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Suncor Energy Inc (SU)

Q2 2007 Earnings Call

July 26, 2007 10:00 am ET

Executives

Rick George - President and CEO

Ken Alley - CFO

Brenda Cherry - VP Controller

Greg Friedman - Controller Department

John Rogers - VP of IR

John Ferguson - Chairman

Analysts

Brian Dutton - Credit Suisse

Martin Molyneaux - FirstEnergy Capital Corp

Paul Sankey - Deutsche Bank

Robert Plexman - CIBC World Markets

Doug Leggate - Citigroup

Tom Brinkmann - Davenport

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Suncor Energy Inc. Second Quarter Results Conference Call. At this time all the participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up your questions. (Operator Instructions) I would like to remind everyone that this conferences call is being recorded on Thursday, July 26, 2007 at 10:00 a.m. Eastern Time. I will now turn the conference over to John Rogers, V.P. of Investor Relations. Please go ahead, sir.

John Rogers

Great. Thanks, Ria and good morning everyone. And thanks for listening into our second quarter conference call. I have with me in the room the usual suspects, Rick George, President and CEO; Ken Alley, our CFO; Brenda Cherry, our VP - Controller and [Greg Friedman] from our Controllers Department.

We are to follow the normal format of Ken -- Rick giving you a bit of an overview of his thoughts on the quarter and a few other comments. Ken giving him very brief outline in terms of the financial implications of the quarter, and then I'll give a short look at our outlook, and then we will open it up for your strategic questions. So, why don't I move it over to Rick and start with his opening comments.

Rick George

Thanks, John, and good morning, everyone. I am delighted to be here to talk about our second quarter earnings and cash flow or, really I guess, Ken is going to talk mostly about that, but, you know, what I think well our position in this quarter is very solid. I know the headlines in the news, may be the fact that our earnings are down quarter-over-quarter, but this was a quarter that was very important for us in terms of positioning ourselves for the future.

The quarter was affected by the planned tie-in and turnaround of the oil sands, and that has gone very well. In fact, the two highlights I had pointed out for the quarter were that we did the, we did complete -- well yes complete here in July of the turnaround in oil sands. Big piece of work, some sound work, and I am very proud of the Suncor oil sands’ employees. It was a big undertaking, and that really puts part of risk of the year behind us.

The other thing was the very strong quarter in our downstream businesses, both Sarnia and Denver had record volumes, very good cost control, very good reliability, and obviously very strong results, so very proud of that in the quarter as well.

The tie-in of the oil sands, which as you know, is a kind of a highlight of the quarter was completed this past week and went very well. We are ramping up as we speak; things are in pretty good shape. We do have the diesel hydrotreater which is the last tuned up, and it will be up by Monday.

Overall, a very solid tie-in work, and this work is important because it will enable us to increase volumes up to the 350,000 barrels a day by the middle of 2008. So very important piece of work and it's also important, I think, to point out that the MCU project is the cheapest source of installed capacity in the oil sands industry.

So it’s one of those incremental projects that will not only just add volumes for us, but also will continue to position us as a low cost installed capacity and lowest-cost operators as well. So, we are looking forward to that. Now that it will come on at stages over the next really 12 months. We will call to the middle of 2008 in terms of capacity of 350,000 barrels day. But, we are very proud about where we stand on that project overall.

I think when we set up our major projects group about five years ago, and we started the execution of these projects, we are starting to really reap some of the benefits of those actions and that really building that human capacity and expert capacity in our company overall.

You’ll notice in the outlook for the rest of this, rest of 2007, we have not changed our guidance for oil sands production and cost. That will mean we have to have a very good last six months particularly for oil sands and that is going to be very important to us. We would expect average in the range of 287,000 barrels a day in the second half with cut cash costs in $22 a barrel kind of range.

That is aggressive, but feel like we have a real opportunity to make that happen so stay tuned but, that’s where we are sticking for the time being and are relatively optimistic so we can have great run here in the last five and half months of the year.

Now the downstream had obviously a very strong second quarter. Good volumes, good performance, very proud of what they have done as well. This integration strategy of ours which we kind of kicked off in the industry up here in Canada, is paying huge dividends for us and we look forward to continuing solid performance in that downstream business.

We continue and I know there will be some questions no doubt, continue to make excellent progress on our Voyageur project. I obviously would distribute lot of work on engineering side and definition and also purchasing lot of equipment long lead items. I can tell you that the economics for Voyageur look fine in my book, and we’ll be looking forward to getting final board approval and to be in position to discuss the costs, as well as the benefits of this project before yearend.

Now just to kind of give you a recap and I think it’s on page 11 of the quarterly, but we are making great progress on our other project work that we have underway. The MCU project, which I talked about before, which gives us something 350,000 barrels a day, is about 85% complete and it is on time and on budget.

The millennium naptha units, it is a small project in the $600 million plus range, it’s about 8% complete on construction, over 70% complete on engineering and again is on time and on budget. The schedule completion to that is the second quarter of 2009.

Steepbank extraction plant is about 10% complete, again not quite 70% complete and it’s again on time and on budget. The Firebag cogeneration and expansion project is about 95% complete and we will be bringing that on in the third quarter of this year, again on time and on budget. Similar I think you are seeing consistency.

We do have an 84 day turnaround at the Sarnia plant here starting September 1st. Now the refinery will be only partially down so not the entire plant and that’s where we’ll finish up the tying of this authorization plant and the integration with our products coming out of our oil sands plant. That project looks like it’s in a very good position to get that done .And we should be able to bring that totally on here very late in 2007. And in 2008 we will enjoy a much lower feedstock cost into that refinery, which again should help margins, particularly as we head into 2008.

So listen, the project work is going well. The Voyager project is kind of where we expected it to be at this particular time. We would get back to you on that before year end, but everything is really kind of on-track. Solid second quarter given the turnaround that we had planned and so work here at Suncor continues on the track that we played out over the last year first time.

So with that Ken, I will turn it over to you.

Ken Alley

Thank you Rick and good morning everyone. As Rick said, we are pleased to report solid earnings and cash flow for the quarter, considering the planned turnaround at oil sands. Net strong financial performance has left the balance sheet in a very good shape and net debt at the end of the quarter stands at about $2.2 billion, up a little bit from the end of last year, very low levels last year, as we expected as we push through the completion of the MCU expansion and move forward with the Voyager expansion project.

So overall we are very pleased with how the balance sheet looks right now. Capital spending came in line with expectations and we are still expecting capital to be in about the $5.3 billion range for the year.

We didn’t add to our hedge positions in the quarter. And just a little bit on the hedge strategy, we continue to evaluate the crude oil market for opportunities to buy what we call inexpensive insurance for the balance sheet going forward. And for us that means that if see opportunities to lock in a high four for good price, but not give away much of the upsides, as we as others continue see a very positive crude oil environment going forward. We don’t want to give away a lot of upsides to protect our strong balance sheet.

Having said that we will continue to evaluate the market and we would look to hedge up 30% of cash and going forward if we could see those kinds of opportunities. So with that I think I will pass it over to you, John.

John Rogers

Great, thanks Ken. Let me give a quick update. In terms of the outlook it is of course in the quarterly release, but I'll try to put a little color around it for you.

The outlook for production, one of the main pieces in here, up 255 to 265, as Rick mentioned we need to average just slightly over 280,000 barrels a day for the final six months of the year. Now we will caution you. We will put out the July numbers next in a little while and clearly with the MCU just starting to comeback in the last ten days of the months, we won't be in that 280 range. I would be considerably less then that.

So August through December is beginning to be a good marker in terms of where we were looking for that production to come from. So again just to caution on the on July production, simply because MCU is coming through that.

You see the mix and I've to just reflect historically where we've been to the end of six months and where we expect to be to the end of the year. I think there is some really good news in terms of the realizations. We have predicted a much wider realization. There are differentials on accrued that we are actually experiencing to-date and what we were going to experience to the end of the year. So we are now predicting somewhere in the range of 350 to 450, even though at the end to the second quarter we only had about a $1.80 off where WTI is.

Cash for operating cost to a large extent goes hand-in-hand with production volumes. So we are looking at $22 cash cost to the end for the six months to the end of the year. So that’s the other market that we were looking and working very hard out to make sure that we are beginning to get the cost in line there.

Natural gas production volumes of 250 to 220, we are looking at a build in those volume in the second half of the year and the hopefully those will come through for us.

The only piece of modeling data that I would like to deal with now is simply on the stock-based compensation. Many of you have asked for that particular number in the charts that we have for each of the divisions.

So if you have your pens ready I am going to give that too. Oil sand, in the second quarter of the charts was $20 million, after tax it was $17 million. For natural gas, it was $1 million before tax and $1 million after. R&M was $7 million before and $6 million after, and the corporate charges are $19 million before and $16 million after. So, that's all we were going to deal with, at least at this stage in terms of the modeling questions.

Ria, what we'd like to do is open the phone lines for everyone's questions for Rick and Ken strategic question. And, of course, Brenda and Greg and I will be available right after the conference call, and will be more easily be with your modeling questions, would be happy to take whatever time is necessary then,. So Ria, if we can open the lines now for questions?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) One moment please for your first question. Your first question comes from Brian Dutton from Credit Suisse, please go ahead.

Brian Dutton - Credit Suisse

Yes, good morning. Rick, I was wondering if you could discuss your natural gas strategy, looking at the costs in the division they seem to be rising, the exploration charges seems to be quite high. Can you give us some insights what you are thinking there, and have you considered buying assets as opposed to going out drilling and exploring?

Rick George

Brian, thanks for that question, and I think you are spot on to ask it, by the way. So, what makes Suncor a little bit unusual in this natural gas business? And it's a strategy philosophy point is, although gas today is very important for us, that gas kind of balance and our future gas production is equally important to us, that gas kind of balance and our future gas production is equally important to us. We, in particularly are taking on a strategy of deep foothill place, in particular, in the more less competition but also longer, bigger longer term reserves usually come with that.

Now we experienced here in the quarter a couple of big well write-downs and that kind of comes hand-in-hand with that strategy. You kind of win big, but lose big as well when you drill these dry holes. And so, you are going to see a little bit more of volatility there. The other thing we also see is much more proved undeveloped reserves because these deep foothill place don’t always have immediate access to plant, and I know there are normally a few modeling based utilities where you shouldn’t drill those until you have plant availability.

But Suncor is a little bit of a different issue. What we are trying to do is to build long-term reserves, so we have that natural hedge there. Now, having said all of that, Brian, we will be undertaking another look at this in terms of what this looks like on a strategy basis. Like the world is changing here a little bit in this natural gas business in the Western Sedimentary Basin. First of all, the issue around the Unit Trust and the Federal Government’s actions there, means probably a fewer buyers of particularly big assets on a go-forward basis. So that may open that opportunity for acquisitions.

I would also say, probably the plateau, I think, will be in a real extended plateau of the Western Sedimentary Basin. In that there may be some different strategies and different moves, so we can take a look at in terms of long-term reserves and long term kind of a hedge position on natural gas.

I would say all of that is in play, you’ve noted that, that a lot of that has changed over the last nine months, and so very much on point, what I would say is, hang with this group, it's kind of be up probably early part of the next year and Bill will talk a little bit more detail about some of the changes in strategy we have in that business.

Brian Dutton - Credit Suisse

Are there any implications for your plans here on gasification?

Rick George

Not really, we should continue to look at the gasification as the long term answer and we continue to look at the technology around that. And again, there are a number of players as you know who are involved in gasification. And some of the leading technology providers, which include Shell, GE, Conoco and a number of other new kinds of technologies is coming along.

But I would say this you want to really kind of see those technologies work on a new technologies work on a power plant scale before we undertake it. And so here is one area that I don’t necessary feel like we have to be the absolute leader. It is important to us, but not absolutely dead central to the oil sands strategy. Being a near-term follower on that technology may be our best position.

Brian Dutton - Credit Suisse

Okay. Thank you very much.

Rick George

Thanks, Brian.

Operator

You next question comes from Martin Molyneaux from FirstEnergy Capital Corp. Please go ahead with your question.

Martin Molyneaux - FirstEnergy Capital Corp

Gentlemen, you don’t segment out the Colorado versus Ontario refining stuff any more, could you just give us a sense of like who did relatively better within those segments?

Ken Alley

Thanks Martin. Yeah we go on to the end that was we combined that with the organizational change earlier this year. They both have very strong quarters, obviously the margins in Colorado have been holding up very, very well and I think we have seen that through the last few quarters, but you do not have split Ontario, it did pretty well also. Both of them contributed very strongly to this particular quarter.

And you know if we look at where the margins are, refining margins on both sectors, you know to this quarter to date, they are not quite as strong, but they are still pretty very strong. So we continue to be pretty happy with both of those markets and where they are contributing.

Martin Molyneaux - FirstEnergy Capital Corp

So in the Colorado, margins have been squeezed like East Coast. Margins have been squeezed also?

Ken Alley

No not as badly, East Coast, since you know the Colorado market tends to be kind of a market on its own, if you like and there is a shortage of supply in that market, so it continuous to be a little stronger than East Coast.

Martin Molyneaux - FirstEnergy Capital Corp

Okay. Rick, in your opening comments you talked about summer long lead time items for Voyageur been ordered up now. Can you give us a sense what kind of magnitude we are talking about as if a $1 billion or pre orders or is it more than that or? What actually does that mean from a dollar commitment point of view?

Rick George

Yeah Martin, I can at least outline that for you. So, yeah, it would be well in excess to a $1 billion, and you got to remember this ties in with Firebag Stages 3 to 6, which means that Firebag Stage 3 is, that is really under way points already started and a lot of the margins are actually been built already through to the operator. And I would say a lot of the longest term lead items have already been ordered and are on track.

The reason that we haven’t announce the cost number yet is we want to get it down where we go a certain amount of certainty and so when we come back to the end of this year, this will be much further along than other companies who announce in terms of completing some engineering will have virtually all of the major piece of equipment on order and a certain percent of the box as well.

We will be, for example, starting powering on the base site, the base site for the upgrader is actually already cleared. We will be starting piling there and deeper in the grounds in the next month. But what we want to go to do is make sure that we get in that range so that we are not updating cost as we go through project. And so that’s the way we have seen the kind of discipline for us and that’s why you see on the current projects we have why we are on schedule and on budget is, don’t announce early numbers make sure you get your engineering done, get your major piece of equipment cost.

And then to be honest with you, the real ability we have is around our construction cost and productivity and those of things that we can certainly narrow the range in on the uncertainty. And so a little different approach than other players who had announced numbers very early, having done only [marine] engineering without purchasing the equipment. If you come down in November, I will be showing you sites of us already driving piles deep underground and why that should tick that way. So we don't talk of any indications, but we are pretty far along the path.

Martin Molyneaux - FirstEnergy Capital Corp

Great, one final question. We've got a bunch of labor issues going on in and around Fort McMurray area. Any thoughts on how all this is going to play out?

Rick George

Well, I remain an optimist, I will tell you about that. Listen, any labor disruption is, and for those of you that are the phone call who don’t know. This deals with the construction trades only. This is not our in-house or unions employers who are the operators of our plant. This deals with the construction crash.

So any strike is bad news in and I would start there. We do feel like we have a very good relationship with our contractors and with their people who work on our sites. It's unfortunates that we come around to this. What is important to remember with regards to the building trades is, we do not have a direct relationship with the unions. That is done by our contractors. That’s done by the [Jacobs, Van Dross] of this industry and so it's really their lead on this that’s happening.

So there is a chance that we will have some strikes. I think from a Suncor viewpoint, my goodness, we are through the turnaround, which was our big event and we have a sense of that. If we do have first strikes on the construction site it may delay a couple of projects I outlined earlier, but again those should not see a huge impact here if the master strike goes on for a considerable period of time.

Martin Molyneaux - FirstEnergy Capital Corp

Great, thank you very much.

Operator

Your next question comes from Paul Sankey from Deutsche Bank. Please go ahead with your question.

Paul Sankey - Deutsche Bank

Hi, guys. Could you just remind us about your strategy for U.S. refining and any observations you got on the market for assets down there? Any other observation that would be interesting for me? Thank you.

Rick George

Okay, Paul. Well thanks for that. We continue to look at all refined assets that are in our orbit that we can get to directly from our oil sands plant. If we look at all of those assets, both in Canada and the U.S, I would say, I would tell you we obviously assume some huge number in terms of cost of purchasing some of these assets. The last number of refineries bought, just a very large ticket items, kind of beyond the rage that we would be wanting to pay and if you look two Denver acquisitions, remember we've thought those two Denver refineries for roughly $200 million U.S. and that has paid off handsomely and although we would like to have more refined assets, I think we are going to wait to see if to if we get the right value and range for us.

Now we have seen refinery margins as mentioned by [Martin], certain to taper off in some parts of the U.S. There will be another side of this regarding cycles. We will be very patient here and we are not in a hurry. For those of you that have been around us for a long time, remember what I talked about. Two or three years before that bit of Denver, that we are looking at assets, we or on the right thing, it worked out fine for us.

What we don't do is going to panic mode and remember we were close to 200,000 barrels a day with refining capacity as we speak, that’s even as we go to a 0.5 million barrels a day, of production capacity in oil sands, they're still not a really bad mix. It might take --having sort that I would take more refined assets of I find them, at the right price.

Paul Sankey - Deutsche Bank

That’s interesting. Thanks a lot. I guess it’s related, and again, and I guess you are kind of reminding us given that you’ve been pretty consistent on this, but could you talk a bit about the US dollar versus the Canadian dollar? And, how you think about that, I mean, obviously we are in volatile times, but it would just be interesting to know how you are seeing it, the very latest updates if you like?

Ken Alley

Paul, its Ken Alley here, and I think as everyone knows, I mean, most of our revenue is denominated in US dollars or related to US dollars. So, clearly we have sensitivity to the exchange rates. And I guess so we’ve learned over the last couple of years that we had a forecast, we probably wouldn’t be trading it. There is a relation between the Canadian dollar and commodity prices, and particularly crude prices.

So, what we are seeing is a strengthening dollar, and we’ve also obviously seen strengthening crude price. So, I mean, the kind of currency exchange rate, and it’s not totally correlated one-to-one, but we do think there is a relationship. So, we think with higher commodity prices we expect to see a stronger dollar. We plan for a stronger dollar; we never really forecast or expect it in the future to have a 70-75 cents dollar or so. We kind of accept the currency for what it is. It’s hard to forecast where it’s going, going forward, but we do think that it is related to the commodity pricing. And then for us the biggest sensitivity continues to be on the crude price, not on the currency.

Paul Sankey - Deutsche Bank

Yes, it is interesting that you have got this returns target, which is unfair, unusual now that with most [loans] having long since abandoned it. But you are speaking with 35 US dollars WTI for a 15% return, and I guess you don’t budge from that?

Ken Alley

And that is through the MCU expansion; Collin will update that as we update the cost for Voyageur as we continue to grow the business going forward.

Paul Sankey - Deutsche Bank

Will your view on the dollar effect, that it’s already single, or are you still pretty strong with respect to that, Alley?

Ken Alley

As I say, what we do is as we look at what crude prices are, and what we’ll do is we’ll update our expectations for returns as we move through the Voyageur expansion with the crude price and a currency that we think is appropriate for that crude price expectation.

Paul Sankey - Deutsche Bank

Yeah, I understand that, okay.

Ken Alley

And you adjust the currency with the crude price.

Paul Sankey - Deutsche Bank

Sure, I got it. Okay. Thanks a lot, gentlemen. I will leave with that. Thank you.

Ken Alley

Thanks Paul.

Operator

(Operator Instructions) Your next question comes from Robert Plexman from CIBC World Markets Please go ahead.

Robert Plexman - CIBC World Markets

Good morning. Rick, I wanted to ask you about Suncor’s strategy and whether you find yourself at all second guessing the strategy means Suncor is quite unique in its capability to generate sustainable production growth, but you can’t do that and generate free cash flow which a lot of investors are looking for, and would like to see. So, how you do spend so much time trying to reconcile those two issues?.

Rick George

That is a great question. Listen, we continue to look at our strategy and do reviews. What I would say is that kind of rapid growth the model that we have seen out of Suncor over the last decade and we’ll see it over the next four years for sure. I think, most of our shareholders are pretty comfortable with as long as we can grow this company at the kind of rate fastest that we grow, which by the way is one of the fastest growing oil company certainly in the public market sector, and that’s not at risk in the sense the plans are pretty well laid out. It’s hard also then necessarily to have the cash flow to increase either share buybacks or dividend.

I think when I talk to the shareholders most of them are very comfortable with our position as long as we can get an adequate return on capital. We feel we can deliver on that. And, so I think as long as we are in that position, now what we give -- Voyageur done, which is 2011-2012 event, then we are working very hard on what that --where we go from there? And one of the options always is, return more of that money back to your shareholders or continue to grow.

And so we will definitely take a look at, what I feel like, Robert, we are pretty well locked and loaded to 2011-2012. After that then we are a lot more open to we can continue to grow at this rate or do we continue to grow at a lesser rate and we still see growth, but its kind at what rate and then what other opportunities that present itself through the shareholder value.

Robert Plexman - CIBC World Markets

Okay. Thank you.

Ken Alley

However one think that, I think you also have to look at is where a corporation is in its kind of its life. And when we get back to the period of millennium and this also talks bit about why our hedging strategy is where it is today.

During the period of millennium we are literally spending two times our cash flow, so the amount of free cash available was very small. If you look at the current expansion and this is expansion going through 2012 the first depending on commodity prices, but we are more or less spending our cash flow in utilizing our balance sheet a little bit.

So, we are kind of gone from spending two times our cash flow to basically being in line. Then, in 2012, as the company becomes more mature you have more free cash flow. And then you have a nice situation where you could grow and you could have a pretty good return back to the shareholders. So we certainly realize and understand and sympathetic with shareholders asking have more free cash returned to them, but they are also as Rick mentioned very supportable to strategy right now where Suncor is in its life cycle.

Robert Plexman - CIBC World Markets

Okay. Thanks Ken.

Operator

Your next question comes from Doug Leggate from Citigroup. Please go ahead with your question.

Doug Leggate - Citigroup

Hi. Good morning guys. I apologize I was a little late getting on the call so I don’t know if you already covered this issue, but it kind of relates to the previous question. As you look out beyond Voyageur and you look at the asset base that you obviously have and the NPV or with the way to optimize NPV of that asset, assuming that you find some combination of incremental growth projects is probably unlikely to fuel raft of opportunities really fit that incremental growth.

I guess my question is where are you on the idea or perhaps not to pier back on some of you asset exposure perhaps explore perhaps sell down some of your assets and may be realize value that way balanced against how you are trying to optimize the NPV coming out those very long life assets?

Rick George

Doug, this is Rick George. So again, thanks for that question and I do get that question more often then you might expect. So listen, I think look at Suncor really differently than any of the other companies, certainly of our size on a worldwide basis, is we have the reserves. So these are high quality assets, they are not fringe kind of leases.

We have obviously, very long life reserves. And you know what, I like that position and to monetize those early to me, it seems like a very short range strategy and would kind of then move us down with a lot of other people. What our forte is that, leading guys in oil sands business, the lowest, all the install capacity on a capital basis and the lowest cost, operating cost position, those are hence to drive for.

And by the way if you monetize, by way you monetize six months as leases then you are just setting up more people to compete with you and what is your hard business. So to me, I am loyal, I don't know that these days, I mean oil sands leases values have dropped recently, but to be honest with you, we are more of a buyer of long-term assets that we are selling.

And again, I think it’s a unique position. If you look worldwide what is the industry claim record, its claim record, access to reserve that they can produce and I don’t need to tell you what’s going in Russia, Venezuela, West Africa or the Middle East. And the great thing about Canada is you got access to them, rather heavy, but at least you have got access to market access as well.

Doug Leggate - Citigroup

Maybe a follow-on Rick, again, I apologized but this is already been asked in detail, but post earlier question about refining exposure and so on. A kind of related question, the strategy remains then to hold on to the assets longer terms, but perhaps find a way of returning cash to shareholders, perhaps the Canadian operating strategy is the swing factor. How do you feel about the prospects on the kind of deals that have been talked about recently, the EnCana Conoco deal or the opportunity of maybe sending some of the incremental production work done vine into the lower forties. Is that something that’s on your mind?

Rick George

Absolutely, I mean, I think there are opportunities for that kind of transaction and we continually talked to all the players, as our single player here just looking at that equation. I think it's been really hard about to use in kind of deals, and why we haven't seen more of them done is the evaluations. And again as I talked about earlier, we are kind of very patient by our downstream assets. I still think long-term there's is going to be more value to that accrue to the player who has reserves, than has refineries.

That's now, I could be dead wrong, but we are going to solve this refinery problem. You are going to see expansions. I'm not sure we are going to solve this access to resource issue in the near-term.

So with that in mind and that is the defined strategy and kind of, I don't see that changing of my watch kind of issue than those evaluation issues. If you have a downstream player that wants to do a deal but values his refineries at the last, since the purchase prices that the refineries have gone for, and that's a hard deal for us to cut, because -- maybe for desperate players, but we are not in the desperate category.

Doug Leggate - Citigroup

Okay. I leave at that. Thanks very much.

Rick George

Okay.

Operator

Your next question comes from Tom Brinkmann from Davenport. Please go ahead with your question.

Tom Brinkmann - Davenport

Good morning. Just want to know little bit more color about the construction, going on the Firebag site both the cogen plants and expansion in-situ operations. Sort of from the standpoint of government approvals and talk about delays possible with any kind of labor, strife with the unions, construction union.. How about getting approvals from Alberta Energy and other government sources?

John Ferguson

Thanks Tom, this is John on that. We actually have the approval for all four bases that we are currently working on in terms of Firebag. Firebag 3 is the one that we are working on currently. And if that gets into command early in 2009 and then Firebag 4 will be right after that and that will be early 2010. So, we actually have the approvals that we need and are in the process of that construction right now.

With the cogen facility that we put in and some of the de-bottlenecking that we’ve done, we look like we probably could get up somewhere in the neighborhood of 80,000 barrel to 90,000 barrels a day. And that’s sort of Phase I and II and then Phase III will be a 65,000 barrels a day operation. As Rick mentioned in his comments, the construction on the Firebag facility is going quite well and we are right on track with that. So we don’t have any major concerns at the moment.

Tom Brinkmann - Davenport

Okay.

Rick George

Let me say, just one slight thing on that is, that we are also waiting for the commercial approval on what you said, I anticipated the problem. The other thing on the permit process is the upgrader, the Voyageur upgrader. All permits are in and so that is not a constraint and even some of our competitor’s announcements. If I remember some of those certainly we can't break into approvals yet. We had that in hand for a period of time. So, we don’t see a lot of roadblocks.

On this construction, you also raised the issue of the construction labor. I covered that earlier, but again we hope that, personally hope there is no strike. And if there is one, we hope it’s not long. Right now we are in probably in a pretty good position. We've got a number of these smaller projects and Voyageur. So it's just in the starting stages of construction. So we are hoping that we don’t have a huge impact. Again, time will tell on that.

Tom Brinkmann - Davenport

And as for as the timing of construction, when it occurs and I know these things you have to work around up there in a broader range in terms of clearing land and all. I think even with the environmental concerns and bird and migratory patterns, that you are confident apparently that you can work around those schedules and be able to build that all the different facilities you need, not just terms of the cogen plant and in-situ operations by the roads and things around the site.

Ken Alley

Actually, I don’t see any issues on that, anything on that right with through Voyageur. Again, I think what my view on that would be we are certainly set through to the 2011-2012 both the 500 to 550,000 barrels a day. Now what I would could we say is, after that all bets are off, because, I think number one we lose accelerated depreciation right after the Federal Government change. We have to look and see what the royalty changes come with provincial government and how that plays out. But what I would say is that it’s not automatic that we would go into a fourth Upgrader in Fort McMurray post 2012. That’s part of the strategy that we are looking at currently.

Tom Brinkmann - Davenport

Okay. Thank you, very much.

Ken Alley

Thanks, Tom.

Operator

Mr. Roger, there are no further questions at this time. Please continue.

John Rogers

Great. Well, thanks Ria, and once again thanks everyone for listening into our conference call. Again, if you have any detailed modeling questions, Greg and Brenda, and I would be around and will be happy to spend in whatever time we need with you to answer your questions. So, once again thanks for listening into our second quarter conference call, and everyone, have a good day. Thanks. Bye.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and you may now disconnect your lines.

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