SEC Gives Boost to Suncor Energy's Oil Reserves

• The Company: Suncor Energy, the world’s largest independent producer of oil and gas from tar sands.
• The Document: On June 26, the SEC announced an update on a proposal to modernize oil and gas company proven reserve reporting requirements.
• The Finding: Current rules limit disclosure to only proved and probable oil and gas reserves. Under new regulations, Suncor Energy would be allowed to classify previously excluded unconventional resources, such as tar sands, as oil and gas reserves, doubling its asset base overnight.

The Upshot: “Reasonable certainty” of recovery, defined as “much more likely to be achieved than not,” will serve as the threshold standard to establishing proved reserves. Using this definition, Suncor’s proved and probable reserves of 1.1 billion barrels of oil would more than double to 2.25 billion barrels.Industry-wide, oil-sands production currently stands at over one million barrels per day, with aggregate production expected to triple by 2015. Suncor, which produced an average of 286,200 barrels at the end of its first-quarter ended March 31, is currently producing about 211,000 barrels of oil each day (at the end of June), due to power outages and unscheduled maintenance.

Meeting 2008 daily production goals of 285,000 barrels will be a challenge for Suncor. Irrespective of current operational issues, Suncor is standing by its Herculean prediction that it can more than double daily production capacity in four years to 550,000 barrels by 2012.

The expansion plans include constructing four additional stages of in-situ bitumen production, a new upgrader to convert that bitumen into higher-value crude oil, and various infrastructure and utilities — all of which will cost an estimated $20.6 billion, according to Suncor management.

Cash flow from operations — which was $3.8 billion in 2007 — will not cover the capital required to fund the expansion. Suncor has $2.5 billion in untapped credit, which means the company would need to access the debt markets, too.

Delays could boost capital spending needs to more than $25 billion.

Suncor had an operating working capital deficit of $347 million at the end of the first-quarter, due primarily to an increase in accounts payable and accrued liabilities. However, the SEC’s expanded disclosure should help potential lenders and investors better understand the company’s leverage, facilitating access to needed monies.

The Question: The oil sand box is getting more crowded. Given record high oil-prices and proven reserves, might Suncor find a merger playmate to help with its own expansion plans?