Canadian Oil Sands Announces Third Quarter Financial Results and a $0.35 Per Share Dividend

October 30, 2013

CALGARY, ALBERTA--(Marketwired - Oct 30, 2013) - Canadian Oil Sands Limited (COS.TO)(COSWF)

All financial figures are unaudited and in Canadian dollars unless otherwise noted.

Highlights for the three and nine-month periods ended September 30, 2013:

  • COS has maintained its quarterly dividend at $0.35 per Share, payable on November 29, 2013 to shareholders of record on November 22, 2013. During the first nine months of 2013, we paid dividends to shareholders totalling $509 million, or $1.05 per Share.
  • Sales volumes were down in the third quarter of 2013, averaging about 84,300 barrels per day compared with 113,300 barrels per day in the 2012 third quarter due to extended turnarounds on the Coker 8-1, LC Finer and hydrotreating units. Year-to-date sales volumes in 2013 were also lower than 2012, averaging about 93,300 barrels per day compared with 103,700 barrels per day in 2012. The decline in 2013 sales volumes reflects the extended turnarounds as well as unplanned outages in extraction units.
  • Lower sales volumes partially offset by higher realized selling prices resulted in cash flow from operations declining to $339 million, or $0.70 per Share, in the third quarter of 2013 from $470 million, or $0.97 per Share, in the 2012 third quarter. In the first nine months of 2013, a higher realized selling price largely offset lower sales volumes; however, higher current taxes reduced 2013 cash flow from operations to $957 million, or $1.97 per Share, from $1,163 million, or $2.40 per Share, in the comparative 2012 period.
  • Operating expenses in the third quarter and first nine months of 2013 increased to $46.15 per barrel and $43.43 per barrel, respectively, from $36.07 per barrel and $38.96 per barrel in the comparative 2012 periods. The increase in per barrel operating expenses is due to lower sales volumes in 2013, as total operating expenses for both the third quarter and year-to-date 2013 were largely unchanged from the prior year periods.
  • The Aurora North Mine Train Relocation project has been completed, ahead of schedule and under budget, following the relocation and start-up of the second of two mine trains at the Aurora North mine in early October. The first mine train was relocated in July of this year.

"We reached an important milestone with the completion of Syncrude's Aurora North Mine Train Relocation project ahead of schedule and under budget," said Marcel Coutu, President and Chief Executive Officer. "The remaining projects are also progressing well and tracking to plan. Healthy crude oil prices have facilitated funding of these major projects and our dividend while maintaining a very strong balance sheet, despite lower than expected production at Syncrude."

Mr. Coutu added: "It has been a particularly challenging year for Syncrude operations with maintenance issues in our extraction facilities and an extended coker turnaround in the third quarter. Syncrude is continuing to work through the implementation of reliability systems, and improving reliability remains ours and Syncrude's main focus."

Highlights

Three Months Ended Nine Months Ended
September 30 September 30
2013 2012 2013 2012
Cash flow from operations (1) ($ millions) $ 339 $ 470 $ 957 $ 1,163
Per Share (1) ($/Share) $ 0.70 $ 0.97 $ 1.97 $ 2.40
Net income ($ millions) $ 246 $ 336 $ 642 $ 755
Per Share, Basic and Diluted ($/Share) $ 0.51 $ 0.69 $ 1.32 $ 1.56
Sales volumes (2)
Total (mmbbls) 7.8 10.4 25.5 28.4
Daily average (bbls) 84,250 113,331 93,301 103,669
Realized SCO selling price ($/bbl) $ 112.55 $ 89.89 $ 102.83 $ 92.59
West Texas Intermediate ("WTI") (average $US/bbl) $ 105.81 $ 92.20 $ 98.20 $ 96.16
SCO premium (discount) to WTI $ 2.51 $ (2.09 ) $ 2.74 $ (4.32 )
(weighted average $/bbl)
Operating expenses ($ millions) $ 357 $ 377 $ 1,106 $ 1,107
Per barrel ($/bbl) $ 46.15 $ 36.07 $ 43.43 $ 38.96
Capital expenditures ($ millions) $ 413 $ 354 $ 1,050 $ 787
Dividends ($ millions) $ 170 $ 170 $ 509 $ 485
Per Share ($/Share) $ 0.35 $ 0.35 $ 1.05 $ 1.00
(1) Cash flow from operations and cash flow from operations per Share are additional GAAP financial measures and are defined in the "Additional GAAP Financial Measures" section of our Management's Discussion and Analysis ("MD&A").
(2) The Corporation's sales volumes differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes. Sales volumes are net of purchases.

COS named for the third time to the Dow Jones Sustainability Index ("DJSI") North America

COS has been named to the Dow Jones Sustainability North America Index for the third year in a row. The Dow Jones Sustainability Index (DJSI) recognizes companies for leadership in corporate responsibility. Inclusion in the index is based on Syncrude's practices, policies and performance related to sustainability, as well as COS' own strong governance and community investment initiatives. More information about the selection criteria and detailed performance data is available at www.sustainability-indices.com. Information on Syncrude's sustainability performance is available on their website and in their sustainability report at www.syncrude.ca.

2013 Outlook revised

We have revised our key estimates and assumptions for 2013 as follows:

  • The production range estimate for Syncrude has been reduced to 97 to 100 million barrels. The single-point estimate of 98 million barrels requires Syncrude to average 313,400 barrels per day in the fourth quarter.
  • Sales, net of crude oil purchases and transportation expense, increased to $3.6 billion, reflecting a higher forecast plant-gate realized selling price of $100 per barrel (based on a U.S. $98 per barrel WTI oil price, no SCO premium/discount to Canadian dollar WTI and a foreign exchange rate of $0.98 U.S./Cdn) partially offset by lower estimated sales volumes of 36 million barrels.
  • Operating expenses of $1,504 million, or $41.77 per barrel, reflecting actual costs incurred to date and a natural gas price assumption of $3.00 per gigajoule.
  • Cash flow from operations of $1,331 million, or $2.75 per Share.

More information on the 2013 Outlook is provided in our MD&A and the October 30, 2013 guidance document, which is available on our web site at www.cdnoilsands.com under "Investor Centre".

The 2013 Outlook contains forward-looking information and users are cautioned that the actual amounts may vary from the estimates disclosed. Please refer to the "Forward-Looking Information Advisory" in the MD&A section of this report for the risks and assumptions underlying this forward-looking information.

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") was prepared as of October 30, 2013 and should be read in conjunction with the unaudited consolidated financial statements and notes thereto of Canadian Oil Sands Limited (the "Corporation") for the three and nine months ended September 30, 2013 and September 30, 2012, the audited consolidated financial statements and MD&A of the Corporation for the year ended December 31, 2012 and the Corporation's Annual Information Form ("AIF") dated February 21, 2013. Additional information on the Corporation, including its AIF, is available on SEDAR at www.sedar.com or on the Corporation's website at www.cdnoilsands.com. References to "Canadian Oil Sands", "COS" or "we" include the Corporation, its subsidiaries and partnerships. The financial results of Canadian Oil Sands have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and are reported in Canadian dollars, unless otherwise noted.

Advisories

Forward Looking Information

In the interest of providing the Corporation's shareholders and potential investors with information regarding the Corporation, including management's assessment of the Corporation's future production and cost estimates, plans and operations, certain statements throughout this MD&A and the related press release contain "forward-looking information" under applicable securities law. Forward-looking statements are typically identified by words such as "anticipate", "expect", "believe", "plan", "intend" or similar words suggesting future outcomes.

Forward-looking statements in this MD&A and the related press release include, but are not limited to, statements with respect to: the expectations regarding the 2013 annual Syncrude forecasted production range of 97 million barrels to 100 million barrels and the single-point Syncrude production estimate of 98 million barrels (36.0 million barrels net to the Corporation); the intention to maintain a quarterly dividend of $0.35 per Share in 2013 based on the assumptions in our 2013 Outlook; future dividends and any increase or decrease from current payment amounts; the establishment of future dividend levels with the intent of absorbing short-term market volatility over several quarters; the expected sales, operating expenses, Crown royalties, capital expenditures and cash flow from operations for 2013; the anticipated amount of current taxes in 2013; expectations regarding the Corporation's cash levels for 2013 and 2014; the expected price for crude oil and natural gas in 2013; the expected foreign exchange rates in 2013; the expected realized selling price, which includes the anticipated differential to West Texas Intermediate ("WTI") to be received in 2013 for the Corporation's product; the expectations regarding net debt; the anticipated impact of increases or decreases in oil prices, production, operating expenses, foreign exchange rates and natural gas prices on the Corporation's cash flow from operations; the belief that items that impacted the Corporation's financial results in the last eight quarters are reasonably likely to impact the Corporation's financial results in the future; the expected amount of total major project costs, anticipated target in-service dates and estimated completion percentages for the Mildred Lake mine train replacements, the Aurora North mine train relocations, the composite tails plant at the Aurora North mine and the centrifuge plant at the Mildred Lake mine; the cost estimates for 2013 to 2015 major project spending; and the expectation that the volatility in the Synthetic Crude Oil ("SCO") to WTI differential is likely to persist for several years until additional pipeline or other delivery capacity is available to deliver crude oil from Western Canada to Cushing, Oklahoma, the U.S. Gulf Coast or the Canadian East or West Coasts.

You are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Corporation believes that the expectations represented by such forward-looking statements are reasonable and reflect the current views of the Corporation with respect to future events, there can be no assurance that such assumptions and expectations will prove to be correct.

The factors or assumptions on which the forward-looking information is based include, but are not limited to: the assumptions outlined in the Corporation's guidance document as posted on the Corporation's website at www.cdnoilsands.com as of October 30, 2013 and as subsequently amended or replaced from time to time, including without limitation, the assumptions as to production, operating expenses and oil prices; the successful and timely implementation of capital projects; Syncrude's major project spending plans; the ability to obtain regulatory and Syncrude joint venture owner approval; our ability to either generate sufficient cash flow from operations to meet our current and future obligations or obtain external sources of debt and equity capital; the continuation of assumed tax, royalty and regulatory regimes and the accuracy of the estimates of our reserves and resources volumes.

Some of the risks and other factors which could cause actual results or events to differ materially from current expectations expressed in the forward-looking statements contained in this MD&A and the related press release include, but are not limited to: the impacts of legislative or regulatory changes especially as such relate to royalties, taxation, the environment and tailings; the impact of technology on operations and processes and how new complex technology may not perform as expected; skilled labour shortages and the productivity achieved from labour in the Fort McMurray area; the supply and demand metrics for oil and natural gas; the impact that pipeline capacity and refinery demand have on prices for our product; the unanimous joint venture owner approval for major expansions and changes in product types; the variances of stock market activities generally; normal risks associated with litigation, general economic, business and market conditions; the impact of Syncrude being unable to meet the conditions of its approval for its tailings management plan under Directive 74; volatility of crude oil prices; volatility of the SCO to WTI price differential; unsuccessful or untimely implementation of capital or maintenance projects; various events that could disrupt operations, including fires, equipment failures and severe weather and such other risks and uncertainties described in the Corporation's AIF dated February 21, 2013 and in the reports and filings made with securities regulatory authorities from time to time by the Corporation which are available on the Corporation's profile on SEDAR at www.sedar.com and on the Corporation's website at www.cdnoilsands.com.

You are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this MD&A and the related press release are made as of October 30, 2013, and unless required by law, the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A and the related press release are expressly qualified by this cautionary statement.

Additional GAAP Financial Measures

In this MD&A and the related press release, we refer to additional GAAP financial measures that do not have any standardized meaning as prescribed by Canadian GAAP. Additional GAAP financial measures are line items, headings or subtotals in addition to those required under Canadian GAAP, and financial measures disclosed in the notes to the financial statements which are relevant to an understanding of the financial statements and are not presented elsewhere in the financial statements. These measures have been described and presented in order to provide shareholders and potential investors with additional measures for analyzing our ability to generate funds to finance our operations and information regarding our liquidity. Users are cautioned that additional GAAP financial measures presented by the Corporation may not be comparable with measures provided by other entities.

Additional GAAP financial measures include: cash flow from operations, cash flow from operations per Share, net debt, total net capitalization, total capitalization, net debt-to-total net capitalization and long-term debt-to-total capitalization.

Cash flow from operations is calculated as cash from operating activities before changes in non-cash working capital. Cash flow from operations per Share is calculated as cash flow from operations divided by the weighted-average number of Shares outstanding in the period. We believe cash flow from operations and cash flow from operations per Share, which are not impacted by fluctuations in non-cash working capital balances, are more indicative of operational performance than cash from operating activities. With the exception of current tax payable, liabilities for Crown royalties and the current portion of our asset retirement obligation, our non-cash working capital is liquid and typically settles within 30 days.

Cash flow from operations is reconciled to cash from operating activities as follows:

Three Months Ended Nine Months Ended
September 30 September 30
($ millions) 2013 2012 2013 2012
Cash flow from operations(1) $ 339 $ 470 $ 957 $ 1,163
Change in non-cash working capital(1) (14 ) (124 ) 158 105
Cash from operating activities(1) $ 325 $ 346 $ 1,115 $ 1,268
(1) As reported in the Unaudited Consolidated Statements of Cash Flows.

Net debt, total net capitalization, total capitalization, net debt-to-total net capitalization and long-term debt-to-total capitalization are used by the Corporation to manage capital, as discussed in the "Liquidity and Capital Resources" section of this MD&A and in Note 12 to the unaudited consolidated financial statements for the three and nine months ended September 30, 2013.

Overview

Synthetic Crude Oil ("SCO") production from the Syncrude Joint Venture ("Syncrude") was lower than expected in the third quarter of 2013, primarily due to delays completing turnarounds on Coker 8-1, the LC Finer and two hydrotreating units. The turnarounds were completed and the respective units returned to operation in late August and early September. Syncrude third quarter production volumes totalled 20.9 million barrels, or 227,000 barrels per day, compared with 26.0 million barrels, or 282,600 barrels per day forecasted in our July 30, 2013 Outlook (included in the second quarter 2013 MD&A).

Cash flow from operations totalled $339 million in the third quarter, reflecting a U.S. $106 per barrel West Texas Intermediate ("WTI") oil price and a $2.51 per barrel SCO premium to WTI. COS realized a $113 per barrel average selling price, 20 per cent higher than the $94 per barrel annual forecast in the July 30, 2013 Outlook. Operating expenses in the 2013 third quarter were similar to the 2012 third quarter on a total dollar basis but, on a per-barrel basis, increased to $46.15 per barrel, reflecting lower 2013 volumes. Syncrude's major projects progressed as planned with $413 million of total capital spending (net to COS) in the quarter. We achieved another important milestone with the relocation and start-up of the second of two mine trains at the Aurora North mine earlier this month. The Aurora North Mine Train Relocation project is now complete, ahead of schedule and under budget.

Based on the results achieved in the first nine months of the year, we have updated our 2013 Outlook to reflect a higher $100 per barrel annual realized selling price, a lower Syncrude production range of 97 to 100 million barrels (with a single-point estimate of 98 million barrels). Cash flow from operations for 2013 is now estimated at $1,331 million, six per cent higher than our July 30, 2013 forecast.

Highlights

Three Months Ended Nine Months Ended
September 30 September 30
2013 2012 2013 2012
Cash flow from operations (1) ($ millions) $ 339 $ 470 $ 957 $ 1,163
Per Share (1) ($/Share) $ 0.70 $ 0.97 $ 1.97 $ 2.40
Net income ($ millions) $ 246 $ 336 $ 642 $ 755
Per Share, Basic and Diluted ($/Share) $ 0.51 $ 0.69 $ 1.32 $ 1.56
Sales volumes (2)
Total (mmbbls) 7.8 10.4 25.5 28.4
Daily average (bbls) 84,250 113,331 93,301 103,669
Realized SCO selling price ($/bbl) $ 112.55 $ 89.89 $ 102.83 $ 92.59
West Texas Intermediate ("WTI") (average $US/bbl) $ 105.81 $ 92.20 $ 98.20 $ 96.16
SCO premium (discount) to WTI $ 2.51 $ (2.09 ) $ 2.74 $ (4.32 )
(weighted average $/bbl)
Operating expenses ($ millions) $ 357 $ 377 $ 1,106 $ 1,107
Per barrel ($/bbl) $ 46.15 $ 36.07 $ 43.43 $ 38.96
Capital expenditures ($ millions) $ 413 $ 354 $ 1,050 $ 787
Dividends ($ millions) $ 170 $ 170 $ 509 $ 485
Per Share ($/Share) $ 0.35 $ 0.35 $ 1.05 $ 1.00
(1) Cash flow from operations and cash flow from operations per Share are additional GAAP financial measures and are defined in the "Additional GAAP Financial Measures" section of this MD&A.
(2) The Corporation's sales volumes differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes.Sales volumes are net of purchases.

Review of Financial Results

Cash Flow from Operations

To see the graphs associated with this release, please select the following link: http://media3.marketwire.com/docs/907277.jpg.

Cash flow from operations decreased to $339 million, or $0.70 per Share, in the third quarter of 2013 from $470 million, or $0.97 per Share, in the third quarter of 2012 primarily due to lower sales volumes and higher Crown royalties, partially offset by a higher realized selling price. On a year-to-date basis, cash flow from operations decreased to $957 million, or $1.97 per Share, in 2013 from $1,163 million, or $2.40 per Share, in 2012 reflecting higher current taxes, with lower sales volumes largely offsetting a higher realized selling price in 2013.

Syncrude production in the 2013 third quarter totalled 20.9 million barrels, or 227,000 barrels per day, a 27 per cent decrease from third quarter 2012 production of 28.8 million barrels, or 313,300 barrels per day. Production volumes in the third quarter of 2013 reflect the Coker 8-1, LC Finer and hydrotreating unit turnarounds, while third quarter 2012 production volumes reflect stable operations with no major maintenance activity. Net to the Corporation, sales volumes decreased to 7.8 million barrels, or 84,300 barrels per day, in the 2013 third quarter from 10.4 million barrels, or 113,300 barrels per day, in the 2012 third quarter.

On a year-to-date basis, Syncrude produced 69.2 million barrels, or 253,400 barrels per day, in 2013 compared with 77.4 million barrels, or 282,300 barrels per day in 2012. The decrease in 2013 production volumes reflects the delays completing the turnarounds as well as unplanned outages in extraction units. Net to the Corporation, sales volumes totalled 25.5 million barrels, or 93,300 barrels per day, in the first nine months of 2013 compared with 28.4 million barrels, or 103,700 barrels per day, in the comparative 2012 period.

Crown royalties increased to $71 million in the third quarter of 2013 from $33 million in the third quarter of 2012 primarily due to refinements in our estimates of bitumen values for both current and prior years, partially offset by higher deductible capital expenditures in the 2013 third quarter.

Current taxes increased in 2013 primarily because tax pools and the partnership structure sheltered the majority of 2012 income from current taxes.

The realized selling price averaged $112.55 per barrel and $102.83 per barrel in the third quarter and first nine months of 2013, respectively, compared with $89.89 per barrel and $92.59 per barrel in the comparative 2012 periods. The increase in 2013 realized selling prices reflects both a higher WTI oil price and an improvement in the SCO differential to WTI.

Net Income

Net income decreased to $246 million, or $0.51 per Share, in the third quarter of 2013 from $336 million, or $0.69 per Share, in the third quarter of 2012 reflecting lower sales volumes and higher Crown royalties, partially offset by a higher realized selling price in the 2013 third quarter. On a year-to-date basis, net income decreased to $642 million, or $1.32 per Share, in 2013 from $755 million, or $1.56 per Share, in 2012. Lower sales volumes were largely offset by a higher realized selling price in 2013; however, the Corporation realized a $42 million foreign exchange loss as a result of revaluing U.S. dollar-denominated debt, cash and accounts receivable in the first nine months of 2013 compared with a $41 million foreign exchange gain in the comparative 2012 period.

The following table shows the components of net income per barrel of SCO:

Three Months Ended Nine Months Ended
September 30 September 30
($ per barrel)(1) 2013 2012 Change 2013 2012 Change
Sales net of crude oil purchases and transportation expense $ 112.52 $ 90.10 $ 22.42 $ 102.85 $ 92.82 $ 10.03
Operating expense (46.15 ) (36.07 ) (10.08 ) (43.43 ) (38.96 ) (4.47 )
Crown royalties (9.20 ) (3.16 ) (6.04 ) (4.79 ) (5.11 ) 0.32
$ 57.17 $ 50.87 $ 6.30 $ 54.63 $ 48.75 $ 5.88
Development expense (2) $ (5.27 ) $ (2.40 ) $ (2.87 ) $ (4.10 ) $ (2.65 ) $ (1.45 )
Administration and insurance expenses (1.43 ) (0.93 ) (0.50 ) (1.34 ) (0.96 ) (0.38 )
Depreciation and depletion expense (13.01 ) (9.19 ) (3.82 ) (12.78 ) (10.00 ) (2.78 )
Net finance expense (1.62 ) (1.25 ) (0.37 ) (1.49 ) (1.57 ) 0.08
Foreign exchange gain (loss) 4.03 4.86 (0.83 ) (1.65 ) 1.43 (3.08 )
Tax expense (8.24 ) (9.86 ) 1.62 (8.06 ) (8.48 ) 0.42
(25.54 ) (18.77 ) (6.77 ) (29.42 ) (22.23 ) (7.19 )
Net income per barrel $ 31.63 $ 32.10 $ (0.47 ) $ 25.21 $ 26.52 $ (1.31 )
Sales volumes (mmbbls) (3) 7.8 10.4 (2.6 ) 25.5 28.4 (2.9 )
(1) Unless otherwise specified, the per barrel measures in this MD&A have been derived by dividing the relevant item by sales volumes in the period.
(2) Previously referred to as non-production expenses.
(3) Sales volumes, net of purchased crude oil volumes.

Sales Net of Crude Oil Purchases and Transportation Expense

Three Months Ended Nine Months Ended
September 30 September 30
($ millions, except where otherwise noted) 2013 2012 (4) Change 2013 2012(4) Change
Sales(1) $ 1,163 $ 1,006 $ 157 $ 3,160 $ 2,905 $ 255
Crude oil purchases (281 ) (55 ) (226 ) (505 ) (240 ) (265 )
Transportation expense (11 ) (10 ) (1 ) (35 ) (28 ) (7 )
$ 871 $ 941 $ (70 ) $ 2,620 $ 2,637 $ (17 )
Sales volumes(2)
Total (mmbbls) 7.8 10.4 (2.6 ) 25.5 28.4 (2.9 )
Daily average (bbls) 84,250 113,331 (29,081 ) 93,301 103,669 (10,368 )
Realized SCO selling price(3) $ 112.55 $ 89.89 $ 22.66 $ 102.83 $ 92.59 $ 10.24
(average $Cdn/bbl)
West Texas Intermediate ("WTI") $ 105.81 $ 92.20 $ 13.61 $ 98.20 $ 96.16 $ 2.04
(average $US/bbl)
SCO premium (discount) to WTI $ 2.51 $ (2.09 ) $ 4.60 $ 2.74 $ (4.32 ) $ 7.06
(weighted-average $Cdn/bbl)
Average foreign exchange rate $ 0.96 $ 1.00 $ (0.04 ) $ 0.98 $ 1.00 $ (0.02 )
($US/$Cdn)
(1) Sales include sales of purchased crude oil and sulphur.
(2) Sales volumes, net of purchased crude oil volumes.
(3) SCO sales net of crude oil purchases and transportation expense divided by sales volumes, net of purchased crude oil volumes.
(4) During the fourth quarter of 2012, the Corporation completed a review of the presentation of crude oil purchase and sales transactions and determined that certain transactions previously reported on a gross basis (sales presented gross of crude oil purchases and transportation expense) are more appropriately reflected on a net basis (crude oil purchases and/or transportation expense are netted against sales). Prior period comparative amounts have been reclassified for comparability with the current period presentation. The impact is as follows:
($ millions) Three months ended September 30, 2012
Increase (decrease
) Nine months ended September 30, 2012
Increase (decrease
)
Sales $ (16 ) $ (78 )
Crude oil purchases (16 ) (79 )
Transportation expense - 1
Sales net of crude oil purchases and transportation expense $ - $ -

The $70 million, or seven per cent, decrease in third quarter 2013 sales, net of crude oil purchases and transportation expense, reflects lower sales volumes partially offset by a higher realized selling price relative to the 2012 third quarter.

  • Third quarter 2013 sales volumes, which averaged 84,300 barrels per day, were impacted by the extended turnarounds on Coker 8-1, the LC Finer and hydrotreating units while third quarter 2012 sales volumes, which averaged 113,300 barrels per day, reflect stable operations with no major maintenance activity.
  • The third quarter 2013 realized selling price increased by $22.66 per barrel reflecting a U.S. $13.61 per barrel increase in WTI oil prices, a $4.60 per barrel improvement in the SCO differential to WTI and a weaker Canadian dollar.

On a year-to-date basis, sales, net of crude oil purchases and transportation expense, decreased $17 million, or less than one per cent, relative to the comparative 2012 period as lower sales volumes in 2013 were largely offset by a higher realized selling price.

  • Sales volumes in the first nine months of 2013 averaged 93,300 barrels per day, down from 103,700 barrels per day in the comparative 2012 period, reflecting delays completing the turnarounds and unplanned outages in extraction units.
  • The realized selling price for the first nine months of 2013 increased $10.24 per barrel relative to the comparative 2012 period, reflecting a $7.06 per barrel improvement in the SCO differential to WTI, a U.S. $2.04 per barrel increase in WTI oil prices and a weaker Canadian dollar.

Both WTI and the SCO differential to WTI reflect supply/demand fundamentals for inland North American light crude oil. Increasing North American production of light crude oil, and refinery modifications that enable processing of heavier crude oils, can push light crude sales, including SCO, to more distant refineries, thereby exposing COS' product to supply/demand factors in different markets and increasing transportation costs. A number of pipelines in both Canada and the United States are at, or near, capacity and any pipeline apportionments can exacerbate this situation by restricting the ability of SCO and other crude oils to reach preferred markets. However, rail shipments of crude to refineries have become another transportation option, alleviating some of the pipeline capacity constraints.

Increases in pipeline and rail capacity in 2013 have resulted in a narrowing of the discount between WTI and world oil prices. However, we expect volatility in the SCO differential to WTI to persist for several years until additional pipeline or other delivery capacity is available to deliver crude oil from Western Canada to Cushing, Oklahoma, the U.S. Gulf Coast, or the Canadian East or West Coasts.

The Corporation purchases crude oil from third parties to fulfill sales commitments with customers when there are shortfalls in Syncrude's production and to facilitate certain transportation arrangements. Sales include the sale of purchased crude oil while the cost of these purchases is included in crude oil purchases and transportation expense. Crude oil purchases were higher in the third quarter and first nine months of 2013, relative to the comparative 2012 periods, reflecting additional purchased volumes to support unanticipated production shortfalls and facilitate certain transportation arrangements combined with higher oil prices in 2013.

Operating Expenses

The following table shows the major components of operating expenses in total dollars and per barrel of SCO:

Three Months Ended Nine Months Ended
September 30 September 30
2013 2012 2013 2012
$ millions $ per bbl $ millions $ per bbl $ millions $ per bbl $ millions $ per bbl
Production and maintenance(1) $ 300 $ 38.77 $ 317 $ 30.37 $ 909 $ 35.69 $ 922 $ 32.47
Natural gas and diesel purchases(2) 24 3.10 28 2.70 107 4.18 89 3.13
Syncrude pension and incentive compensation 24 3.11 23 2.16 64 2.53 66 2.32
Other(3) 9 1.17 9 0.84 26 1.03 30 1.04
Total operating expenses $ 357 $ 46.15 $ 377 $ 36.07 $ 1,106 $ 43.43 $ 1,107 $ 38.96
(1) Includes non-major turnaround costs. Major turnaround costs are capitalized as property, plant and equipment.
(2) Includes costs to purchase natural gas used to produce energy and hydrogen and diesel consumed as fuel.
(3) Includes fees for management services provided by Imperial Oil Resources, insurance premiums, and greenhouse gas emissions levies.

On a total dollar basis, operating expenses in the third quarter of 2013 decreased slightly, relative to the third quarter of 2012, as lower production costs, due primarily to less mining activity, were partially offset by higher maintenance costs associated with the extended turnarounds, the Aurora North mine train relocations and unplanned outages in extraction units. Year to date, total dollar operating expenses were similar in 2013 and 2012, as lower production costs were offset by higher maintenance costs and higher natural gas prices in 2013.

On a per barrel basis, operating expenses in the third quarter and first nine months of 2013 increased, reflecting lower sales volumes.

The following table shows operating expenses per barrel of bitumen and SCO. Costs are allocated to bitumen production and upgrading on the basis used to determine Crown royalties.

...
Three Months Ended Nine Months Ended
September 30 September 30
2013 2012(3) 2013 2012(3)
($ per barrel) Bitumen SCO Bitumen SCO Bitumen SCO