Suncor Energy Inc. (SU) Q4 2007 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Suncor Energy Inc. Fourth Quarter Results Conference Call. At this time, all 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 the questions. [Operator Instructions]. I would like to remind everyone that this conference is being recorded today, Tuesday, January 22, 2008 at 9.30 AM Eastern Time. I would now like to turn the conference over to Mr. John Rogers, Vice President, Investor Relations. Please go ahead, sir.

Good morning everyone and welcome to our fourth quarter conference call. I have the usual suspects in the room, Rick George, our President and CEO; Ken Alley, our CFO; Brenda Cherry, our Corporate Controller; and Greg Friedman from the Controllers Department also. We are going to follow the usual format. Rick is going to give you a bit of an overview of the quarter and then also his thoughts on 2008. Then, I will give you a bit of a commentary on the outlook for 2008 and then, we will throw it open for questions. Why don't I turn it right over to Rick to get started?

Thanks John. Good morning everybody and obviously, pleased to announce earnings in the fourth quarter of 2007 of $963 million, excluding the effects of federal tax changes... and federal and provincial tax changes. The number is actually $598 million that compares to $358 million in the fourth quarter of last year. So quarter-over-quarter looks good. Cash flow for the quarter was 1.1... just over $1.1 billion. Last year it would have been $746 million. Now, we also are well aware that we missed targets in 2007, and obviously, we're not pleased with that. And I do want to discuss 2007 in the overall context as the continuing growth of Suncor and where we are. And if you look at 2007, we and others internally here we remember as a year of great change and very, very high activity levels. Our operations were dominated by two of the major planned maintenance events, first was a 50-plus day outage... planned turnaround of Upgrader 2, which is of course our largest unit at the Oil Sands plant and 50-plus days of turnaround is a huge number and this dealt with timing the MCU project. The normal turnaround on these units will be about 30 days. In addition to that though we had a 120-day planned... and this is on a planned basis of turnaround at Sarnia, I am sure our refinery naphtha [ph], we converted that refinery to run sour product. All that planned but still a massive amount of work. You know, normal turnaround of one of these units in the refinery would be again 30 days or less; so, just to show you the massive amount of activity. In addition to that though we also had some unplanned maintenance, both at Oil sands and Sarnia and... so all of that, the net-net of that is we did miss production targets on the year, missing production targets had a major impact on cash cost and so, the two are definitely related. What I would say is that, while a lot of this planned work is now behind us, at least a major, major stuff, we do have a U1- Upgrader 1 outage in 2008. It should be roughly 30 days, should be in the second or early third quarter of the year, and that's probably a major piece of plant maintenance coming up. So, this coming year should be a little bit or should be quiet bit lower in terms of maintenance, on a go-forward basis. Some of the other highlights of the year were the expansion of our Pier 2, which... a project we call the MCU project, actually progressed very well. At the end of the year, we were about 95% complete and by the fourth quarter of this year that project will enable the capacity at the plant to be in the 350,000 barrels a day. The $650 million Millennium naptha unit project, engineering is about 93% complete, construction is about 20% complete. Another big project there going at Oil sands is our Steepbank extraction plant, that's an $880 million project. Engineering at the end of the year was 96% complete, construction about 25% complete. Both of those projects will wrap-up in the middle of 2009, that's the Millennium naptha unit and the Steepbank mine. Now the... starting of the diesel desulphurization and Oil Sands integration project, which in total over the last three, four years about $860 million was completed during the fourth quarter. We are going through some operational challenges in terms of start up. I would say nothing out of the ordinary from what we have seen, a little bit slow on the start-up than we might have hoped. We have also been hampered there by outage of an Air Products hydrogen plant that has also kind of slowed down that work; so, a kind of a combination of things. We are just working through those now and we expect us to have that unit totally wind up here in the next three or four, five weeks, as we go forward. One of the other highlights is we have at the end of 2007, spent about $2.5 billion on our project Voyageur, that includes engineering site preparation, pre-ordering the long-term equipment and also construction on Phase III Firebag which is one piece of that project. And before anybody asks, no we are not going to announce what the total project is today, in terms of cost and schedule. We expect to do that in the near future here. We've also by the way completed our fourth and largest wind power project investment [ph] in Ontario. It was about $86 million investment for Suncor, that was completed in December and brought online. So that actually looks quite good as well. And we have a number of other wind power projects on the run here in terms of a go-forward basis. The only... that's a major estimate we put on the course is our Denver refinery. They had a terrific year 2007 and it was our kind of standard in terms of operating very well and going quite well in that. Our natural gas business did have more dry hole costs than we expect and that is one that we will be doing a deep look at here in 2008. So that's 2007 kind of in a nutshell and 2008 I will be focusing on a couple of things, on a go-forward basis and that is our focus on operational excellence. We do know that we need to achieve a higher level of reliability from the assets we have. We know that we need to start meeting targets that's very high on our agenda. We also are working through the control orders we have on our Firebag operation. We would hope to have lifted those control orders during the year, could be at least the forth quarter where we are hoping actually much, much earlier than that. And we will continue our work on... try and move all of our operations to environmental excellences as well as operational excellence on a go-forward basis. The other big focus on growth in 2008 will be around continuing, I had mentioned, the products on Millennium naphtha unit on Steepbank mine and Firebag stage 3 and of course, the continued execution of our Voyageur project. What we are in really good shape in terms of site clearance, in terms of progressing engineering and feel very good about where we are on that including the ordering of long-term equipment items. The other thing that the company is working very hard on is taking a look at what we do beyond 2012 that work progresses and as 2008 unfolds, I hope to get back to you with little bit of announcements about what that might look like. So, the other question I normally get but I don't answer upfront is around royalties and the royalties discussion quite simply what I can say is, we continue to have constructive dialogue with the provincial government and we hope to resolve the issues very shortly. Having said all of that and with all the work on our plate this is one of the busiest periods in my 17 years at the company. We know that this is a very ambitious growth time. We know we need to search and meet our targets and we are very well aware of our need to drive operational excellence. I think, we are very realistic about the size of the challenge, but I remain very optimistic about our chances for success, particularly on a go-forward basis here. So, with that John, one thing that we will never give up and I see I am relatively optimistic about 2008.

Great. Thanks Rick. I am... Rick already talked to you for the most part around the production volumes of 275 to 300 and I realized that it will be a little shy of where many of you are thinking for the year. And I just wanted to reinforce that the... kind of the reins that we have put out is fairly wide and during the year, we will actually... as we go along and better understand how the commissioning of the assets come along, we will take that range for you and give you a little figures [ph] to realize that its almost 10% from the bottom to the top. But I think that reflects the size and the magnitude of the commissioning of the assets. We didn't want to reinforce that this has everything to do with commissioning of the new assets and really has nothing to do with the quality of Firebag or the reservoir itself nor the quality of the mine fee that we are getting and it's really a mechanical issue in terms of getting these up and running the reliability we're looking forward. So, it's just taking a little longer than we'd hoped in terms of commissioning and that's the best way to say it. The splits in terms of production in pretty well laid out there for you. We won't reiterate that and the cash operating costs reflect the wide range that we have for the production volumes. So that's really all I was going to say in terms of the outlook. 2008, as Rick would say before you, it have to be the 2008 cap spending will be put out soon in conjunction with the Voyageur announcement. So we'll just have to wait for that and hopefully we'll be able to clear that outlook for you pretty soon. The one modeling question we're going to deal with on the call is the change in the federal tax, which changed our opening tax deferred tax balance. So I'll just give you the numbers for the fourth quarter and year-to-date, so you've those. So if you bear with me, I'm going to give you numbers here. First of all, for the Oil Sands, for the fourth quarter, the reduction was $348 million, year-to-date it was $413 million. So for the Oil Sands Q4, $348 million, year-to-date it's $413 million. For natural gas, Q4 is $33 million year-to-date it's $39 million. For the R&M division, $15 million for Q4, $17 million year-to-date and for the Corporate it's actually a positive charge of $36 million and $42 million. So those numbers should add up for the Q4 to $360 million and $427 million year-to-date. So those are the only modeling-type questions. Hopefully will be with you on the call, Brenda and Greg and I of course will be around after the call to really help you with any of the modeling questions you have for 2008 and going forward. So with that, Alec why don't we open it up for questions for Rick and Ken in terms of the strategic questions people may have. Question And Answer

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions]. Your first question comes from Amir Arif of FBR. Please go ahead. Amir Arif - Friedman, Billings Ramsey & Co.: Hi, Good morning guys. Just a quick question on the '08 outlook; can you tell us is this related more to the emission issues with the SAGD or is it just related to your own desire not the process or not to produce bitumen in the marketplace?

Or not to sell bitumen; is that what you mean? Amir Arif - Friedman, Billings Ramsey & Co.: I am sorry, yes not to sell bitumen without upgrading it?

Yes. No, I mean the outlook here is everything to do with bringing up this huge asset. And we have to remember that it is about... we've just spent 3.6 or slightly more than that in terms of bringing in 90,000 barrels a day in terms of that asset. So for the most part, it has a lot to do with the bringing up the asset. Going we will see how the control order is lifted, if one is lifted and one were actually able to increase the amount of bitumen from Firebag. But we could find ourselves slightly short of bitumen going into the fourth quarter. But it's not huge amount. I mean for the most part this has to do with the commissioning of the assets as opposed to being tremendously bitumen short. Amir Arif - Friedman, Billings Ramsey & Co.: Do you know when that issue is going to be taken care of the emission issues?

Well in terms of capital, we are expecting that it probably will be in place by the end of this year and we are working currently with the regulators to try to get that lifted.

Yes John, actually the issue is related to emissions that we've not actually had one controversy since early December. So, I think we continue this good track record on where we are, there is an opportunity to have that lifted earlier. Amir Arif - Friedman, Billings Ramsey & Co.: Okay, so if there was no emission issues and if differentials narrow, it sounds like this production range still would remain the same for '08?

Yes it could be, because what you are able to actually start teaming, it will take a while to get up to a pretty good production levels. We should add that we are producing today at about 41,000 which is where we capped out and it has continued to be in that range. Amir Arif - Friedman, Billings Ramsey & Co.: Okay and just one final question on the CapEx and the Voyageur causing not going into numbers, but can you narrow what you mean by releasing soon. Are we talking Q1 or sometimes later in '08?

It would be our expectation, Q1. Amir Arif - Friedman, Billings Ramsey & Co.: Q1, okay. Thank you very much.

Your next question comes from Paul Cheng of Lehman Brothers. Please go ahead.

Hi good morning gentlemen. Rick, you were talking about the... meeting the talk and reliability to be bettered in the future or at least in 2008 starting. Anything that had... maybe that you've known in the forth quarter to lead to a change in the way how you guys conduct or that be I mean what make you feel more comfortable with that, you would be able to meet the target as well as your reliability better than in 2008, anything changes?

Well, Paul if you remember, we changed our operating model in our organization and appointed Steve Williams as the Chief Operating Officer. He and his team including all the business units heads are working hard on a continuous improvement program around operational improvements. You know we haven't necessarily seen that result, so they are working in terms of 2007. But I will expect to see a lot of that on a go-forward basis. Things like increased plant maintenance, steady operation. One thing I will say is 2007 with all the changes that I have mentioned is a year of massive amount of change and in that, especially given the size and the scale of these plants, not always easy in terms of getting this to up, running and smoothing them out. I think the fact we are bringing on less assets in 2008 should also enable us to build the focus more on our operational excellence. Having said all that, we do know that we have to start delivery.

May not... may not be totally fair, but in the first quarter I mean you guys gave a guidance in October, which always made by them that you are ready know what kind of full schedule that you have, is there anything that you need in the fourth quarter, while it is so difficult with that, or that you end up that to be missing that, say relatively near-term target or guidance on that? Is there anything you need in the fourth quarter?

Yes sure we had a major event in December that we're obviously are working on and fundamentally what happened is we went through a very rich ore seen [ph] in the mine. We ended up having sanding problems in the extraction plant and it's interesting and everybody sees this business as relatively simple and from 10,000 feet it is a problem on the ground is in these mines. You can find everything from oil that sinks instead of floats, petrified wood to in this case a very rich ore that actually did not allow the sand to kind of fall as it normally would in our process. So this, and there are always variability and this is laid down by nature. It was a fairly major event for us and limited the amount of provision we produced in December. You remember also we had a pretty closed on December. Usually you get these events right but at exactly wrong time. These guys have recovered very well. Very proud of what they did, just a very tough and unplanned issue. And I think that kind of goes with the territory in this business. It is a different business than refining in the sense that your feedstock varies by the hour almost and you've got to adjust to that, once if all something we will catch you up.

Rick, if I could now two final ones. One, when you are talking about the rich bitumen and not allowing the sand to flow, is that a unique just to that session or that we should expect that to rest of the mine or that to rest of the Firebag, other session that may have this problem also. And secondly, there with federal tax rate reduction, wondering if Ken would be able to give us rough estimate that 2008, what is the effective tax rate by division?

Yes, so I will take the first one while... and Ken I will take the second part of that. Listen, there is going to be variability in this business from the front end and I always think of the challenge in the Oil Sands business being division production, be that from open bit mine or SAGD we have a lot of experience in both. You are going to see big variabilities, you are going to see some surprises all over the place. I mean you look at the Deer Creek property where they have breakthrough on a SAGD project to surface. We're still are working on technology across this broad front. So I mean, I give you a lot of comfort, but what I would say is we continually learn, continually improve but you can always get surprises. Even a company like ours, who have been in this business for 40 years, continue to find new things and part of that is just what mother nature throws at us. So, it's just that variability that we have to handle. We are not... I am not making excuses, but it's not as straightforward as many parts of this business. Ken over to you or...

Yes, Paul one of things we are going to do if we can is the overall tax rate for the corporation, we would expect to be in 29.5% to 30% and what we are doing is just kind of working through the tax rate by division. So if you bear with me, I will actually get back to you with that number.

Okay, thank you.

Thank you.

Your next question comes from Andrew Fairbanks of Merrill Lynch. Please go ahead.

Hey, good morning guys.

Hey Andrew.

I had more of a strategic question for you Rick. One of that perhaps positives of this volatile market is it produced a weaker year in U.S. refining, certainly the equities at U.S. refineries are a bit less expensive this year. I wanted to just get an update on your views on the importance of integration, if you're still looking at downstream integration in the U.S. and if that at all could factor into your plans over the next few years?

Andrew, thank you very much and I do like that strategic question. So, absolutely, I think we continuing to look for assets for sale. As you know, we picked up Denver what we thought was right part of the cycle, and that's proven to be the case. If you look at last year that asset had 28% returns on capital number and so we are very proud of that. But this year, you got to pick your moments. I think we are going to operate our required margins, to head towards a more normal range and with that I think some of the asset valuations of downstream assets will comeback into a range where Suncor can actually find them acceptable. Now, the only caution I would say about that is, we do have our plate full and Voyageur is a huge project. I want to be a little bit careful about how much I load on this organization at once. And so, what you can expect out of us over the next couple of years is a pretty Voyageur-centric organization, refocused on excellence and operations and execute on Voyageur. Having said that, if we could find the right refinery assets that came up for sale in our sphere that we could reach terrific milestones, we will be looking at talking to all those people for sure. You just wouldn't expect, you don't expect Suncor to come out of a big purchase of a larger refinery at a large price. I mean we are looking for the right sets of assets that we can fit in and make work right.

And would a joint venture structure be of interest to you?

Yes, Andrew we kicked that around. As you know there's been a number of joint ventures done across the spectrum. I guess one of my biggest hurdles is first of all, we don't have to do one of those, we have options on both side in refining as well as the upstream. My fundamental belief, Andrew is the reserves in the ground long term are going to have higher value than do refining assets. And refined assets I still have to run more but we do have pressure from changes in consumer behavior around purchasing of cars, you got ethanol bio-fuels coming on and you are going to have more product on the water around the world moving towards U.S. coast. So when I look at all that I still... I have been seeing this for a few years that I wouldn't do that joint venture deal on the valuations they had on those refineries at that time. I would look at joint venture deals but it would have to be the right transaction and my underlying fundamental belief is the reserves are going to be worth more than refining assets on a go-forward basis. So I will tell you little bit, it's pretty hard to do a deal when a guy has that kind of mindset.

Now that makes sense. Thanks.

Thanks Andrew.

Your next question comes from Terry Peters of Canaccord Adams. Please go ahead.

Thank you Alec. Rick I believe, previously you mentioned that you might supplement your natural gas division, gas assets by looking at selected acquisitions or... and I am kind of wondering is that move forward on to your plate in the coming year or where about does that fit in your strategic thinking?

Yes, so listen the natural gas business has been a tough business. I expect the industry to be a pretty tough industry for the next 12 to 18 months and you have your own view Terry of prices. So I will be a little bit cautious here. Steve Williams and his team are going to taking a look that business. Going back to strategy, acquisitions is one piece of that. If we can see the right kind of assets coming up for sale and weakness in 2008-2009 we'll definitely look at that, still a priority for me in terms of being in the natural gas business. But as you know, this has been a business that would move from a 30% return on capital business for all of a sudden a very low return on capital business, almost as the cash business for the industry during '07 and looks like the same for '08. So just a little cautious about how much money I would invest in that. Although, I think there will be opportunities at the bottom of this cycle somewhere to pick up some assets that make sense.

Alright. So you're thinking we're not at the bottom of the cycle yet?

I am not so sure to be honest with you. I am not so sure. You can get both sides of that by the way in terms of some people think we're and more than a few people think we're not at the bottom of the cycle yet.

That's fair. Okay, thank you.

Thanks Terry.

Your next question comes from Mark Polak from RBC Capital Markets. Please go ahead.

Good morning guys. Couple of quick questions on Voyageur; First Firebag stages IV through VI in case if you could update us on the regulatory process. And then second you mentioned we're getting an update in near future on Voyageur. I am just curious what all would be included in there that would be both stages for the Upgrader and North Steepbank extension and so forth what all would be included in there?

Yes okay thanks. We're just going through the final stages of the regulatory approvals on IV through VI. We expect to have that in hand in the second quarter of this year or middle of this year. That's our expectation. We could have it earlier. I mean a lot of the work is actually finalized on that and lot of that is not in our hands in terms of regulator, actually is in controller schedule. But we actually do expect to have that relatively shortly, meaning in the next three to six months. On the voyageur, we'll do a full layout for you in terms of cost, schedule, how much of it is Upgrader capital versus bitumen production capital. We will have detailed schedules and we will have a profile in terms of what that spending looks like. So our intention is when we do announce this that we will layout entirely out for you and you will see quite clearly where we are. I mean I know it is very unusual to have a project where you have spent $2.5 billion but just there is good reason that we are not in the position today to announce it. And the one thing I would say is that I feel really good about the fact that we have done a lot of working. The engineering is pretty quite along and we have done a lot of our homework, with a lot of equipment purchase. So, not taking the risk as a total, it used to be a very challenging project but we are taking a lot of the front-end risk out of it.

Great, thanks a lot

Thanks Mark.

Your next question comes from Brian Dutton of Credit Suisse. Please go ahead.

Yes good morning. Rick, you are using the new naphtha mine-based technology again this winter. Could you perhaps comment on the success ratio or the utilization into that technology this winter?

Yes I can. I mean it's in full production. I don't have an exact number but it's operating very well. It would be in the range of 15% to 20% of our production on a normal day basis. I think that number is correct and so it's fully turned on for we are getting a rate to order our second one and so that will tell you a lot about our confidence around the overall technology. So, I would say kind of now, we can say that to be part of the overall production process as the debugging kind of done on it.

Could you remind us on the lead time for the ordering and what you are scheduling in for brining in the new units over the next few years?

Yes. So the delivery time on these is about 18 to 20 months, may be a slightly longer. So you know it will be another two years before you see us bringing on probably in the, you can hear '08. So it is in all '10 timeframe we'll bring in the next unit on and then we should have another unit online by the year after that. So here it will be kind of a sequential movement on here. It's probably little bit later than we might have indicated before, but I think a part of that I wanted to make sure we debug the technology. We also have to change the mine plan to make sure that it is set for these kinds of units, and so there is lot of mine plan in the units [ph] in that effort as well.

Okay. Thank you.

Thanks.

[Operator Instructions]. Your next question comes from Robert Plexman of CIBC World Markets. Please go ahead.

Hey good morning Rick in your opening remarks you talked about your continuing cost pressure. I am just wondering if you are approaching a point where you are getting concerned about this continuing cost escalation and becoming more cautious about the expansion plans?

No. I mean now with regards to Voyageur, we are kind of ... we're pretty far along in that and again because we ordered the major piece of equipment, our biggest... when we do announce the number, I think our biggest risk around that will be field productivity. And so at least you narrow the risk down to that. I am not saying that's easy but at least we will kind of know that. One thing that I would say about Voyageur is, we found our major project suite now about six years ago. So this whole thing is going to be building up to this large project. This will be a major test there is no question about that, but I am... we mentioned just that we got the best team of people with the most experience to get us through that effort. So, no, I am not getting cold feet if that's the question. What I would say is we continue to experience inflation both on the operating side and the construction side. At some point you are right, in terms of... at some point if these projects continue to escalate in Alberta and in support remember it's a worldwide issue not here, you will eventually choke-up the economics of these projects. I don't think we are at that point yet. We still see inflation on the operating side as well, but that's probably a little bit more manageable although certainly a challenge as we go forward.

Thanks Rick.

Your next question comes from William Lacey of FirstEnergy Capital. Please go ahead.

Rick just two real quick questions. In 2008, obviously you are pretty busy with Upgrader 1 and 2 and the Sarnia restart as it were. As I look forward to the next year in 2009, should that be a reasonably clean year?

Yes, that's a good question. So the answer is, we are going to bring on the naptha, the Millennium naptha unit and Steepbank extraction plant both in the middle of 2009. And by the way we'll be finishing our Firebag stage 3. And so again that will be a year where we are bringing on new assets, so always a challenge. I do think the base plan itself, it will... this is a year where we should have the major turnarounds behind us, we should have a bounce [ph] but what I would say is that's a lot of assets to bring on. So that alone would be several billion dollars worth of assets, all coming on in one year, 2009; so, not without its challenges.

And then as far as the base production is concerned when you were talking about December and about the fact that you guys hit a rich ore body in December, you are going to go out and access it and see whether you need to continue to blend or adjust the overall configuration, where you are right now on that?

All I have to get... guys to give detail review of that. But what I would say is we have done out, they are working on root cause analysis of what happened, how to prevent it in the future. I believe that the ways they are doing today is by blending it all in terms of the rich ore with some less rich ore and that seems to have worked fine on a go-forward basis. John if you have got any other?

That's where we came on in terms of the analysis is for the most part we have to fix a few things in the extraction plant, but what we are doing now is blending the really rich ore with a little leaner quality which is fixing the issue. So, today what we are working through for the most part is just some of the valid issues which is what we had in the Upgrader in December also and really just working through that, that particular dilemma.

So, John from your perspective this is more of a shorter-term issue versus a reconfiguring issue from a change in the ore base?

Yes.

Absolutely.

Yes, absolutely.

Thank you.

Your next question comes from Kate Lucas [ph] of JP Morgan. Please go ahead.

Good morning gentlemen.

Hey Kate.

Good morning.

Hey, just a couple of quick questions; one on your reserve disclosures. I was curious as to how year-end commodity pricing and especially the differentials to some of the heavy burns from Canada might have impacted your reserve disclosures?

Kate they didn't. We'll continue to have about 15 billion barrels of reserves. So, there has... with no changes there.

Okay, and then on your hedges, it seems that you have about 10,000 barrels per day hedged for 2008. Is that about the maximum levels that you would be thinking about at current crude prices or would you be looking to hedge anymore of your production?

Yes, Kate its Ken Alley here. I think if you look at the balance sheet going forward, I mean we ended 2007 with net debt of about $3.2 billion. So we feel really good about the balance sheet and our financial capacity going forward, as we move into the heavy-spending period with Voyageur. As far as hedging goes, I think we continue to look at a hedge strategy as form of prudent insurance for the balance sheet. We think it make sense as we finalize the Voyageur spending. So I guess I would say we'll continue to look at hedge strategies, as long as we feel we could buy what I would call inexpensive insurance for the balance sheet. When I say inexpensive which means locking in a reasonable floor price for some percentage of our production, historically for us that's been in the kind 30% range, or a third of production, without giving upside on the commodity. Because we continue to believe that the commodity price will be very strong going forward. So it's really just prudent financial management.

Okay, thanks very much.

You're welcome.

Your next question comes from Jon Harding of the National Post, please go ahead.

Good morning, I wanted to ask two quick questions. The first one, the province had given a 90-day window when... in one of the talks on a new royalty agreement to conclude by, which I think we're almost that. So I'm just wondering, have the talks been extended or else a perhaps the deal imminent?

Yes, John its Rick here. So, I think I have said all I can say on the royalty and that is, we've got... we continue to have a great constructive dialogue. We hope to resolve it soon. It's always a two-way street, so we're going to wait and see where the timeline is. I don't think we're actually had the 90 days yet. But and again that was the deadline the government gave that wasn't a Suncor deadline. I'm very hopeful that it'll be within that deadline.

Okay and secondly, the cost estimate on Voyageur, you explained a bit of why this has occurred, there's been some spending take place already, but you announced in the next quarter the total cost estimate. Can you again further detail a little bit about why this approach has been taken?

Well Jon if you look at it, we've learned a lot from the last decade on this and if we are announcing that number earlier than you guys, the press then reports against that number for the next three years. So what we wanted to remember that we can have some degree of assurance about what our risk is going forward and so one of the issues is when we do give you final number will be number which we have some faith and we can meet. To do that, we need to make sure we have major pieces of equipment ordered engineering pretty far along besides clear and that eliminates a lot of risk in the variability and so that means that I will have to report against the number in much confidence into next four years.

Great. Okay, thank you.

Thanks.

Thanks John.

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

Thank you. Morning guys, closing, I was a little late getting on the call. The production guidance that you given for this year, hopefully I have a simple question, I was just wondering if it is possible to give us some idea of the patterns through the year, John. You've mentioned the maintenance in the second quarter, but you have also mentioned you expect to be close to 350 by the end of the year. So need a little help there in the modeling with DSO.

Well we have to pull out the crystal ball for you Doug. That's a difficult one. I would just think that you had probably think a bit about something north of 260 going into the turnaround and then the turnaround will kind of cut the production in half and then coming out of the turnaround, you will be north of 300,000 barrels a day. And there isn't a whole lot of signs to what I just said, that's our best estimate at this point in time. The numbers are going to be what they are going to be and we will be able to give you a better update as we go along on a month-to-month basis, we'll get a little more comfortable with this huge new asset that we have and really give you a better idea in terms of how that production profile will turn out. But I will... for now if you use those kind of numbers... I think you will for now have a good estimate of where we will be.

Would we expect the same kind of pattern obviously embedded in the operating costs John?

Well you should see, as you see due to the nature of the high cost or a tight fixed cost environment, you should see of some easing of those cash costs as the production levels increase.

Great, all said. Thanks very much.

Thanks.

Your next question comes from Ian McKinnon of Bloomberg News. Please go ahead.

Hi Ian.

Hi there is just quick guys. Have you guys any estimates on capital cost to retrofit Firebag 1 and 2, to meet the sulfur emission limit?

It probably, I don't have the final number, but if you use something in the $200 million range it wouldn't be too far off.

All Canadian dollars?

Yes.

Thank you

There are no further questions at this time. Please continue.

Okay, well thank you very much everyone for listening in on our fourth quarter conference call. Again Brenda and Greg and I will be around to answer you in detail modeling questions and we will be happy to spend as much time as we need with you. So with that we wish everybody a good day and we will talk to you very soon. Thanks, bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.