French gas giant pulls out of Suncor partnership

French oil and gas giant Total SA is pulling out of its tar sands partnership with Suncor. Total purchased its 49% stake in the Voyageur upgrader project in 2010, saying they were making a “long-term bet” on the profitability of the Alberta tar sands. Now they’re selling their shares back to Suncor at a $1.65 billion loss, rather than spending the $5 billion required to keep the project going.

“Not only does the Total divestiture raise questions about the long-term viability of Canadian oil sands investments, it also raises questions about whether the controversial Keystone XL pipeline project is really in the US’ interests—at a time when US oil output is rising and Canada’s oil sands are becoming less strategically advantageous,” writes Oilprice.com.

This comes just days after Suncor announced that it would be cancelling construction of the Voyageur upgrader altogether. The company, which in 1967 was the first to begin its foray into tar sands development, argued that increasing labour costs, labour shortages and large supplies of light crude from the US have made the project untenable.

"It's always disappointing when a project of that scale doesn't go ahead," Alberta Energy Minister Ken Hughes told the Canadian Press.

"But this is really not a big surprise to a lot of people because it's been in a state of hold for about four or five years … the marketplace as we have seen for petroleum products, whether heavy or light, continues to evolve quite dramatically."

When it was first announced in 2001, the upgrading plant, named for the intrepid French Canadian fur traders who first explored the Western frontier, was supposed to almost double Suncor’s output of refinery-ready synthetic bitumen from 225,000 to 450,000 barrels per day by 2008. The goal was to exceed 500,000 barrels per day by 2011-2012.

It would have been a huge win for Suncor, but how the market and labour force would support this extraordinary jump in supply never seemed to be part of the calculation.

The 2008 economic downturn and its attendant drop in gasoline prices to below $40 per barrel put the project on hold. Newspapers described workers from Newfoundland to the Philippines who had packed their bags, ready for the move to Alberta, suddenly out of work. In late 2009 then CEO Rick George said the project was “on our list.”

Total jumped into the fray in 2010, sparking hopes that this would give Voyageur the kick-starter it needed to get moving again. But the investment wasn't enough to save the project and Suncor was forced to take a $1.49 billion hit last year to shut it down.

Both companies have promised to stay in the tar sands, despite continued volatility. They’ll be shifting their focus onto exploration and extraction rather than manufacturing. However, experts are increasingly calling into question the wisdom of this kind of blind development of the tar sands as development far outstrips the market. 

In their 2010 World Energy Outlook, the International Energy Agency (IEA) predicted that the number of approved projects in the tar sands would far outstrip global demand by 2035. According to the IEA, the actions that governments must inevitably take to control climate change will make tar sands less and less profitable.

Image Credit: Kris Krug via Twitter