We hold a 7.23% participating interest in Syncrude. This joint venture was established in 1975 to mine shallow oil sands deposits using open-pit mining methods, extract the bitumen and upgrade it to a high-quality, light (32° API), sweet, synthetic crude oil. Syncrude’s operating strategy is to develop this resource, focusing on safe, reliable and profitable operations.

Location
Syncrude exploits a portion of the Athabasca oil sands that contains bitumen in the unconsolidated sands of the McMurray formation. Ore bodies are buried beneath 50 to 150 feet of over-burden, have bitumen grades ranging from 4 to 14 percent by weight and ore bearing sand thickness of 100 to 160 feet. Syncrude’s operations are on eight leases (10, 12, 17, 22, 29, 30, 31, and 34) covering 248,300 hectares, 40 km north of Fort McMurray in northeast Alberta. Syncrude mines oil sands at two mines: Mildred Lake North and Aurora North. These locations are readily accessible by public road. Trucks and shovels are used to collect the oil sands in the open pit mines. The oil sands are transferred for processing using a hydro-transport system.

Extraction Process
The extraction facilities, which separate bitumen from oil sands, are capable of processing more than 270 million tons of oil sands per year and between 150 to 160 million barrels of bitumen per year depending on the average bitumen ore grade. To extract bitumen, the oil sands are mixed with water to form a slurry. Air and chemicals are added to separate bitumen from the sand grains. The process at the Mildred Lake North Mine uses hot water, steam and caustic soda to create a slurry, while at the Aurora North Mine, the oil sands are mixed with warm water to produce a slurry. Most of the water used in operations is recycled from the upgrader and mine sites. Incremental water is drawn from the Athabasca River in accordance with existing licenses.

The extracted bitumen is fed into a vacuum distillation tower and three cokers for primary upgrading. The resulting products are then separated into naphtha, light gas-oil, and heavy gas-oil streams. These streams are hydrotreated to remove sulphur and nitrogen impurities to form light, sweet, synthetic crude oil. Sulphur and coke, which are by-products of the process, are stockpiled for possible future sale.

Final Product
The high quality of Syncrude’s synthetic crude oil allows it to be sold at prices approximating WTI. In 2008, about 40% of the synthetic crude oil was sold to Edmonton area refineries, and the remaining 60% was sold to refineries in eastern Canada and the mid-western United States. Electricity is provided to Syncrude from two generating plants on site: a 270 MW plant and an 80 MW plant.

Since operations started in 1978, Syncrude has shipped more than 1.9 billion barrels of synthetic crude oil to Edmonton by Alberta Oil Sands Pipeline Ltd. The pipeline was expanded in 2004 to accommodate increased Syncrude production.

At December 31, 2008, our total net book value of property, plant and equipment, including surface mining facilities, transportation equipment, and upgrading facilities, was approximately $1.1 billion. Based on development plans, our share of future expansion and equipment replacement costs over the next 35 years is expected to be about $5.2 billion.

In 1999, the Alberta Energy and Utilities Board (AEUB) extended Syncrude’s operating license for the eight oil sands leases through to 2035. The license permits Syncrude to mine oil sands and produce synthetic crude oil from approved development areas on the oil sands leases. The leases are automatically renewable as long as oil sands operations are ongoing or the leases are part of an approved development plan. All eight leases are included in a development plan approved by the AEUB. There were no known commercial operations on these leases prior to the start up of operations in 1978.

In 1999, the AEUB approved an increase in Syncrude’s production capacity to 465,700 bbls/d. At the end of 2001, Syncrude had increased its synthetic crude oil capacity to 246,500 bbls/d with the development of the Aurora North Mine, which involved extending mining operations to a new location about 25 miles north of the main Syncrude site. The next expansion of Syncrude came on stream in 2006, increasing capacity to 360,000 bbls/d with the completion of the Stage 3 project.

Royalties
Syncrude pays a royalty to the Alberta government. As of January 2002, this royalty was equal to the greater of 1% of gross revenue or 25% of net synthetic-based profit after deducting new capital expenditures. In connection with the provincial government’s review of Alberta royalty rates in 2007, the Syncrude owners entered into negotiations at the request of the government to revise the royalty terms. Effective January 1, 2009, and consistent with the rest of the oil sands industry, Syncrude will begin paying royalties based on bitumen product, rather than paying royalties calculated on fully upgraded synthetic crude oil. As a part of this conversion, the Alberta government will recapture upgrader capital expenses of about $5 billion (gross) that were deducted against prior royalties payables. The $5 billion royalty deductions previously received by the Syncrude owners will be recaptured by the Alberta government over a 25 year period. In addition, the Province of Alberta and Syncrude reached agreement to establish new transitional royalty terms. Under the terms of the agreement, until December 31, 2015, Syncrude will continue to pay base royalty rates (being the greater of 25% of net bitumen-based revenues, or 1% of gross bitumen-based revenues) plus an incremental royalty of up to $975 million (our share $70.5 million). The incremental royalty is subject to certain minimum bitumen production thresholds and is to be paid in six annual payments, as indicated in the following table: