Suncor Energy Inc. on Thursday reported second quarter 2008 net earnings of $829 million ($0.89 per common share), compared to $738 million ($0.80 per common share) for the second quarter of 2007.

Excluding unrealized foreign exchange gains on the company's U.S. dollar denominated long-term debt, the impact of income tax rate reductions on opening future income tax liabilities, and project start-up costs, earnings for the second quarter of 2008 were $821 million ($0.88 per common share), compared to $607 million ($0.66 per common share) in the second quarter of 2007.

The increase in earnings was primarily due to improved price realizations on oil sands products as benchmark crude prices rose to historically high levels, and strong results from natural gas operations. This was partially offset by lower oil sands production, increased operating expenses and purchases in the oil sands business, and reduced margins in the refining and marketing business. Planned and unplanned maintenance at oil sands, including a scheduled maintenance shutdown of one of the company's two upgraders, as well as lower than expected bitumen production, impacted both crude oil production and operational costs during the quarter.

Cash flow from operations in the second quarter of 2008 was $1.405 billion, compared to $1.027 billion in the same period of 2007. The increase was due primarily to the same factors that impacted earnings, as well as an increase in non-cash future income tax.

Net earnings for the first six months of 2008 were $1.537 billion, compared to $1.314 billion for the same period in 2007. Excluding unrealized foreign exchange impacts on the company's U.S. dollar denominated long-term debt, the impact of income tax rate reductions on opening future income tax liabilities, and project start-up costs, earnings for the first half of 2008 were $1.609 billion, compared to $1.175 billion in the same period for 2007. Cash flow from operations for the first six months of 2008 was $2.566 billion, compared to $1.852 billion in the first six months of 2007. The year-to-date increases in earnings and cash flow from operations were due to the same factors that impacted second quarter results and increased oil sands royalties in the first six months of 2008.

Suncor's total upstream production averaged 212,300 barrels of oil equivalent (boe) per day in the second quarter of 2008, compared to 237,200 boe per day in the second quarter of 2007. In Suncor's natural gas business, production was 226 million cubic feet equivalent (mmcfe) per day compared to second quarter 2007 production of 209 mmcfe per day. Strong performance during the first half of the year has allowed Suncor to increase its annual production outlook for natural gas to an average expected to range between 210 to 220 mmcfe per day. Oil sands production contributed 174,600 barrels per day (bpd) in the second quarter of 2008 compared to 202,300 bpd in the second quarter of 2007. Production in both quarters was lower than average because of planned shutdowns.

Oil sands cash operating costs in the second quarter of 2008 averaged $50.85 per barrel, compared to $32.70 per barrel during the second quarter of 2007. The increase in cash operating costs per barrel was due to higher operating expenses, lower production volumes, and increased third-party bitumen purchases. With lower than planned production over the first half of the year, Suncor has adjusted its production outlook to an annual average of 240,000 to 250,000 bpd for 2008, with a corresponding increase in our cash operating cost target to a range of $35.00 to $36.00 per barrel.

"A combination of a very cold winter, unplanned maintenance issues and tight bitumen supply made for a difficult start to the year," said Rick George, president and chief executive officer. "Going forward, we'll be focused on getting our oil sands operations running at steady and reliable rates. At the same time, we'll continue work to realize the full benefit of our current and planned expansions."

Operations and growth update

Suncor's growth strategy reached a major milestone with the substantial completion of a $2.3 billion expansion to one of two oil sands upgraders. The project was completed within the planned budget range and on schedule.

"I'm very proud of the efforts of Suncor's team to keep this key project on schedule and on budget in a tight labor market and highly inflationary business environment," said George.

Commissioning of the expanded facility is underway and production volumes are expected to begin ramping up toward a total target of approximately 300,000 bpd by the end of the year. With additional bitumen feedstock planned to come online, Suncor's upgrading operations are expected to ramp up toward design capacity of 350,000 bpd in 2009.

Production from Suncor's Firebag in-situ operations had been limited by regulators to 42,000 bpd due to sulfur emissions that exceeded regulatory limits in 2007. With the lifting on July 22 of the production cap, Suncor expects to begin steaming new wells, with small amounts of incremental production expected to come on line in the fourth quarter of 2008.

While in-situ operations ramp up, reduced in-situ bitumen supply is expected to be partially mitigated by higher mined bitumen volumes in the second half of the year. Suncor is also pursuing opportunities to increase third-party bitumen purchases.

Suncor is also making steady progress on work to construct new emission abatement equipment for its in-situ operations, including a $340 million sulfur plant. This project is on budget and on schedule for completion in 2009. The sulfur plant is intended to reduce emissions generated from current and future stages of in-situ development, including Firebag Stage 3, targeted for completion in 2009. Stage 3 remains on schedule and on budget with engineering 90% complete and construction 30% complete.

In addition to Firebag Stage 3, work also continues to progress on other elements of the $20.6 billion Voyageur strategy which, together, are expected to increase production capacity by 200,000 bpd to a total capacity of 550,000 bpd in 2012. More than $2.2 billion has been spent to date on expanding in-situ operations, while approximately $2 billion has been spent to date on construction of a third upgrader.

"The foundations have been poured for the Voyageur upgrader cokers and at Firebag we're seeing great strides on infrastructure development, especially pipeline connections. There is visible progress on our journey to 550,000 barrels per day," said George.

As Suncor invests for future growth, prudent debt management remains a priority. Net debt levels increased to $4.4 billion at the end of the second quarter of 2008 from $3.2 billion at year-end 2007. Suncor continues to target net debt at a maximum of two times annual cash flow from operations.