'll meet our commitments and deliver steadily increasing value to our shareholders. Steve, over to you.

Steven Williams

Okay, thanks. And as Rick noted, we put a tremendous focus on operational excellence and it's clearly starting to pay dividends. Our goal is to operate in a way that is safe, reliable, cost efficient and environmentally responsible. And the goal, of course, is to be continuously improving on all of those fronts. So we're definitely making progress. Safety is a core value at Suncor. And true of what you've heard me call our journey up to 0 program, we continue to achieve year-over-year declines in both lost time and recordable injuries. We also continue to implement a new set of process safety management standards across the company, starting with the higher-risk facilities. Process safety is all about avoiding losses of containment that can contribute to the very serious incidents. Reliability, while it's not perfect, is increasing right across our operations, which in turn contributes to lower costs and better environmental performance.

In Oil Sands, we had another strong production quarter, averaging 322,000 barrels a day despite the fact we completed our planned maintenance on the Unit 1 vacuum tower in March. We posted April numbers this morning and I'm pleased to report production of 330,000 barrels a day for April. So that gives us a year-to-date average of just over 324,000 barrels a day, and that puts us in a very good position to meet our guidance for the year. However, I should like to note that secondary upgrade in reliability, that's the hydrogen plants and the Hydro treating plants, has been disappointing so far this year, resulting in a less than optimal mix of sweet and sour production. So work is progressing to improve the reliability of these plants, but we have adjusted our guidance to reflect a less favorable average of sweet and sour mix for the year. As you know, we are now beginning a major turnaround of the Unit 2 Upgrader, which is scheduled to extend for 6 weeks for the coker units and slightly extended for pre-turnaround and post-turnaround work for other units. But the cokers themselves will be down for 6 weeks. An enormous amount of work has been done to prepare for a successful turnaround and the unit was safely shutdown on the 1st of May.

Rick already spoke to the challenges we experienced in our Middle Eastern operations in the first quarter, but it's fair to say with the exception of our suspended production in Libya, we enjoyed strong reliability in our E&P operations. East Coast production was very consistent this quarter. The 15-week dock side maintenance at Terra Nova, originally scheduled for July this year, has been deferred until 2012. So the plans to resolve the H2S issues may be implemented concurrently with that work. We expect that Terra Nova will undergo 4-week annual maintenance shutdown, with an impact of approximately 20,000 barrels a day during Q3 this year. White Rose maintenance has also been adjusted from 2 weeks to 4 days and is still scheduled for the third quarter. In Refining and Marketing, performance once again exceeded expectations, resulting in record earnings. Our reliability continued to increase as we averaged 97% utilization for the quarter. In the East, Montréal ran at record rates, but this was slightly offset by decreased throughput at Sarnia as logistical constraints on the Enbridge Pipeline continued to negatively impact the refinery there.

In the West, both Edmonton and Denver ran reliably and we were able to take full advantage of the unprecedented differential between WTI and Brent crude pricing. As Rick mentioned, this quarter, we also completed the expansion of the Ontario ethanol plant, doubling capacity to 400 million liters per year and reinforcing our position as Canada's largest biofuels production facility. In summary, we continue to pursue operational excellence across the organization and 2011 so far is a testament to our operation's excellent management system. While we recognize that this is a journey without a finish line, we believe it will lead us to more reliable production, lower costs and, ultimately, increased value for shareholders. On that note, I'll pass it over to Bart.

Bart Demosky

Thanks, Steve and good morning, everybody, to everyone on the call. This certainly was a quarter where strong operational performance, in conjunction with a favorable crude pricing environment, delivered exceptional financial results for the company, with operating earnings coming in at just under $1.5 billion. And that's roughly 4x the operating earnings we saw in Q1 of 2010 and operating cash flow more than doubling to just about $2.4 billion. Now, the cash flow number I would highlight is not fully reflective of our run rate. It does include reductions of about $170 million associated with some current tax on the disposal of the U.K. assets that we completed in the quarter and settlement on some mark-to-market of derivative losses that were booked in Q4. Both of these really fall into the category of unusual or one-time events. For the downstream, that part of our business delivered record results, with operating earnings of $627 million and cash flow at record levels of $929 million, mainly due to wider light-heavy differentials and certainly the improved crack spreads that we've been seeing in the markets. R&M continues to be a very significant source of free cash flow for us as our inland refineries are, in today's market, at least able to purchase WTI-based crude and sell the finished products at prices that reflect the much higher Brent crude posting.

Upstream, on the upstream side of the business, Oil sands recorded earnings of $694 million, again, a very strong number for that part of the operations and reflective of reliable production and the strong crude price environment. Sales outstripped production very slightly as we sold off some inventory built up in Q4. However, the sales mix continues to be impacted by work on the Hydro treater. Steven mentioned this earlier. And as such, we have updated our sales mix guidance to reflect a somewhat higher percentage of sour crude sales for the year. There are obviously opportunity costs associated with the new sales mix, and we're very much looking forward to getting the Hydro treater issues resolved. Oil sands cash operating costs per barrel in the first quarter were down a bit versus Q4 of last year at $36.15. And we do anticipate that number obviously ramping up in Q2 as we undertake a major maintenance turnaround on our second Upgrader and with the startup of Firebag 3. And we've mentioned that on previous calls. We do, however, still expect to meet our original guidance of $39 to $43 per barrel costs for 2011. So we're not understating any change there at all.

The E&P division also delivered strong operating earnings, achieving $337 million for the quarter and net earnings of $186 million. Now, that lower number on the net earnings is due for the most part to a one-time negative deferred tax adjustment of $442 million. You would've seen that in the financials. That charge relates to the increased tax on oil and gas profits in the U.K., which came into place in late March. And our guidance for the year has also been updated to reflect the new U.K. tax structure and the decrease in taxes and royalties that we won't be paying in Libya. So you'll find that in the revised outlook.

I did want to take a moment and build on Rick and Steve's comments regarding the situation in Libya. From a cash flow perspective, we were expecting to be roughly cash-flow neutral to negative for 2011 due to the scheduled bonus payment and exploration commitments we have there. So no impact on cash that we foresee for the year. As of the end of March, our net assets in Libya, including working capital balances, net of liabilities, was about $900 million. We do have risk mitigation instruments in place with third parties in the aggregate amount of about $400 million, and those could very well come into play.

We continue to evaluate and assess our assets in Libya for potential impairments. This quarter, we did not record any write-downs and the duration of possible resolution to that end, as well as the physical state of our production and distribution facilities, are somewhat uncertain at this time. So at this point, we don't believe any of our assets are impaired. However, if the situation in Libya persists or were to worsen, certainly there is the potential that assets will become impaired.

The balance sheet, as Rick highlighted, is really a great news story. Thanks to the strong operating cash flows and the proceeds from our deal with Total, our net debt is now down to about $7.4 billion at the end of the quarter. That's just terrific progress as our net debt at the time of the merger was $13.4 billion and even at the end of last year 2010, it was still at $11.1 billion. And that brings our debt to cash flow ratio now down to below 1x and our debt to cap is approximately 23%. So we're now right near the very bottom of our target range. And so our balance sheet as we launch into this next stage of growth for the company has never been in better shape. Even with our aggressive growth plans, we are targeting a debt to cash flow ratio to stay below 2x and continued range of debt to cap of 20% to 25%.

Our capital spending program forecast of $6.7 billion for the year is on target year-to-date. But given the strong free cash flows we are generating, we will look at opportunities to accelerate some spending where it makes sense. But we wouldn't expect to significantly surpass our current targets. Now with the improvement in the balance sheet and cash flows, Suncor is well-positioned to increase our return to shareholders and I'm pleased to reiterate what Rick said earlier, that Suncor's Board of Directors approved a 10% increase in dividend payments. What I'd say is this is a first important step and we look forward to further increases to our dividend as we execute our growth plans and steadily increase production. So in summary, we've had an outstanding start to the year, I think, and we believe our integrated model will continue to drive strong results for shareholders as we move forward from here. With that, I'll conclude my remarks and turn things back over to Steve Douglas. Steve?

Steve Douglas

Thanks, Bart, and thanks to everyone around the table. As was mentioned earlier in the call, we have made some adjustments to our guidance for the full-year 2011. Those include a slight decrease on overall production as a result of the Libyan situation, an update to Oil sands sales mix and an increase in the Oil Sands price realizations. Detailed guidance is posted on our website where you can also find our monthly production numbers. Additionally, I should note a change in the treatment of stock-based compensation, which I know many are interested in. Previously, we backed out the mark-to-market impacts and only recognized the cost in our ops earnings when they were actually incurred. Going forward, we'll no longer adjust operating earnings. Under IFRS, which we began in January of this year, the mark-to-market changes to our stock-based comp will generally be less volatile because we now account for them on a fair value basis using Black-Scholes as opposed to the previous GAAP where we accounted for them on an intrinsic value basis. The impact of stock-based compensation are included in our ops, selling and general expense. For those of you who wish to still remove the impact from your models, you can find the details in Note 8 to the financial statements.

Finally, for our U.S. analysts listening, the impact of FIFO accounting resulted in an increase to our after-tax earnings of approximately $185 million. With that, I think it's fair to say we're off to a great start and we're anticipating a very strong 2011. I'm going to ask the operator to open the lines for questions. I will ask that you please save detailed modeling questions for after the call. We will make several members of our IR team and controllers team available after the call. With that, I'll hand it over to the operator. Wayne?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Joe Citarrella from Goldman Sachs.

Joe Citarrella - Goldman Sachs

My question is really around the planned leverage and uses of cash going forward. You've clearly built a more sizable cash position of the balance sheet, your net debt to cap ratios are lower and near your target now and with oil prices where they are today, can you just give us some color, more color on how you're thinking about excess cash and free cash flow here? On the one hand, you raised the dividend modestly and mentioned this should increase. But how much might you be willing to do? And aren't buybacks also on the table? And finally, what do you think the areas are in your portfolio that you could accelerate spending and how much might that be?

Bart Demosky

Great questions. Thanks very much. I think to just kind of go back a little bit, we have been very consistent over the last number of quarters in our view that as our cash flows started to grow, and certainly as production grows, first call on that is going to be further shoring up of the balance sheet. Now you point out quite correctly that we've come a long way. We think we're getting pretty close to our target capital structure. But there's one thing that I think we also all know about this business. It's very cyclical. So we're being, I think, reasonably cautious here early. I think the dividend increase is reflective of what we said earlier, that we do want to grow it commensurate with production growth over time. If we do come into a period with a very, very strong free cash flow well above what we've planned, we'll look at strategic options. But share buybacks is not something that we've considered and we haven't lined out any plans yet on how we might use free cash to accelerate any capital.

Joe Citarrella - Goldman Sachs

You had mentioned there might be some areas in the portfolio that you could consider. What would those be? Are there any that you're currently looking into or might like to? Would that be sort of this year or next year and any color on that?

Richard George

So Joe, it's Rick here. What you got to remember is, of course, a major part of our capital spending is going towards Oil Sands for the next decade. We, as well as most of the markets, are really aware of our concerns around not creating an inflationary atmosphere in this industry. And with that, of course, we're the largest player. So we want to be very cautious about creating our own firestorm of overloading the area, overloading our communities and overloading the workforce. And so you're going to see us to be very systematic about this. We've talked a number of times about the need to get engineering done before you head in the field and so there's a pace at which we've set out to do this and that's our game plan on a go-forward basis. That doesn't rule out that we would do some other things, but this is a 10-year plan where the company is going to be here 50 years. We're going to go at this pretty systematically.

Joe Citarrella - Goldman Sachs

Would acquisitions be on the table as well?

Richard George

You know what, I don't have any current plans.

Operator

The next question is from Mark Gilman from the Benchmark Company.

Mark Gilman - The Benchmark Company, LLC

A couple of things. Rick, trying to read between the lines in your comments on Golden Eagle. Is your approval of this project contingent on some change in that U.K. tax increase proposed recently?

Richard George

It's a good question. I think what I'm really trying to signal is we don't have all the commercial agreements lined up, and we've not asked our Board for approval until we get that. We're not making it contingent on that, but we do expect the industry and ourselves to have a full dialogue with the U.K. government.

Mark Gilman - The Benchmark Company, LLC

One other one, I wonder if Rick, you or Steve could contrast the ore body quality between Joslyn and Fort Hills as it might relate to project economics?

Richard George

I think the basic summary of that is there's not a huge material difference between the two. And so we don't believe that, that should have a material impact on economics in relationship to the 2 projects being compared side-by-side.

Mark Gilman - The Benchmark Company, LLC

Okay, just one more for me. I'm a little bit confused, I guess, by the reference to Edmonton benefiting from the WTI-related dislocations, given that at least it appears to us that WCS has disassociated or dislocated versus WTI. I wonder if you could talk a little bit more specifically about feedstock at Edmonton and how it does relate to WTI type pricing.

Steven Williams

Yes, I mean, what we find, there are a couple of things around Edmonton. One is having the 2 facilities close together and the ability to move some materials between them is proving very beneficial to us. Generally, what we found is where we have integrated our operations between the Oil Sand and the downstream, we've been able to take advantage of that. There are a couple of ways we're able to do that. Clearly, with Edmonton, we've got the biggest integration and therefore, we can get the largest volumes in there. On the differential front, we've been able -- so with the Brent/WTI differential is one benefit, below bitumen prices is another benefit and we've been able to take advantage of both of those. So low feedstock costs and then the product prices, partially related to more of a WTI price than to a feedstock price or to the WTI rather than to the Brent price that we're getting on the products. So we get both the feed benefit and the product benefit and we've been able to take full advantage of that with the reliability of the plant.

Mark Gilman - The Benchmark Company, LLC

Steve, if I could just go one more. There's reference in the release to crude contamination type issues relating to Sarnia feedstock. I wonder if you could put some color on that.

Steve Douglas

Steve Douglas here. Can we maybe pick that kind of detailed question up after the call? We'll be available for a good hour and I will give the coordinates just before we sign off here.

Operator

The next question is from George Toriola from UBS.

George Toriola - UBS Investment Bank

A couple of questions. First, with respect to the U2 turnaround. You talked about us being the largest in history. I wonder if you can just talk about what you see as key risks here in terms of taking this down and also starting this back up and the confidence you have in getting back to -- getting things back to the operating rates that we've seen recently here.

Steven Williams

Okay, I'll pick that one up, George. So yes, this is the largest turnaround we've seen in our Oil Sands business. It's just north of 1.2 million man-hours that will execute through the piece. So that takes us up to a number of thousands of people at the peak of this project. We have a very high degree of confidence on our ability to complete this turnaround on cost and on schedule. The last 7 shutdowns that we've done in Oil Sands and a lot of that was rehearsing the procedures, the protocol and the turnaround practices for this big shutdown. So really confident about how it's going. We've got the same team in place that rolled from each of those turnarounds in the next one. So very confident with the practices, very confident with the team we have doing it. We went into the shutdown on the 1st of May. The units have been successfully and safely shut down and so far, the turnaround is on schedule. So I would say we have a higher degree of confidence than we would normally have going into this. Clearly, there's a period of discovery as we go through the first opening of all of the major vessels to sub-sea conditions, but our confidence is high.

George Toriola - UBS Investment Bank

So that process of discovery is not over yet?

Steven Williams

No. That will go on until just about 50%, 60% of the way through the turnaround, when you go through the last piece. But we know the feed quality we've been putting into that unit and it's the best we've seen prior to a shutdown. So my confidence is good.

George Toriola - UBS Investment Bank

Next question is around the Natural Gas divestitures you had talked about before. How do you see that landscape now? Are you still looking at divestitures, and can you talk a little bit about that?

Richard George

So it's Rick here, George. We still have a number of Natural Gas properties up for sale. Obviously, this is a very dynamic market. So it's still for sale, but what I would say is nothing conclusive at this point.

George Toriola - UBS Investment Bank

Then the last one for me is what's your target return on capital employed? Where would you like to be inclusive of -- well, exclusive of sort of detailed growth capital, I guess?

Bart Demosky

Sure. George, it's Bart here. So over time, we target in excess of 15% return on capital employed. That's as a company as a whole. We're quickly approaching that level now. And for new capital that we put on the ground, each of those projects, we target 15% as well. So we want to be consistent with that. And certainly for a good part of our history, that's where we've been and we believe we're going to be back there very shortly.

Operator

The next question is from Greg Pardy from RBC Capital Markets.

Greg Pardy - RBC Capital Markets, LLC

Just a couple for me. Could you just talk about the status just of the Hydro treater outages, just in terms of repairs or just curious as to whether that's fully back online now? And then secondly, there's just a reference to this, I guess, the Ballicatters exploration well. I'm probably mispronouncing that. But just any additional insight on that would be great.

Steven Williams

I'll take the first one of those, Greg, on Hydro treaters. Right now, the Hydro treaters' problems we've had are having no impact whatsoever on the operation of the plant and, of course, the reason for that is we've got half of the complex shutdown with Unit 2. So in the current configuration, we have all of the hydrogen we need and we have the Hydro treating capacity we need. So in fact, we're actually in a window now where it's free for us to do the repairs in terms of the operating costs. It's just the maintenance costs. The Hydro treaters themselves have been largely repaired. We have two problems with them. Some would just pump by back to pumps, which we've completed to work on. Some was around exchanger leaks and we've done those repairs and have plans the next turnaround to do a more full-some repair. We do have a challenge on the Unit 1 hydrogen plant at the moment and we're currently working through that. But the cost of it to the operation is 0 because we were able to use the other hydrogen plant we have. So we'll update you with that course if it's going to change. But also all of those impacts are reflected in the guidance.

Richard George

Greg, it's Rick here on the second part of your question, on the Ballicatters Well's. So we're just moving off that well if we haven't already moved off of it. We did test hydrocarbons there. We have not released actually the volume of those hydrocarbons, and part of the reason for that is we still are doing a detailed analysis of shut-in pressures of fluid and gas quantities and volumes. And so until we do a complete analysis of that, we really won't know a lot more. And so it was obviously a successful well in the sense that we've got hydrocarbons. Is it a successful well in terms of economics and is it a gas condensate well or is it a gas leg and a condensate leg? That's all the analysis that we've got to determine. So we're actually not in a position to say a lot more about it except yes, it was a discovery. We obviously had a flair that's probably not a secret in the industry. But until we do all of our homework, I'm not really in a position to declare anything related to volumes or anything else about the test.

Greg Pardy - RBC Capital Markets, LLC

Okay, no problem. And then Rick, what's your working interest just on that one?

Richard George

That's a great question.

Greg Pardy - RBC Capital Markets, LLC

I can get that after from Steve. Maybe just one last one then. I mean, your Syrian gas project that seems to be hitting the cover off the ball, volume wise, can you just -- just any thoughts around that just even given some of the upheaval we're starting to now see in Syria. Has there been any impact in your operations whatsoever?

Richard George

No, there's been no operational upsets. I think one thing is really important to remember about this asset is the gas field itself is out in the middle of the desert. It's not near any towns of any size. And the gas plant, although located about 70 kilometers away, is also not near any population centers. This gas is produced for the domestic market and, if anything, Syria is gas and electricity short and we're heading into the summer periods. So what I would say is I think it's in everybody's interest, virtually everybody, that we keep that facility up and running. So we've seen really actually no change. And our hearts and minds go out to our employees there, but also all of the people of Syria.

Operator

The next question is from Mark Polak from Scotia Capital.

Mark Polak - Scotia Capital Inc.

I was wondering just maybe a bit of a cost update first on Firebag 3, kind of where you're at as you near completion on that project. And then maybe just an update on cost assessments for Firebag 4, Fort Hills and Voyageur, if you could.

Richard George

Sure. So on Firebag 3, I mean, I think in the release, we talked about that it's largely on schedule. We're maybe a few weeks behind. We're bringing assets online. We may have seen a slight increase in capital but not anything of any significance. Firebag 4, which I recall off the top, and Steve can give you the details, it was about -- project was about $1.75 billion. We'll get the exact number for you. And that remains on track and both in terms of time and budget. So we don't see any large misses there. The good news about all of the rest of our major projects, whether it's the Benzene project, MNU, TRO, they're all tracking to budget, which is really great news for us. So again, that doesn't mean that you shouldn't be concerned about inflation on a go-forward basis. We would just say that these slated projects we have now are largely on track.

Mark Polak - Scotia Capital Inc.

That's great. And any thoughts on capital intensities for Fort Hills or the Voyageur?

Richard George

Not until we do our homework. It's a great question and we will be back to you once we have the data. But if I gave you any number now, it would be pure speculation.

Operator

The next question is from Paul Cheng from Barclays Capital.

Paul Cheng

Rick, if we're looking in today's oil price and the way that your mining operation because of the impurity coming out of mining, one is the coker or the distillation tower, down at that whole batch off the operation would need to be done. And some of the design in Shell happening at the asphalt [ph] unit, we allow them that you -- even when the conversion unit was standard, still producing bitumen and sell it to the market. And so at today's market environment, does it make sense for you guys to stay at that unit with the capital investment given your cash flow? And also there in the Fort Hills decided to add that so that even when the downstream unit will be down and you can still produce? Or that is just -- doesn't make sense from a return standpoint.

Richard George

Paul, it's a great question. It probably doesn't make sense for us to do that kind of technology in our current mine, but it will definitely be a part of Fort Hills and of Joslyn. So when you see us ring up these new mines, they'll both have that kind of technology. It may not be exactly shelves. But that technology is no longer pioneering-type technology. So absolutely, that's the game plan on Fort Hills and Joslyn.

Paul Cheng

So with the new mine that you're going to add those equipment in that, but in the existing mines -- is there -- why that it doesn't make sense in the existing mine if you make sense for the new one?

Richard George

It really deals with, if you will, we have the stuff that's in place. Remember, we will have at the end of this, Suncor alone, something like 450,000 barrels a day of upgrading capacity. So we don't see a position here where we get to where we don't have the capacity to handle that. So there's no logical reason to invest that additional capital.

Paul Cheng

I see, I see. And just a quick one. I hear what you say about Syria. Just curious now, what is the Syria and Libya profit in the first quarter?

Richard George

Sorry, well, Libya was largely shut in, Paul. So I'd have to go back into the numbers. Syria definitely is a strong earner. I don't know if we've got the number there, guys. We can call you back with the exact number, Paul.

Paul Cheng

Okay, that's great. And then a final one. Typically, that Hydro treating equipment are not being designed and built to have the same durability as some of, like, the coker and the other units. So they tend to kind of come down a little bit more often. So the question in here is that given there's a big price difference between the sweet and sour, does it make sense for you to increase your Hydro treating capability and so in some way to build you some cushion more than what you currently need so that in case some unit is down that you can still produce, maybe maintaining your revenue, your production mix?

Steven Williams

Okay, Paul, let me pick that one up. First, to get back to your other question as well. So I mean part of our strategy is that we aim to be able to have a mix of products which are sweet, sour, light and heavy. And one of the advantages we've had versus competition is we've been able to match that products back to the market. So we've never had a plan to 100% sweet on all of our material. Your question on hydrogen plants and Hydro treating, let me just context it versus best-in-class. To start with, the equipment we have, we can do a better job with it. We've actually done the work on the Unit 2 hydrogen plant and done a lot of the work now on the Hydro treaters there. So as we work through operational excellence, you'll see those units getting more reliable. And that will enable us then to, against our guidance, be more predictable. You'll see better service factors from the hydrogen plant and better operation from the Hydro treaters. And the technology exists to do that and we're sort of mid-flight with that team putting those units to world-class standards. Let me just take your question on and, actually, that's the exact reason we put the Millennium Naphtha Unit in there. So what we've done is we have in that facility the ability to Hydro treat the coker in Naphtha, which gives us flexibility. But we've also built a third hydrogen plant with that unit as well. So we will tie, we will then have 3 hydrogen plants all going into one common hydrogen header and the flexibility to use that on any of the Hydro treaters where it makes most sense depending on the market. So that will then give us another piece of increased flexibility around Hydro treating. So the operational excellence piece and investments we've made on MNU are addressing exactly the issues you raised.

Paul Cheng

Just one final short question. On the U.K. tax increases and it's going to be an agg in the third quarter, but retroactively back to March? I presume that you're not going to see the tax increase impact until you report your third quarter. Is that the game plan? Or that you would start showing it in the second quarter?

Bart Demosky

Yeah, sorry. Paul, within the first quarter, I think that the number we booked was about $37 million.

Paul Cheng

So you already booked something in the first quarter? So it's not like you're going to wait until the third quarter. Because in the U.S. GAAP, everyone is waiting until the third quarter before they report it.

Bart Demosky

Yes, that's a good differentiation. We're under IFRS, which is now the Canadian GAAP standard, Paul. And so we started taking that through cash flow right away here in Q1.

Operator

The next question is from Brian Dutton from Crédit Suisse.

Brian Dutton - Crédit Suisse AG

Rick, recognizing the federal election was only last night, how are you thinking this morning on federal greenhouse gas legislation now that the conservative party has a majority government?

Richard George

Brian, I feel like you're setting me up now. So listen, I think -- I actually expect that we will continue to kind of progress this file on many fronts. And remember, we here in Alberta, are one of the few provinces in North America that does have a carbon tax. And so I think there will still be lots of work going forward in this country around what is our energy strategy, how do we do this overall, how do we do it that works out the best for all Canadians. When you look at this industry, the one thing I'm extremely proud of is all of the advances that we have made here in terms of reduction of CO2 intensity per barrel and absolute reduction in air, land and water impacts. And the way I look at this is, this is our chance to show here over the next period of time how much better we can make this industry overall. And I would say we're not the only oil company that feels like that and that are making really big investments in R&D and really making a difference. So I think we'll continue to work this file. I don't see a big kind of cliff change coming at all.

Brian Dutton - Crédit Suisse AG

Would you think that there is more an emphasis on intensity of the emissions or absolute emission reductions?

Richard George

I think we have to start with intensity only because of the amount of growth coming in this industry. So obviously, from our perspective, that's the first place to start. But I think now, I'm a pretty big bull on technology over the next 5 to 10 years. But I think we can get to a point where we could see absolute reductions as well. It is all determined by technology. And so that's the key to this whole thing.

Operator

The next question is from Mike Dunn from FirstEnergy Capital.

Michael P. Dunn - FirstEnergy Capital Corp.

Just following on Mark's comments or questions earlier. Could you just remind us what your plans are right now for the North Steepbank Mine expansion and how we should think about costs for that? And if you don't have any hard numbers, just maybe when you expect you might be able to talk more about that.

Steven Williams

Steve, let me pick this one up. So the current plans have the North Steepbank Mine coming into production in 2012. And, of course, the main driver for that project is a reduction in operating costs because as the Millennium Mine gets bigger and more complicated, it becomes inefficient. So being able to move across to North Steepbank has that benefit to us. Bart talked earlier about the possibility of looking to see if there were other projects we could advance. This is a very attractive project to us and brings with it great returns and in our control because they're based on operating costs. So as we approach the middle of the year, I'm just in the process of reviewing whether there is any scope to advance that project. Most of it is mining and earth movement. So there may be some scope. So I would expect before the end of the third quarter to be able to talk about whether there's any scope to accelerate that project.

Michael P. Dunn - FirstEnergy Capital Corp.

Okay, great. So best case is it comes on some time in 2012 and there may be the potential to accelerate that. Am I understanding that correctly?

Steven Williams

That's correct.

Operator

The next question is from Moira Baird from The Telegram.

Moira Baird

I just had a question about the work you need to do at Terra Nova. Can you explain just briefly what kind of work needs to be done to resolve the H2S issues at the oilfield?

Richard George

Yes, so this is on Terra Nova. So first of all, integrity of the systems, which include the well and the flow lines and the ability to handle H2S on the platform is all work that needs to be done. So just to make sure that we mitigate risks, we have shut in certain wells there that have been producing H2S and to make sure that we do not have any issues. So we'll be replacing flow lines. And then going back to the whole system to make sure that we actually have the ability to handle H2S on the vessel itself. But here over the next 18 to 24 months, we'll be going through this thing kind of item by item. The biggest single thing is replacement of the flow lines and some of the subsea lines.

Moira Baird

Okay, and this will happen at the same time -- well, obviously this work will happen starting now, I guess, but the actual repair work will happen at the same time as the 2012 shutdown to repair the swivel?

Richard George

That's correct, yes. When we take the vessel in 2012, that's when a lot of this offshore work will be done. 2012 will be a heavy year on Terra Nova.

Moira Baird

And just one brief question regarding the flare of Ballicatters. Was that from the Natural Gas condensates?

Richard George

The answer is yes. But no more details other than to say that we did tests, but we're not releasing any details.

Moira Baird

Okay. And sorry, just need to go back for a second on the H2S. Can you tell me how many wells you're talking about?

Richard George

That's a detail I don't have right at my fingertips, but a number of wells.

Operator

The next question is from Allen Good from the Morningstar.

Allen Good

I wonder if you could just give an update on any inflation that you're seeing in the Oil Sands region and if you think that if oil prices stay at current levels and other companies increase spending as well, is there any risk in the back half of the year or early next year for inflation to rise as well?

Richard George

Yes, Allen. It's Rick here. So listen, we haven't seen large amounts of inflation. If you listened to the whole call, you would've seen that largely our projects are on schedule and on budget. We, as well as other people, are always concerned that we will slip back into the inflationary period that we experienced for 2 or 3 years into the fall of 2008. This does feel different to me, this go-around, because we're not seeing manufacturing and base kind of fabricating facilities as crowded as we saw last term. If there's a period that we're most concerned about, it's in that 2013, '14, '15 kind of timeframe. And again, we, as well as the whole industry, are working hard to try to minimize that kind of impact.

Allen Good

Also, you mentioned that there's some remaining Natural Gas assets for sale. Is there anything else on your plan as far as divestitures over the next year?

Richard George

We're just about there.

Operator

There are no further questions registered at this time. I would like to return the meeting to Mr. Douglas.

Steve Douglas

Great. Thank you, operator. Pardon me. Just a couple of follow-ups to earlier questions or comments. I think we did misstate on the White Rose maintenance. It is in fact 16 days, not 4 days and that's consistent with the notes in our quarterly report to shareholders. And then there was a question around our working interest in Ballicatters and it is 50%. I had said that we'll be available after the call. We will make several people available immediately after the call. If you give us about 5 minutes, I'd ask you to call in to Jenna at (403) 296-6639 and we'll have folks available to deal with detailed questions. On that, I'd like to thank everyone. As I said, great quarter, and we're looking forward to a very strong year. Thank you.

Operator

That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.

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