Good day, ladies and gentlemen, and welcome to the Suncor Energy first quarter 2018 financial results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions for how to participate will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Steve Douglas, Vice President of Investor Relations. Please go ahead.
Thank you, operator, and good morning to everyone. Welcome to the Suncor Energy first quarter earnings call. I have with me here in Calgary this morning, Steve Williams, our President and CEO, Mark Little, our Chief Operating Officer, Alister Cowan, EVP and Chief Financial Officer, and also Trevor Bell, who is our current Vice President of Tax, but the incoming Vice President of Investor Relations with my imminent retirement. I'd ask you to note that today's comments contain forward-looking information. Actual results may differ materially from expected results because of various risk factors and assumptions. These are described in our first quarter earnings release, as well as our current AIF, both of these are available on SEDAR, EDGAR, and suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian GAAP. For a description, please see our first quarter earnings release.
After the formal remarks, we'll open the call to questions, first from members of the investment community, then if time permits, members of the media. With that, I'll hand it over to Steve Williams.
Good morning, thank you for joining us. I would like to start by taking a moment to recognize the contributions of Steve, who is taking, as he describes it, a well-deserved retirement after almost 28 years with Suncor. Investor relations has clearly been a genuine strength here at Suncor. Steve's leadership has been greatly appreciated. I'd also like to welcome Trevor Bell, who is transitioning into Investor Relations role. I know that he'll provide equally strong leadership as we continue to tell the Suncor story to an expanding shareholder base around the world. Turning to our results. The first quarter of 2018 featured the highest average oil prices since the fourth quarter of 2014. The combination of positive supply-demand fundamentals, global oil inventories finally moved into balance, has begun to shift both industry and I think, investor sentiment.
In Canada, the story is complicated by wide light heavy differentials as a result of increasing market access challenges. Just as an aside, I will cover those differentials later in more detail. For Suncor, it has no impact. Amid all of these developments, I think it is important to come back to the guiding principles that underpin the Suncor story and to remind everyone of the unique advantage that continues to enable our outperformance. These are constants that will not shift with oil price cycle or investor sentiment. As I've said many times, it starts with capital discipline. As rising production and higher oil prices drive increased free cash flow, we will maintain our focus on rigorous allocation of capital. We will meet our commitments on reduced capital spending. We will avoid growth for growth's sake and instead focus on growing free cash flow and returns per shareholders.
We will deliver cash back to our shareholders through competitive dividends and value-based share buybacks. Our tightly integrated business model is a critical part of the Suncor advantage and one that is very hard for our competitors to match. Our upgrading and midstream assets and expertise, combined with our industry-leading refining and marketing network, enable us to maximize the value of every oil sands barrel that we produce. In the first quarter, the WCS-WTI price differential averaged $24 per barrel versus just $12 per barrel in the fourth quarter of last year. That near doubling of the light heavy differential had absolutely no impact on our earnings or cash flow. Let me repeat that. The near doubling of the light heavy differential had absolutely no impact on our earnings or cash flow.
What we lost in realized pricing at oil sands, we completely recovered through our midstream and downstream operations. Our integrated model and strong logistics capability fully shielded us from the significant market access issues and pricing differentials. We didn't lose any value. We simply realized it elsewhere in the value chain. That's exactly what the strategy was designed to do. Operational excellence is another key element of our business model. Unfortunately, the operations at both the Suncor base plant and Syncrude fell short of Suncor's high standards in the first quarter. We need to do better and be assured we will. We will continue to work in a disciplined manner to improve safety and reliability, reduce costs, and ensure the sustainability of our operations. We will also continue to bring technology and innovation to bear across the entire business in support of our operational excellence.
Let me give you an example. After several years of comprehensive testing, we've begun to roll out autonomous haul trucks across our mines, a global first for soft rock mining. Our North Steepbank mine is already operating with a fleet of automated trucks. The implementation of this technology will result in safer, more productive mining operations with improved fuel efficiency and lower associated emissions. This is just one of a host of technologies that we expect to drive operational excellence across our business over the next few years. Finally, we continue to focus on profitably growing the company. The successful ramp-up of Fort Hills and Hebron production, combined with continuous improvements at Syncrude, will lead to a 10% production growth this year, a further 10% in 2019. We've certainly been pleased with the progress on both our major growth projects so far this year.
Despite the Fort Hills startup being delayed by exceptionally cold weather until the last week of January, we were able to hit the midpoint of first-quarter guidance, effectively delivering three months of production in just February and March. With the startup of the second solvent extraction unit on April 22nd, we've now successfully run the plant at over 150,000 barrels per day. With the startup of the third and final extraction train now planned for later this month, we expect to be producing at capacity well ahead of our original schedule. We've had a similar experience at Hebron, where the second production well came on ahead of schedule in the first quarter. We were anticipating average net production for this year of about 10,000 barrels per day at Hebron. With a third production well now in operation, we've already seen volumes exceed that target.
Our immediate growth is ramping up ahead of expectations. Of course, we laid out a series of low capital intensity projects that we believe will grow our free cash flow by more than CAD 500 million annually beginning in 2020. Of course, that's irrespective of oil prices. Many of those projects involve the application of technology to reduce costs and improve environmental performance. Examples range from replacing our coke-fired boiler system with cogen units, to the use of advanced analytics to reduce maintenance costs and optimize facility throughput. To more simple measures like employing remote sensing technologies such as drones to generate real-time flare stack diagnostics and calculate overburden removal. We have a great deal of confidence in that suite of projects, and we believe that they'll increase our annual cash flow by more than CAD 2 billion by 2023.
The real strength of our growth plan for the next five or six years is a high level of certainty, and it's not constrained by market access issues. We have existing pipeline access to accommodate all of our oil sands production, including our Fort Hills barrels. Again, let me repeat, we have existing pipeline access to accommodate all of our oil sands production, including our Fort Hills barrels. Our growth from 2020 to 2023 is largely about increased productivity, efficiency, and margin enhancement. Now, that said, we are fully supportive of all pipeline projects to increase market access for Western Canadian crudes. We believe it's important for all Canadians that new pipelines are not just approved, but constructed and put into operation in a timely manner following the well-defined Canadian regulatory processes.
I have to say, I've been encouraged by the strength of the recent support that the Alberta and federal governments have expressed for the Trans Mountain expansion, and I look forward to seeing their plans unfold over the coming weeks. In the meantime, Suncor is making strong progress as we execute on our growth and returns strategy. I'm now going to ask our Chief Operating Officer, Mark Little, to provide some color on our operational performance in the first quarter. Mark?
Great. Thanks, Steve, and good morning, everyone. As Steve mentioned, we dealt with some operational challenges in the first quarter, which reduced production at both our oil sands base and at Syncrude. However, strong performance from our offshore projects and record refining and marketing results largely bridged the gap. I just wanted to go through a couple of the details here. Total oil sands production averaged 572,000 barrels per day, which was down about 3% from the first quarter of last year. At our Oil Sands base plant, a leak in a waterline damaged electrical equipment and led to a power outage, which shut down the plant in mid-January. This event was complicated by extreme cold winter weather, which extended the time required to restart the plant.
We returned to normal operations in February, and I just wanted to acknowledge the terrific job done by the team to safely return the plant and manage through this event. At Syncrude, we experienced a partial blockage in the pipeline that carries bitumen from the Aurora North mine to the upgraders. As a result, the Syncrude plant was short bitumen feed and forced to operate below capacity. To reduce the impact of this event, the planned Syncrude turnaround was advanced by approximately one month, so that the issue with the froth line could be resolved during the turnaround window. This issue has been fully resolved, and the line is back in service with several mitigations implemented to prevent a reoccurrence. We expect Syncrude to complete the turnaround and return to normal operations in the next couple of weeks.
In situ operations continue to be extremely reliable as Firebag and MacKay River combine to produce 241,000 barrels per day of bitumen, equal to 100% of the nameplate capacity. As Steve mentioned earlier, the Fort Hills ramp-up is proceeding ahead of schedule, and I'm very pleased with the performance trend. The strong results reflect the high quality of construction and the dedication and teamwork of thousands of employees and contractors, and our unique phased approach to handover, commissioning, and startup that leveraged all of Suncor's infrastructure in the region. We conducted several pre-winter test runs on the front end of the plant prior to starting up secondary extraction, and then we started up the first two secondary extraction plants in a phased manner in the first four months of the year.
With preparations ongoing for the final secondary extraction train to come on later this month, it's too early to declare victory. However, I'm very pleased with our progress to date, and I'm increasingly confident that we'll be able to achieve full, stable operations ahead of the previously announced timeline. In the E&P group, production exceeded our guidance range as the faster than expected ramp-up at Hebron production helped to offset the expected natural declines elsewhere. As Steve pointed out, the second and third production wells have come online already this year at Hebron. The drilling activities were also conducted in the first quarter at Terra Nova, Hibernia, and White Rose as part of our investment to mitigate natural declines going forward. In the downstream, strong wholesale and retail product demand enabled us to run our refineries at record rates for the first quarter.
Crude throughput averaged 454,000 barrels per day, which equates to 98% of nameplate capacity. Building inventory for the second quarter refinery turnarounds also helps support strong utilization rates. A key element of operational excellence is strong cost management. We've been working successfully to steadily reduce our operating costs across the business. Our Oil Sands operations costs came in at CAD 26.85 per barrel in the first quarter. The higher unit cost this quarter largely resulted from the reduced production and the incremental maintenance associated with the outage that I talked about, as well as preparation for the U1 turnaround that started at the beginning of April. Of note, our all-in in situ cash costs averaged CAD 9.55 per barrel in Q1. That's in situ's third consecutive quarter of sub-CAD 10 per barrel cash costs. Syncrude cash costs rose to CAD 50.75 per barrel.
Once again, the increased costs reflected the reduced production and incremental maintenance expenses. We anticipate a return to more typical cost levels at both Oil Sands operations and Syncrude once turnaround activities are completed later this month. We maintain both our production and cash cost guidance unchanged for the full year, which reflects our confidence in the safe, reliable, low-cost operations for the remainder of the year once we complete the current turnarounds. In E&P, we continued to see exceptional cost performance as the U.K. North Sea came in at just CAD 5.36 per barrel, and the East Coast operating costs fell below CAD 10 per barrel for the first time in a year at CAD 9.70 per barrel. Finally, with record Q1 throughput at our refineries, we were able to reduce operating expenses to just CAD 4.90 per barrel.
Looking forward, our immediate focus is to safely complete our major turnaround work and to start up the final secondary extraction train at Fort Hills. Success on those two fronts will set us up for a strong operating performance in the second half of the year. With that, I'll turn it over to Alister Cowan to provide some color on our financial results. Alister.
Thanks, Mark, and good morning. With an average WTI price of $62.90 US at a New York Harbor 3-2-1 refining crack of $15.50 US per barrel, the business environment in Q1 was stronger than we've seen in some time. As Steve mentioned, the WCS price was heavily discounted in the quarter, but our integration completely shielded us from the wide WCS-WTI differential. Just as a reminder when looking at our results, we use market prices to transfer our production from our upstream to our downstream refining operations. The realized pricing for oil sands crudes net of transportation expense ranged from CAD 76.85 Canadian per barrel for Syncrude SSP then to CAD 27.57 Canadian for in situ bitumen, reflecting the unusually high Western Canadian light-heavy differential. Fort Hills higher quality PFT bitumen realized a premium of approximately CAD 5 Canadian per barrel over in situ bitumen.
In the offshore, our production realized very close to Brent pricing, with East Coast Canada averaging CAD 82.78 per barrel and the North Sea averaging CAD 81 per barrel. Downstream achieved an average refining gross margin of CAD 30.25 per barrel versus the New York Harbor 3-2-1 crack of CAD 19.60 per barrel. With the strong realized margins across the business, we delivered strong financial results again in the quarter. We generated CAD 2.16 billion in funds from operations and CAD 985 million in operating earnings in the first quarter. Our return on capital employed improved to 7.8%, excluding major projects in progress.
Our funds from operations for the first quarter significantly exceeded our sustaining capital plus our dividend, leaving CAD 755 million in discretionary free funds flow to invest in growth and return to shareholders. I should just note there's a couple of unusual items in the quarter that reduced our funds from operations and our GAAP cash flow or cash flow from operating activities. Both metrics were reduced by approximately CAD 335 million due to the annual payout of stock-based compensation, which we accrue to earnings on a quarterly basis. It only hits our cash flow on the annual basis in the first quarter. Cash flow from operating activities is adjusted for changes in non-cash working capital.
You'll have noted that the working capital increased by CAD 1.4 billion in the first quarter, and that's really a result of an increase to accounts receivable on an improving price environment, a substantial build of product inventory in advance of major turnarounds, and the payment of deferred 2017 taxes. Obviously, some of this build in working capital will reverse in Q2 and later in the year. As everyone is aware, with the start of our Fort Hills at Hebron, we have reached the end of a period of intense capital spending on large growth projects. In the first quarter, our total capital expenditures were CAD 1.2 billion, with approximately two-thirds of that expenditure being devoted to sustaining our business.
The first quarter spend puts us right on track to meet our annual capital guidance range of CAD 4.5 billion-CAD 5 billion, a significant reduction from our CAD 5.8 billion capital program in 2017. With increasing production, reduced capital spending, and the disciplined cost management driving structural increases in our free funds flow, we are comfortable returning more cash to our shareholders. During the first quarter, Suncor's dividend increased by 12.5%, marking the 16th consecutive year of dividend increases. We invested CAD 389 million to repurchase approximately 9 million shares. That brought the total since we launched the current program last May to an investment of just over CAD 1.8 billion to repurchase over 42 million Suncor shares. That's roughly about 2.6% of our outstanding float. The average repurchase price for the program to the end of Q1 is CAD 42.77. That's more than 12% below our current trading levels.
Later this week, we will begin executing on a new 12-month, CAD 2.15 billion share buyback program. We finished the first quarter with our balance sheet in robust health, including cash on hand of approximately CAD 2.1 billion and approximately CAD 4.8 billion in liquidity after funding approximately CAD 1 billion of acquisitions. Our net debt to funds from operations was 1.7 times, and our debt to capitalization was 28%. Of course, we continue to attract a strong investment-grade credit rating. The heavy turnaround activity currently underway will obviously have an impact on our second quarter results, but that has been factored into our guidance. All things considered, with growth projects ramping up ahead of schedule, reduced capital spending programs on track, and major turnarounds expected to wrap up later this month, we should be well-positioned for a strong back half to the year.
With that, I'll pass it back to Steve Douglas.
Well, thank you, Alister, Mark, and Steve. Just a couple of things to note before we go to questions from the phone. We did have rising crude prices through the first quarter. As a result, we had a FIFO gain after tax of CAD 53 million. Stock-based compensation was a net cost to us of CAD 82 million after tax.
On foreign exchange, the Canadian dollar weakened by CAD 0.02 from the end of the year to the end of the first quarter, resulting in a CAD 329 million after-tax charge. That, of course, has no cash impact. That's a balance sheet item on our forward debt payments denominated in US currency. We did reference our guidance for 2018. There are no changes to production, cash costs or capital, but we have adjusted the business environment to reflect actual pricing in the first quarter and forward curve pricing through the end of the year. The only change that results in is an increase to our cash taxes. With that, I will turn the call back to the operator to take questions, first from the analyst community and then, if time permits, from the media.
Thank you. At this time, if you'd like to ask a question, please hit star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please hit the pound key. We ask that once you've asked your question, please mute your line to prevent any background noise from coming through. Again, that is star, then one to ask a question. Our first question comes from Phil Gresh with JPMorgan. Your line is now open.
Yes, good morning. I would be remiss if I didn't start off by congratulating Steve Douglas on his retirement after 28 years. You're definitely going to be missed.
Thank you, Phil. I appreciate it.
First question. Alister, a couple of questions on the quarter, if you don't mind. One would be, obviously, there were some transitory effects, and you guys kind of went through all those, but if you could just maybe quantify for us how you think about the headwind that came from the lost production and the OpEx headwinds in the quarter. Secondarily, just on this working capital that you briefly mentioned, how do you think about how much of that will reverse as we go through the year? Just thinking about cash balances and the balance sheet.
That's a good question, Phil. Thanks for asking that. I would say the headwind from the lost production, we estimated roughly CAD 270 million from a cash flow perspective. On the working capital, let me just kind of highlight. I mentioned some of the key things, I'll just give you some quantification around those. Price related, because of the increase in price of oil from December to March, really is about CAD 450 million of that CAD 1.4 billion. If prices stay where they are, that won't reverse. We had some timing of receivables. We sold the cargo, an offshore cargo, towards the end of March, that was sitting in receivables. They're always lumpy, as you know. That's about CAD 225 million. We did build up the inventory, as we talked about in the script.
That's about CAD 200 million that should reverse in Q2 as we draw that down. On the payable side, our annual incentive comp gets paid out as a working capital movement. We paid the final installments of the 2017 cash taxes. That was about CAD 570 million. Of the CAD 1.4 billion, I would say about half of it will reverse during the year.
Okay. All right. That's very helpful.
The rest is related to price. If the price goes down, you'll see some of it reverse. If price goes up, you'll see more going into AR.
Okay. That's very helpful. Thanks. I guess the second question would probably be for Mark, just around the ramp-up here at Fort Hills. You gave some color about why that is, but it sounds like you didn't want to declare victory yet. What are you looking for to get more confident that, I guess, in the run rate through the back half of the year? If you could just update us on your latest thoughts around what the long-term cost structure of this asset would be from an operating cost perspective. I think in the past you've talked low 20s, but just based on what you've seen so far, if you have any color.
Hi, Phil. It's Steve. I'll just start and then quickly hand over to Mark, who can run us through his views. Overall, Hebron and Fort Hills coming up very well. I mentioned it in passing, although we didn't put it in print. We are in excess of 150,000 barrels a day at the facility as we speak. Just to context it, before Mark goes into a lot more detail, remember that we've got the vast majority of that plant up. It's only the final parts of secondary extraction which need to come on, and we've started the first two of those up, so we've got a pretty high degree of confidence. Whilst not stealing Mark's thunder, we'll be bringing the third one on in a couple of weeks.
If history is anything to go by, we'll be hitting full run rate on this thing well ahead of our schedule. Let me hand over to Mark.
Great. Thanks, Steve. Yeah, Phil, it's interesting that with Fort Hills, part of the challenge with secondary extraction is parts of it are fully on. We have 100% of the capacity, the flare systems, the solvent recovery systems and such. What will happen as we bring on the third train is we will end up running into, ultimately, the constraints of the facility. Is there the bottleneck beyond that will be determined by exactly where the constraint is, which is true in any facility. It's exactly what we saw at Firebag. As Steve mentioned, because we're in the process of bringing on the third train here in the coming month, we expect that we will be seeing this, and seeing stable rates likely by the end of the third quarter here as we go through it.
It is never over till it is over, and that is the word of caution in it, because you never know where the constraint is going to be and whether we are going to find some issue through the startup. So far, it is going extremely well, and we are very optimistic about finishing this off.
Great. If I could just sneak one last one in for Steve. You continue to find small bolt-on opportunities as we look at the portfolio. How do you feel about the rest of this year? Do you still see opportunities ahead, or is it more business as usual from here from your perspective?
I mean, we have talked, Phil, about that CAD 500 million a year adding up to CAD 2 billion a year in cash flow between now and the early 2020. You have seen our track record over 10 years. We understate and over-deliver. That is our plan. You have not seen us change guidance with any of the operating challenge we have had, and that is because we have a high degree of confidence we will deliver through our operational excellence for the rest of the year, and that includes continuing some of these projects. The Fort Hills is, as Mark said, he is going to get there second stroke third quarter. We will not change guidance. We will report once we have actually achieved that. Syncrude is moving ahead very well. I mean, Mark sort of said it fairly quickly in his update there, but we have already addressed that pipeline standing issue that we had.
We are fully confident we are past that. We have got to be realistic, but we are cautiously optimistic we are going to hit and beat the beat guidance this year. Yes, you will see some continuing improvements. You will get a chance to see what we are capable of in the third and fourth quarter as we unconstrain these operations.
Okay. I apologize. I was just referring to M&A bolt-ons.
Oh.
If you see further opportunities ahead or if it's just operating the business as usual.
I would start from we love the base case. We got 10% growth this year, 10% growth next year, and then the CAD 500 million a year. We keep an active look in the market. We're in a great position where the base case is so good, we're not chasing anything. There's still a lot of sellers in the market. We keep looking. We've got nothing imminent though at the moment.
Okay, perfect. Thanks a lot.
Thank you. Our next question comes from Guy Baber with Simmons & Company. Your line is now open.
Good morning, everybody. First off, Steve Douglas, congrats on a great run, man. I hope your future is filled with a lot of golf and a lot of really fun places.
I'm sure it will be. Thank you.
For my questions, I wanted to talk a little bit more about the resilience to the light heavy differential here. You all highlighted no impact to cash flow during the quarter. Can you maybe talk a little bit more about how you are outperforming relative to the framework you gave of the CAD 25 million sensitivity? Maybe some examples of what the midstream and marketing team are doing there, which is pretty impressive, and whether that's sustainable through the rest of this year. Can you talk about maybe at a high level, how you see that sensitivity evolving over the next couple of years, and the extent to which your team might be putting plans in place to continue to mitigate some of those spread headwinds?
I mean, I'll start, and I'm sure the guys will jump in and help me with some of the details. First of all, it's as we designed it, not because we're clairvoyant and can see it, but because our strategy is an integrated strategy. We balance with the bitumen we produce in Canada, upgrading and downstream. We don't do a perfect balance. We're about 70%-80% of those ratio to the upstream, which is why we never say we have no exposure forever going forward. You can assume, we already purchased, that was part of the strategy, the long-term access to pipeline to accommodate the Fort Hills production. It's not zero exposure to differentials going forward.
You can see with the physical asset integration we have and the management in the midstream, we were able to be completely immune from it in the first quarter. It's an impossible number to give exactly because it's so market-specific on the day. We put in what we believe is a very conservative number into the IR deck, which is the one you're talking about. We don't expect to see any significant exposure to the light heavy differentials through the piece. One of the questions as we look at M&A is, are we prepared to accept more exposure to that? When we look, we factor that into the economics. We look at what we think those differentials will be and for how long they will be. We've seen some. Just a few comments and then the guys can jump in after.
We've seen some spikes in that differential over the last few months. We expect as rail contracts start to get negotiated, that the spikes may not be quite as high, but we still expect there to be a large light-heavy differential until pipelines get built, because rail is more expensive than pipelines. Of course, the IMO 2020 regulations start to put a pressure in there, too. We like our position. If we do any M&As we go forward, we will factor in potentially more exposure if that's heavy without the corresponding downstream integration. We think they're going to remain modestly high for a number of years until the pipelines get built. I don't know if you guys want to add anything.
Yeah. The only thing I would add to that, Steve, is we've obviously been ramping up Fort Hills in the quarter. We have been moving product down to the Gulf Coast. Therefore, on our existing Keystone access, obviously we're not exposed to the hardest of differential. We're getting Gulf Coast pricing for our product. That's part of it. That's helpful. Excuse me. You're seeing the premium that we talked about in getting for PFT bitumen of CAD 5. That's significant over a CAD 27 sort of in situ bitumen price to get a CAD 5 premium for Fort Hills bitumen. It's an attractive bitumen commanding a strong premium exactly as we thought it would do.
Very helpful, guys. My follow-up is with oil prices where they are right now, assuming that holds, once you guys get through some of this turnaround activity, the back half of the year does look pretty good. You guys should be generating a lot of free cash flow. I really like slide 11 in your deck, where you lay out the fundamental priorities for the free cash over time. As we think about the back half of this year, specifically, can you maybe walk us through how you're thinking about the usages of excess cash? Specifically, could we see CapEx begin to creep a little bit higher as you put more into the business? Or how do you think about a little bit more CapEx versus more buyback? Would appreciate any color there.
Yeah. I'll just make a few comments there. We really mean what we've been saying in terms of capital discipline. Our capital budget this year, irrespective of crude price, is expected to be CAD 4.5 billion-CAD 5 billion. You won't see us taking any sharp left or right-hand turns. We've got a well-established capital expenditure program. We've got the projects being developed. The sort of CapEx profile we've talked about covers that. If you look at this year with the free cash, because I wouldn't disagree with your analysis, we use share buybacks to handle that short-term cyclical variation that we see on cash flow coming in. Generally, we aim to adjust dividends annually as the underlying fundamental cash flow profile is coming up.
Clearly dividends are a board decision, you can expect to see dividends continuing year-over-year to come up as the earning power of the company comes up. You'll see us using share buybacks to take up that slack.
Thanks very much.
Thank you. As a reminder to our speakers and our audience, when you ask a question to please mute your line to prevent any background noise from coming through. Our next question comes from Greg Pardy with RBC Capital Markets. Your line is now open.
Yeah, thanks. Good morning and happy trails, Mr. Douglas. Really a lot of my questions have been answered, maybe this is a question more for Mark Little. Could you dig a little bit into the Syncrude turnaround, and then specifically, I think it's, what, one of three cokers or one of four cokers that are down right now. How much is Syncrude actually down at this stage?
Yeah. It's one of the three cokers that's down. In fact, this is an annual event, we have this every single year. The plan is to take one of these down. This is a planned turnaround. The only thing that was adjusted was we moved it forward a little bit to deal with this pipeline restriction. We take the coker offline and clean up the assets and take the coke out of it and replenish it and get it back online. The maintenance and work that we're doing is very routine. The only thing that was different than planned was this restriction. Our view was, is instead of limping along and then going to a turnaround, we might as well take the asset offline. Because we weren't fully utilizing the assets anyway.
Okay. That's great. Just a quick one for me. Your exploration expense the first quarter is really small. It's like CAD nine million or so. What are you doing on the exploration side, whether that's North Sea or whether that's East Coast of Canada? Just curious there.
Well, it's interesting, Greg, that one of the things we've found, and one of the joys of our organization, is we have this massive resource space. You saw our transaction as an example of when we went into Rosebank. Our view was, well, we can go and buy resource substantially cheaper than people's finding costs in commercial quantities that then we can commercialize and generate a commercial return for the shareholder. At this stage of the game, we've had very limited exploration. In some cases, the work that we're doing is around existing assets or improving the 3D seismic and those sorts of things. We're very minimal on exploration right now, and that's intentional.
Okay, great. Thanks very much.
Thank you. Our next question comes from Roger Read with Wells Fargo. Your line is now open.
Yeah, thanks. Good morning. I guess maybe one of the things that wasn't really talked about on the opening area. I know it depends on the pipeline access, the replication, your target to get to $50 WTI breakeven. Just where do you think you are at this point? What do you think the biggest hurdles are to get there? Quite obviously, let's assume this is a post-2020 event, given what's going on in the pipeline world.
If you look at how the schedule pans out, the schedule works very well for us. We're still continuing to work on the details of the replication and the design. It's looking very promising. We're already starting to get into the ranges where we could approve these projects. As you say, our plans would be, we don't see major investment in the Canadian oil sands until we see an improvement in the competitive position of the industry. One of the big pieces of that is market access. We have a number of projects which it is possible for us to execute, and we think those will have good returns. The technology is developing well, the plans are developing well, and we need to see some of these pipelines get nearer to fruition.
As I said in my opening remarks, we are reassured by the provincial and federal governments standing up and being prepared to take these pipeline challenges on now. We look forward over the next few weeks to see exactly what those plans look like. It's working really well. As I said, we've got that 10% growth this year, 10% growth next year. We've got these CAD 500 million per year building up to the CAD 2 billion by 2023. We've got this set of projects coming in. That whole sequence is looking very strong now.
No doubt. Really good visibility on that front. I guess my follow-up question, what are you watching here in terms of the pipelines? What do you want to see coming out of, well, both governments, provincial and the federal? What do you see as more likely, the access due south or the access to the West Coast, in order?
First of all, we need to see, particularly the Alberta government and the Prime Minister himself came over to look at Fort Hills. We spent some considerable time with them going through the competitive challenges the industry has and what we would look to gain confidence to be able to start to allocate capital into the region. Clearly, one of those was pipeline access because we don't want these new projects to have to bear the burden of some of these differentials. We've been looking. The simple measure will be, we want to start to see shovels in ground and pipelines being built. Degree of confidence, I don't think in the last five years I've had a higher degree of confidence that these lines are going to be built.
I think TMX will be built, I think Line 3 will be built, and I think the other lines to the south will be built. I'm greatly encouraged.
Okay, thanks. Steve, I forgot to mention at the beginning, but congratulations to you, and I hope you do have a good retirement.
Thanks very much, Roger.
Thank you. Our next question comes from Paul Cheng with Barclays. Your line is now open. Again, our next question comes from Paul Cheng with Barclays. Your line is now open, sir. If your phone is on mute, could you please unmute it? Your line is currently open to ask your question. All right. Our next question comes from Neil Mehta with Goldman Sachs. Your line is now open.
Good morning. Steve, congratulations, and looking forward to celebrating with you in person next week. I guess the first question I had was just around IMO 2020. You alluded to it, Steve, in your comments, about the impact it could have on the light, heavy differential. I want to talk about how you see it both from a macro standpoint for the light heavy for the refining margins. Also just talk about your business because in theory, you should be a net beneficiary of it, given your downstream business.
Yeah. Let me start. Then I'll hand it over to other Steve. You're right. From a macro point of view for Suncor, we think net-net, we will actually gain by the IMO 2020, that's to do with the diesel yields off of our average barrel across the company and the fact that we think demand and prices will be relatively strong there. Overall, the impact for Suncor is a positive one, and Steve can talk to the trends.
Yeah, I think there are three things to look at. One is light heavies are expected to be wide, we've already talked about the fact that we're really well cushioned against light heavies because of our integration and because of the amount of our bitumen that we actually upgrade or refine. The second piece is not often talked about, that's that sweet synthetic crude or upgraded synthetic actually has a very, very good distillate yield. I would expect that it will be in demand and will price well versus, say, tight oil, which is more of a gasoline crude and doesn't have the same distillate cut. The third thing is we produce far, far more low sulfur distillate from our refineries than we do bunker fuel.
While there will be a heavy discount for high sulfur distillate, we produce a great deal of low sulfur distillate, we should benefit from the wider margins. We're actually looking at this as a net pretty significant positive for Suncor.
I don't know if you can comment on this, either of the Steves, but for your planning purposes, what are you using in the early 2020s from a light heavy differential standpoint, WTI versus WCS, as a result of IMO?
I think we have CAD 25 in the plan in that 2021, 2022 period.
Okay.
That's on, I think, a CAD 80 crude.
Okay. That's great. Then the follow-up question is just how you guys are thinking about the cost side of the equation. Every quarter for the last four years, we've revised down our cost per barrel. Crude prices are actually starting to move higher here. Are we getting to the point where we should start thinking about cost inflation on a unit cost basis for your portfolio over the next couple of years?
Just a general comment. In the real world, we're not seeing much cost pressure as we speak at the moment. If we look at the cost reductions we've done, we've always talked about it being in the 60%, 70%, and in some cases, 75%, depending on the business. The costs are largely systematic, so they're not reversible. We're not expecting to see any significant increase. We have still got some more to deliver from our program. If you think of the automation. When the automation of the truck fleet is fully finished, we think that that's worth about CAD 1 a barrel to us on those barrels. We've still got programs in place which are putting some downward pressure on costs. We haven't updated Fort Hills because it's too early.
Clearly, we'll get a much clearer line of sight as we start to come up to full capacity. All I would say is that the first signs are very encouraging, and between you and me, we won't mention it to many people. The target we've set for the business is CAD 20 a barrel.
Okay. That's great. Thank you.
That's right the way across that oil sands business. We still see CAD 20 a barrel is a possibility. Still have some work to do to get there, and that's around the reliability, but we still see that as a possibility, and the equivalent for Syncrude is we still believe with the work that Mark's team are doing now, that we can get to 90% reliability and CAD 30 a barrel by 2020.
That's great. Thanks, guys.
Thank you. Our next question comes from Amir Arif with Cormark Securities. Your line is now open.
Thanks. Good morning, guys. Just a few questions for you. The CAD 500 million of increased fund flow, Steve, that you mentioned from your operating and margin initiatives that you're undertaking. Just curious, how much capital would be required to achieve that? I understand it's over three years.
Yeah. Amir, it's very minimal capital. We're really looking at minimal capital, low intensity spend to achieve lots of technology. Really within that sort of CAD 4.5 billion-CAD 5 billion capital targets that we'll bleed out.
Okay. It seems like it's from a lot of little projects. Is that lumpy, or it linearly will come in over the three years in terms of the improvement in-
It's a lot of small projects. We'd expect it to be relatively straight-lined.
Okay. Sounds good. At Fort Hills, the production number, again, coming in strong, just shy of 30, the sales volumes were only eight. Is that just a normal startup as you do tank fills and line fills, or are you actively holding back production based on the bitumen market?
No, it's exactly what you said at the beginning. It's you start production, you got to fill your lines and fill your tanks. We started production, and then we started selling at the beginning of March after we filled lines and tanks. Exactly that.
Okay. The price realization at Fort Hills specifically, it's better than your average bitumen realization in the other oil sands. Is there a difference in quality or is there a difference in that bitumen grade at Fort Hills versus your other bitumen?
Yeah, that's a great question, Amir. One of the things we do with Fort Hills bitumen is we literally cut off the bottom 10% of the barrel, and we remove a bunch of the carbon and put it back in the ground. Instead of waiting until it's a greenhouse gas and then spending a lot of money trying to figure out how to get it back in the ground or contain or offset it, we cut out the carbon right away. The quality of the barrel that goes to market is much better than a normal bitumen barrel. In fact, on a full lifecycle basis, it has essentially the same greenhouse gas emissions as the average barrel run in U.S. refining, which isn't the way a lot of people look at oil sands.
The quality's very good, the yield structure is higher, and it has a lower greenhouse gas emissions.
Okay. Interesting. Just a final question on the downstream side. The crack spreads are still strong, and you're running already at a 98% utilization rate. Is there any opportunities, or is this part of some of the initiatives that you're looking at in terms of capacity creep that you might be able to do on the downstream side?
Well, one of the things we're looking at is exactly that, is what is the capacity creep, and how does it fit in with the markets in the various regions and such. That's something that we're looking at as part of our planning process.
Okay. Do you feel that you could grow capacity a few percentage points with?
Well, Sorry. There's definitely opportunities there. I think one of the things we're looking through is where are the best opportunities for the organization, and then how do they fit with all the spreads and expected market conditions, and where do we think the cracks are going. That's the ongoing debate. Obviously, we haven't announced anything yet, so it's something that's still under consideration.
Okay. Perfect. Thank you.
Thank you. Our next question comes from Joe Gemino with Morningstar. Your line is now open.
Thanks, guys. You touched on that you won't make any investments in oil sands unless you have a clear line of sight into something that improves the environment. In that scenario, how do you see yourself deploying your cash? Is that where you would increase share buybacks? Is that where you increase the dividend?
Yeah. I think our capital allocation will be quite clear. Our run rate for sustaining capital, and the small incremental growth programs that we've been talking about is in that CAD 4 billion-CAD 5 billion a year range. That will be a constant through the piece. Dividends are forever as far as we're concerned. As the long term, we like to be able to pay our dividend at a very low crude price. It's not subject to the commodity price cycle. We've been steadily increasing that. We're now in our 16th year of increasing that. The balance will be share buybacks. We do not see ourselves making major investments in Canada until we can see some clarity on market access issues.
Great. Thank you.
Thank you. Our next question comes from Harry Mateer with Barclays. Your line is now open.
Hey, good morning, guys. Appreciate the comments earlier on around working capital changes. Just wanted to clarify on your short-term debt balance, it's creeped up a bit. Do you have any intentions in terming it out, or is that going to draw down over time as the working capital reverses?
Yeah, Harry, that was a planned event. As we look forward to our cash flow coming in, we're positioning ourselves to be able to pay that down. Certainly as the working capital reverses and then as we generate more cash towards the end of the year and into next year.
Great. Thank you. That's all for me.
Thank you. That brings an end to our Q&A session for today and to our call. Your call is concluded for today, and thank you for participating. You may all disconnect. Everyone, have a great day.