Suncor Energy (SU) 40-F2019 FY Annual report (Canada)

EXHIBIT 99-2

Management's Discussion and Analysis for the fiscal year ended December 31, 2019,
dated February 26, 2020

This Management's Discussion and Analysis (this MD&A) should be read in conjunction with Suncor's December 31, 2019 audited Consolidated Financial Statements and the accompanying notes. Additional information about Suncor filed with Canadian securities regulatory authorities and the United States Securities and Exchange Commission (SEC), including quarterly and annual reports and Suncor's Annual Information Form dated February 26, 2020 (the 2019 AIF), which is also filed with the SEC under cover of Form 40-F, is available online at www.sedar.com, www.sec.gov and our website www.suncor.com. Information on or connected to our website, even if referred to in this MD&A, does not constitute part of this MD&A.

References to "we", "our", "Suncor", or "the company" mean Suncor Energy Inc. and the company's subsidiaries and interests in associates and joint arrangements, unless the context requires otherwise. For a list of abbreviations that may be used in this MD&A, refer to the Advisories – Common Abbreviations section of this MD&A.

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Basis of Presentation

Unless otherwise noted, all financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Canadian generally accepted accounting principles (GAAP) as contained within Part 1 of the Canadian Institute of Chartered Professional Accountants Handbook.

Effective January 1, 2019, the company adopted IFRS 16Leases (IFRS 16), which replaced the previous leasing standard IAS 17Leases (IAS 17), and requires the recognition of all leases on the balance sheet, with optional exemptions for short-term leases where the term is twelve months or less and for leases of low value. IFRS 16 effectively removes the classification of leases as either finance or operating leases and treats all leases as finance leases for lessees. The accounting treatment for lessors remains essentially unchanged, with the requirement to classify leases as either finance or operating. Please refer to note 5 in the company's December 31, 2019 audited Consolidated Financial Statements for further information. The company has selected the modified retrospective transition approach, electing to adjust opening retained earnings with no re-statement of comparative figures. As such, comparative information continues to be reported under IAS 17 and International Financial Reporting Interpretations Committee (IFRIC) 4.

All financial information is reported in Canadian dollars, unless otherwise noted. Production volumes, apart from Libya, are presented on a working-interest basis, before royalties, unless otherwise noted. Libyan production volumes are presented on an economic basis.

Beginning in 2019, results from the company's Energy Trading business have been included within each of the respective operating business segments to which the respective trading activity relates. The Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment. Prior periods have been restated to reflect this change.

Also beginning in 2019, the company revised the classification of its capital expenditures into "asset sustainment and maintenance" and "economic investment" to better reflect the types of capital investments being made by the company. There is no impact to overall capital expenditures, and comparative periods have been restated to reflect this change. Refer to the Capital Investment Update section of this MD&A for further details.

Non-GAAP Financial Measures

Certain financial measures in this MD&A – namely operating earnings (loss), funds from (used in) operations, return on capital employed (ROCE), Oil Sands operations cash operating costs, In Situ cash operating costs, Fort Hills cash operating costs, Syncrude cash operating costs, refining margin, refining operating expense, free funds flow, discretionary free funds flow, and last-in, first-out (LIFO) inventory valuation methodology – are not prescribed by GAAP. Operating earnings (loss), Oil Sands operations cash operating costs, Fort Hills cash operating costs, Syncrude cash operating costs and LIFO inventory valuation methodology are defined in the Advisories – Non-GAAP Financial Measures section of this MD&A and reconciled to the most directly comparable GAAP measures in the Financial Information and Segment Results and Analysis sections of this MD&A. ROCE, funds from (used in) operations, free funds flow, discretionary free funds flow, refining margin, refining operating expense and In Situ cash operating costs are defined and reconciled, where applicable, to the most directly comparable GAAP measures in the Advisories – Non-GAAP Financial Measures section of this MD&A.

Measurement Conversions

Crude oil and natural gas liquids volumes have been converted to mcfe on the basis of one bbl to six mcf in this MD&A. Also, certain natural gas volumes have been converted to boe or mboe on the same basis. Refer to the Advisories – Measurement Conversions section of this MD&A.

Common Abbreviations

For a list of abbreviations that may be used in this MD&A, refer to the Advisories – Common Abbreviations section of this MD&A.

Risks and Forward-Looking Information

The company's business, reserves, financial condition and results of operations may be affected by a number of factors, including, but not limited to, the factors described in the Risk Factors section of this MD&A.

This MD&A contains forward-looking information based on Suncor's current expectations, estimates, projections and assumptions. This information is subject to a number of risks and uncertainties, including those discussed in this MD&A and Suncor's other disclosure documents filed with Canadian securities regulatory authorities and the SEC, many of which are beyond the company's control. Users of this information are cautioned that actual results may differ materially. Refer to the Advisories – Forward-Looking Information section of this MD&A for information on the material risk factors and assumptions underlying our forward-looking information.

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1. FINANCIAL AND OPERATING SUMMARY

Financial Summary

(1)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

(2)

Excludes capitalized costs related to major projects in progress. ROCE excluding major projects in progress would have been 8.6% in 2019, excluding the impacts of impairments of $3.352 billion and the impacts of a $1.116 billion deferred tax recovery relating to a change in the Alberta corporate income tax rate.

(3)

Excludes capitalized interest of $122 million in 2019, $156 million in 2018, and $729 million in 2017, and now reflects the company's revised capital expenditure classification, with prior periods having been restated for this change. Refer to the Capital Investment Update section of this MD&A for further details.

(4)

Net debt is equal to total debt less cash and cash equivalents. Total debt includes short-term debt, current portion of long-term debt, current portion of long-term lease liabilities, long-term debt, and long-term lease liabilities.

(5)

2018 and 2017 exclude the impact of IFRS 16, which was prospectively adopted on January 1, 2019, in accordance with the standard, adding $1.792 billion at December 31, 2019 to net debt.

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Operating Summary

(1)

Net of transportation costs, but before royalties.

(2)

Refinery utilization is the amount of crude oil run through crude distillation units, expressed as a percentage of the nameplate capacity of these units.

(3)

Non-GAAP financial measure. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

Segment Summary ⁽¹⁾

(1)

2018 and 2017 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact on overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate Energy Trading and Eliminations segment.

(2)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

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2. SUNCOR OVERVIEW

Suncor is an integrated energy company headquartered in Calgary, Alberta, Canada. We are strategically focused on developing one of the world's largest petroleum resource basins – Canada's Athabasca oil sands. In addition, we explore for, acquire, develop, produce and market crude oil in Canada and internationally; we transport and refine crude oil, and we market petroleum and petrochemical products primarily in Canada. We also operate a renewable energy business and conduct energy trading activities focused principally on the marketing and trading of crude oil, natural gas, byproducts, refined products, and power.

For a description of Suncor's business segments, refer to the Segment Results and Analysis section of this MD&A.

Suncor's Strategy

Delivering competitive and sustainable returns to shareholders is a top priority of the company and we aim to maximize shareholder returns by focusing on our operational excellence, capital discipline through investment in high-value projects, and our commitment to environmental stewardship and sustainability. In an industry that has experienced volatility in recent years, we believe that Suncor is well positioned to succeed due to the company's competitive advantages: financial strength, including our ability to consistently generate free funds flow across a wide range of business environments, a highly efficient, tightly integrated suite of assets, an industry-leading long-life, low-decline oil sands reserves base, an offshore business that provides geographically diversified cash flow, and our investment in sustainability, technology and innovation.

Key components of Suncor's strategy include:

•

Free funds flow growth through high-return investments – Suncor's growth and development plan is focused on projects and initiatives that are expected to create long-term value for the company through structural free funds flow growth. The company's significant long-life, low-decline reserves base combined with our industry expertise allows the company to execute improvement strategies at existing assets, such as debottlenecks and the deployment of autonomous haul trucks, that are expected to generate additional value for years to come. In addition, the company's regional oil sands advantage provides the company with the economies of scale required to realize synergies between assets and further develop our in situ resources in a low-cost manner under the company's replication strategy.

•

Optimize value through integration and secured market access – From the ground to the gas station, Suncor optimizes profit along each step of the value chain through integration of the company's oil sands assets with its midstream and refining assets. This integration helps to significantly shield Suncor from the effects of western Canadian crude price differentials, and our midstream and marketing assets provide the logistical flexibility to move production to a wide range of markets. Through this midstream and marketing network and our geographical diversity, the company receives global-based pricing for the majority of its production.

•

Achieve industry-leading unit costs in each business segment – Suncor aims to get the most out of our assets through a focus on operational excellence, which means operating in a way that is safe, reliable, cost-efficient and environmentally responsible. Driving down costs and a continued focus on improved productivity and reliability will help us achieve maximum value from our operations. With the Government of Alberta's imposition of mandatory production curtailments in 2019, the company's short-term focus in Oil Sands has shifted from maximizing production to maximizing margin from each barrel produced, resulting in higher production costs per barrel but optimizing the cash generation from our Oil Sands assets.

•

Be an industry leader in sustainable development – Suncor is focused on triple bottom line sustainability, which means leadership and industry collaboration in environmental performance, social responsibility and creating a strong economy. We believe that Suncor's growth will be fuelled by investments in lower carbon energy, and we have made such investments a key priority in achieving our sustainable development goals.

•

Technology and people-enabled – Suncor is focused on shifting our culture and leveraging technology to improve performance and reliability which are central to our operational excellence journey. Unleashing the full potential of our people and technology will be critical in achieving our environmental, operational and financial goals.

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2019 Highlights

Suncor generated a record $10.8 billion in funds from operations⁽¹⁾ in 2019, reflecting the ability of our integrated business to deliver strong results across a wide range of market conditions.

•

In 2019, Suncor achieved record funds from operations of $10.818 billion, compared to $10.172 billion in 2018, and marked the second consecutive year above $10 billion.

•

Cash flow provided by operating activities, which includes changes in non-cash working capital, was $10.421 billion in 2019, compared to $10.580 billion in 2018.

•

Operating earnings⁽¹⁾ in 2019 were $4.358 billion, compared to $4.312 billion in 2018.

•

Net earnings for 2019 were $2.899 billion, compared to $3.293 billion in 2018. In 2019, net earnings included non-cash asset impairment charges of $3.352 billion after-tax primarily due to lower forecasted heavy oil prices for Fort Hills and higher capital cost estimates for the West White Rose Project.

Suncor returned $4.9 billion in dividends and share repurchases to shareholders in 2019, representing 45% of total funds from operations, demonstrating our commitment to shareholder returns.

•

In 2019, the company distributed $2.614 billion in dividends to shareholders, marking the 17^th consecutive year of dividend increases for Suncor.

•

The company repurchased $2.274 billion of its own common shares for cancellation during 2019. Since May 2017, the company has repurchased over 9% of its outstanding common shares.

•

Suncor reduced its debt by $425 million, further improving the company's liquidity and balance sheet flexibility.

•

Subsequent to the end of the year, Suncor's Board of Directors approved a quarterly dividend of $0.465 per common share, an increase of 11%, to be paid in the first quarter of 2020 and also approved the renewal of its share repurchase program of up to $2.0 billion beginning March 1, 2020.

Oil Sands production increased 7%, despite being limited by the Government of Alberta's mandatory production curtailments, with a continued focus on operational excellence and improved reliability.

•

In 2019, the company achieved an SCO production record of 485,600 bbls/d across its Oil Sands assets while minimizing the impacts of mandatory production curtailments. During 2019, Suncor demonstrated the value of the company's asset integration and flexibility by shifting our focus to value over volume, optimization of product mix and transferring production quotas among its assets, in addition to purchasing third-party credits, to minimize the impacts of mandatory production curtailments.

•

Oil Sands operations increased its production of higher value SCO to 313,300 bbls/d and achieved upgrader utilization of 90%, compared to SCO production of 280,300 bbls/d and upgrader utilization of 80% in the prior year.

•

Syncrude reached three billion barrels of production and achieved the second best year of production in the history of the asset, due to improved upgrader reliability and despite mandatory production curtailments. In 2019, Suncor's share of Syncrude production was 172,300 bbls/d with 85% utilization, compared to 144,200 bbls/d and 70% utilization in the prior year. Syncrude cash operating costs per barrel⁽¹⁾ decreased approximately 20%, to $37.95 in 2019, from the prior year.

•

Fort Hills production increased to 85,300 bbls/d in 2019, compared to 66,100 bbls/d in the prior year. The ramp up of Fort Hills operations throughout 2018 drove the increase in production, partially offset by mandatory production curtailments. Fort Hills cash operating costs per barrel⁽¹⁾ averaged $26.15 in 2019, compared to $31.20 in 2018, reflecting the impact of increased production.

(1)

Funds from (used in) operations, operating earnings (loss), Syncrude cash operating costs and Fort Hills cash operating costs are Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

Exploration and Production (E&P) increased production with Hebron reaching nameplate ahead of schedule and first oil from Oda.

•

Hebron reached nameplate production ahead of schedule in 2019, with six new production wells coming online during the year. Production at Hebron averaged 23,500 bbls/d in 2019.

•

First oil was achieved ahead of schedule at Oda, with production averaging 3,700 boe/d in 2019, and averaging 7,800 boe/d in the fourth quarter of 2019.

•

In 2019, the company sanctioned the Terra Nova asset life extension (ALE) project, which is expected to extend the life of Terra Nova by approximately a decade and is planned for execution by the end of 2020.

Refinery and Marketing (R&M) segment achieved new records and continued to deliver strong results in 2019.

•

R&M achieved record funds from operations of $3.863 billion in 2019, delivering crude throughput of 438,900 bbls/d compared to funds from operations of $3.798 billion and crude throughput of 430,800 bbls/d in

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the prior year. Average refinery utilization was 95% in 2019, compared with 93% in 2018, reflecting the company's continued focus on operational excellence.

•

Refined product sales were 539,400 bbls/d, with record volumes sold in the marketing channels in 2019, including a new annual record for Canadian retail sales.

Continued focus on free funds flow growth by investing in projects that are economically robust, sustainability minded and technologically progressive.

•

Suncor announced that it is replacing its coke-fired boilers with a new cogeneration facility at its Oil Sands Base Plant. The cogeneration units are expected to provide reliable steam generation required for Suncor's extraction and upgrading operations and are expected to reduce the greenhouse gas (GHG) emissions intensity associated with steam production at its Oil Sands Base Plant by approximately 25%. The project is estimated to cost $1.4 billion and is expected to be in service in the second half of 2023.

•

In 2019, construction began on interconnecting pipelines between Suncor's Oil Sands Base Plant and Syncrude in anticipation of an in-service date in the second half of 2020. The bi-directional pipelines will enhance integration between these assets and is expected to increase reliability at Syncrude.

•

The company continued to invest in clean energy by sanctioning the Forty Mile Wind Power Project, which is expected to drive value through sustainable low-carbon power generation and retention of the generated carbon credits for utilization in Suncor's upstream business. In addition, the company invested in clean technology, including a $73 million equity investment in Enerkem Inc., a waste-to-biofuels and chemicals producer.

•

Suncor continued to advance the implementation of autonomous haul systems (AHS), tailings technology advancements, and accelerated our digital technology adoption at Fort Hills and Oil Sands operations.

•

Suncor advanced its sustainability and technology initiatives by completing its coast-to-coast network of fast-charging electric vehicle stations across Canada in 2019.

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3. FINANCIAL INFORMATION

Net Earnings

Suncor's net earnings in 2019 were $2.899 billion, compared to $3.293 billion in 2018. Net earnings were impacted by the same factors that influenced operating earnings, which are described below. Other items affecting net earnings in 2019 and 2018 included:

•

During 2019, the company recorded non-cash after-tax impairment charges of $2.803 billion on its share of Fort Hills assets, in the Oil Sands segment, due to a decline in forecasted heavy crude oil prices and $393 million against White Rose, in the E&P segment, due to increased capital cost estimates at the West White Rose Project.

•

The after-tax unrealized foreign exchange gain on the revaluation of U.S. dollar denominated debt was $590 million in 2019, compared to an after-tax loss of $989 million in 2018.

•

In 2019, Suncor sold its 37% interest in Canbriam Energy Inc. (Canbriam), a private natural gas company, for total proceeds and an equivalent gain of $151 million ($139 million after-tax).

•

In 2019, the company recorded an after-tax gain of $48 million in the E&P segment related to the sale of certain non-core assets.

•

In 2019, the company recorded a $1.116 billion deferred income tax recovery associated with the Government of Alberta's enactment of legislation for a staged reduction of the corporate income tax rate from 12% to 8% over the next four years.

•

In 2018, the company recorded a net non-cash loss of $90 million, after-tax, in the E&P segment related to an asset exchange with Canbriam, as a result of the decline in benchmark natural gas prices in B.C.

•

In 2018, the company recorded an after-tax gain of $60 million in the Oil Sands segment on the sale of the company's interest in the Joslyn oil sands mining project.

Operating Earnings

Consolidated Operating Earnings Reconciliation⁽¹⁾

(1)

Non-GAAP financial measure. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

(2)

In 2017, the company recorded a $354 million after-tax gain in the R&M segment related to the sale of the company's lubricants business, and an after-tax gain of $83 million in the Corporate and Eliminations segment related to the sale of the company's interest in the Cedar Point wind facility.

(3)

In 2017, the company recorded an adjustment to its deferred income taxes of $124 million related to tax reform legislation in the U.S., with the most significant impact resulting from a decrease in the corporate income tax rate from 35% to 21%.

(4)

Loss on forward interest rate swaps associated with issued debt, due to changes in long-term interest rates, in the Corporate and Eliminations segment.

(5)

Charges associated with the early repayment of debt, net of associated realized foreign currency hedges, in the Corporate and Eliminations segment.

(6)

In 2017, the company received after-tax property damage insurance proceeds of $55 million ($76 million before tax) related to a facility incident at Syncrude, in the Oil Sands segment.

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Bridge Analysis of Consolidated Operating Earnings($ millions)⁽¹⁾

(1)

For an explanation of the construction of this bridge analysis, see the Advisories – Non-GAAP Financial Measures section of this MD&A.

Suncor's consolidated operating earnings in 2019 were $4.358 billion, compared to $4.312 billion in the prior year. The increase was primarily a result of improved western Canadian crude oil differentials, including a substantial narrowing of heavy crude and SCO differentials, which more than offset lower benchmark pricing from the prior year. This led to an increase in Oil Sands price realizations and a net favourable inventory valuation change on crude feedstock costs, partially offset by increased deferral of profit on crude oil sales to R&M, and lower refining margins. Operating earnings in 2019 were also positively impacted by higher overall upstream production, attributed to improved reliability at Syncrude and the ramp up of Fort Hills and Hebron throughout 2019, partially offset by the impact of the Government of Alberta's mandatory production curtailments.

These factors were partially offset by an increase in expenses associated with Suncor's increased production in 2019. DD&A was further impacted by transition to IFRS 16, which also increased financing expenses.

Cash Flow Provided by Operating Activities and Funds from Operations

Consolidated funds from operations for 2019 were $10.818 billion, compared to $10.172 billion in 2018, and were impacted by the same factors as operating earnings described above, excluding the impact of DD&A expense.

Cash flow provided by operating activities, which includes changes in non-cash working capital, was $10.421 billion in 2019, compared to $10.580 billion in 2018, as the current year included a use of cash in working capital, compared to a source of cash in working capital in the prior year which was due to a decrease in accounts receivable balances and refinery inventory value associated with the declining price environment in the second half of 2018.

Results for 2018 Compared with 2017

Net earnings in 2018 were $3.293 billion, compared to $4.458 billion in 2017. The decrease in net earnings was impacted by the same factors impacting operating earnings described below, as well as an after-tax unrealized foreign exchange loss on the revaluation of U.S. dollar denominated debt in 2018, compared to an after-tax unrealized foreign exchange gain in 2017.

Operating earnings were $4.312 billion in 2018, compared to $3.188 billion in 2017. The increase was primarily due to improved overall benchmark crude pricing, increased refining margins, higher overall upstream production, primarily attributed to the ramp up of Fort Hills and Hebron and the increased working interest in Syncrude acquired in early 2018, as well as improved energy trading earnings. These factors were partially offset by an increase in expenses associated with the expansion of the company's production in 2018, an increase in maintenance expenditures at Syncrude and Oil Sands operations resulting from an increase in planned and unplanned maintenance, a decrease in the capitalization of borrowing costs with the commissioning of the company's major growth projects, as well as a net unfavourable inventory valuation change on declining crude feedstock costs at the end of 2018.

Consolidated funds from operations for 2018 were $10.172 billion, compared to $9.139 billion in 2017. Funds from operations were impacted by the same factors as operating earnings described above.

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Cash flow provided by operating activities, which includes changes in non-cash working capital, was $10.580 billion in 2018, compared to $8.966 billion in 2017, and reflected a source of cash from the company's working capital balances in 2018, compared to a use of cash in 2017, as a result of lower year end benchmarks.

Business Environment

Commodity prices, refining crack spreads and foreign exchange rates are important factors that affect the results of Suncor's operations.

(1)

2-1-1 crack spreads are indicators of the refining margin generated by converting two barrels of WTI into one barrel of gasoline and one barrel of diesel. The company previously quoted 3-2-1 crack margin benchmarks based on wider use and familiarity with these benchmarks and, although the 3-2-1 crack spread is more commonly quoted, the company's refinery production is better aligned with a 2-1-1 crack spread, which better reflects the approximate composition of Suncor's overall refined product mix. The crack spreads presented here generally approximate the regions into which the company sells refined products through retail and wholesale channels.

Suncor's sweet SCO price realizations are influenced primarily by the price of WTI at Cushing and by the supply and demand of sweet SCO from Western Canada, which influences SCO differentials. Price realizations for sweet SCO were favourably impacted by a significant narrowing of SCO differentials, partially offset by a decrease in WTI at Cushing to US$57.05/bbl in 2019, from US$64.80/bbl in 2018.

Suncor also produces a specific grade of sour SCO, the price realizations for which are influenced by various crude benchmarks including, but not limited to, MSW at Edmonton and WCS at Hardisty, and which can also be affected by prices negotiated for spot sales. Prices for MSW at Edmonton in 2019 were relatively unchanged from 2018, while WCS at Hardisty increased to US$44.25 in 2019 compared to US$38.50 in 2018, reflecting the impact of narrowing western Canadian heavy crude differentials, in part due to mandatory production curtailments in Alberta. Sweet and sour SCO differentials in 2019 were favourable when compared to 2018.

Bitumen production that Suncor does not upgrade is blended with diluent to facilitate delivery on pipeline systems. Net bitumen price realizations are therefore influenced by both prices for Canadian heavy crude oil (WCS at Hardisty is a common reference) and prices for diluent (Condensate at Edmonton and SCO) and pipeline tolls. Bitumen price realizations can also be affected by bitumen quality and spot sales. Bitumen prices were favourably impacted by narrower heavy crude oil differentials in 2019.

Suncor's price realizations for production from East Coast Canada and E&P International assets are influenced primarily by the price for Brent crude, which averaged US$64.30/bbl in 2019, compared to US$71.05/bbl in 2018. Due to the nature of cargo shipments at the company's offshore assets, the timing associated with bulk cargo sales can result in price realizations that deviate from the average benchmark price over the period.

Suncor's refining margins are primarily influenced by industry benchmark crack spreads and, although the 3-2-1 crack spread is more commonly quoted, the company's refinery

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production is better aligned with a 2-1-1 crack spread, which more appropriately reflects the company's refined product mix of gasoline and distillates. Benchmark crack spreads are industry indicators approximating the gross margin on a barrel of crude oil that is refined to produce gasoline and distillates. More complex refineries can earn greater refining margins by processing less expensive, heavier crudes, or lighter crudes discounted relative to the WTI benchmark. Crack spreads do not necessarily reflect the margins of a specific refinery. Crack spreads quoted in the market are based on current crude feedstock prices whereas actual earnings are based on first-in, first-out (FIFO) inventory accounting, where a delay exists between the time that feedstock is purchased and when it is processed and sold to a third party. A FIFO loss normally reflects a declining price environment for crude oil and finished products, whereas FIFO gains reflect an increasing price environment for crude oil and finished products. Specific refinery margins are further impacted by actual crude purchase costs, refinery configuration, production mix and realized prices for refined products sales in markets unique to each refinery.

Natural gas used in Suncor's Oil Sands and Refining operations is primarily referenced to Alberta spot prices at AECO. The average AECO benchmark increased to $1.75/mcf in 2019, from $1.50/mcf in the prior year.

Excess electricity produced in Suncor's Oil Sands operations business is sold to the Alberta Electric System Operator, with the proceeds netted against the Oil Sands operations cash operating costs per barrel metric. The Alberta power pool price increased to an average of $54.95/MWh in 2019 from $50.20/MWh in the prior year.

The majority of Suncor's revenues from the sale of oil and natural gas commodities are based on prices that are determined by or referenced to U.S. dollar benchmark prices. The majority of Suncor's expenditures are realized in Canadian dollars. A decrease in the value of the Canadian dollar relative to the U.S. dollar will increase the revenues received from the sale of commodities. An increase in the value of the Canadian dollar relative to the U.S. dollar will decrease revenues received from the sale of commodities. In 2019, the Canadian dollar weakened in relation to the U.S. dollar as the average exchange rate decreased to US$0.75 per one Canadian dollar from US$0.77 per one Canadian dollar, which had a positive impact on price realizations for the company in 2019.

Conversely, some of Suncor's assets and liabilities, notably 65% of the company's debt, are denominated in U.S. dollars and translated to Suncor's reporting currency (Canadian dollars) at each balance sheet date. An increase in the value of the Canadian dollar relative to the U.S. dollar from the previous balance sheet date decreases the amount of Canadian dollars required to settle U.S. dollar denominated obligations.

Economic Sensitivities⁽¹⁾⁽²⁾

The following table illustrates the estimated effects that changes in certain factors would have had on 2019 net earnings and funds from operations⁽³⁾ if the listed changes had occurred.

(1)

Each line item in this table shows the effects of a change in that variable only, with other variables being held consistent.

(2)

Changes for a variable imply that all such similar variables are impacted, such that Suncor's average price realizations increase uniformly. For instance, "Crude oil +US$1.00/bbl" implies that price realizations influenced by WTI, Brent, SCO, WCS, par crude at Edmonton and condensate all increase by US$1.00/bbl.

(3)

Non-GAAP financial measure. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

(4)

Excludes the foreign exchange impact on U.S dollar denominated debt.

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4. SEGMENT RESULTS AND ANALYSIS

Suncor has classified its operations into the following segments:

OIL SANDS

Suncor's Oil Sands segment, with assets located in the Athabasca oil sands of northeast Alberta, recovers bitumen from mining and in situ operations. Bitumen is either upgraded into SCO for refinery feedstock and diesel fuel, or blended with diluent for direct sale to market through the company's midstream infrastructure and its marketing activities. The Oil Sands segment includes:

•

Oil Sands operations refer to Suncor's owned and operated mining, extraction, upgrading, in situ and related logistics, blending and storage assets in the Athabasca oil sands region. Oil Sands operations consist of:

•

Oil Sands Base operations include the Millennium and North Steepbank mining and extraction operations, integrated upgrading facilities known as Upgrader 1 and Upgrader 2, and the associated infrastructure for these assets – including utilities, energy, reclamation and storage facilities.

•

In Situ operations include oil sands bitumen production from Firebag and MacKay River and supporting infrastructure, including central processing facilities, cogeneration units, product transportation infrastructure, diluent import capabilities, storage assets and a cooling and blending facility. In Situ also includes development opportunities which may support future in situ production, including Meadow Creek (75%), Lewis (100%), OSLO (77.78%), various interests in Chard (25% to 50%), and a non-operated interest in Kirby (10%). In Situ production is either upgraded by Oil Sands Base, or blended with diluent and marketed directly to customers.

•

Fort Hills includes Suncor's 54.11% interest in Fort Hills, which the company operates, and the East Tank Farm Development in which Suncor holds a 51% interest and operates.

•

Syncrude refers to Suncor's 58.74% interest in the Syncrude oil sands mining and upgrading operation.

EXPLORATION AND PRODUCTION

Suncor's E&P segment consists of offshore operations off the east coast of Canada and in the North Sea, and onshore assets in Libya and Syria.

•

E&P Canada operations include Suncor's 37.675% working interest in Terra Nova, which Suncor operates. Suncor also holds non-operated interests in Hibernia (20% in the base project and 19.190% in the Hibernia Southern Extension Unit), White Rose (27.5% in the base project and 26.125% in the extensions), and Hebron (21.034%). In addition, the company holds interests in several exploration licences and significant discovery licences offshore Newfoundland and Labrador. Previously, E&P Canada also included Suncor's 37% equity interest in Canbriam which was sold during the second quarter of 2019.

•

E&P International operations include Suncor's non-operated interests in Buzzard (29.89%), the Golden Eagle Area Development (26.69%), Oda (30%), the Fenja project (17.5%), and the Rosebank future development project (40%). Buzzard, Golden Eagle, and Rosebank are located in the U.K. sector of the North Sea, while Oda and the Fenja project are located in the Norwegian North Sea and the Norwegian Sea, respectively. In addition, Suncor owns, pursuant to Exploration and Production Sharing Agreements (EPSAs), working interests in the exploration and development of oilfields in the Sirte Basin in Libya, although production in Libya remained partially shut in throughout 2019 due to continued political unrest. The timing of a return to normal operations in Libya remains uncertain. Suncor also owns, pursuant to a Production Sharing Contract (PSC), an interest in the Ebla gas development in Syria, which has been suspended, indefinitely, since 2011 due to political unrest in the country.

REFINING AND MARKETING

The R&M segment consists of two primary operations, the refining and supply and marketing operations discussed below, as well as the infrastructure supporting the marketing and supply of refined products, crude oil, natural gas, power and byproducts.

•

Refining and Supply operations refine crude oil and intermediate feedstock into a wide range of petroleum and petrochemical products. Refining and Supply consists of:

•

Eastern North America operations include a 137,000 bbls/d refinery located in Montreal, Quebec and an 85,000 bbls/d refinery located in Sarnia, Ontario.

•

Western North America operations include a 142,000 bbls/d refinery located in Edmonton, Alberta and a 98,000 bbls/d refinery in Commerce City, Colorado.

•

Other Refining and Supply assets include interests in a petrochemical plant and a sulphur recovery facility in Montreal, Quebec, product pipelines and terminals

2019 ANNUAL REPORT  Suncor Energy Inc.  29

throughout Canada and the U.S., and the St. Clair ethanol plant in Ontario.

•

Marketing operations sell refined petroleum products to retail, commercial and industrial customers through a combination of company-owned, Petro-Canada™ and Sunoco™ location and branded-dealers in Canada and other non-branded retail stations in the U.S., a nationwide commercial road transportation network in Canada, as well as a bulk sales channel in Canada.

CORPORATE AND ELIMINATIONS

TheCorporate and Eliminations segment includes the company's investments in renewable energy projects, and other activities not directly attributable to any other operating segment.

•

Renewable Energy includes interests in four wind farm operations in Ontario and Western Canada: Adelaide, Chin Chute, Magrath and Sunbridge, as well as the recently sanctioned Forty Mile Wind Power Project currently under construction.

•

Corporate activities include stewardship of Suncor's debt and borrowing costs, expenses not allocated to the company's businesses, the company's captive insurance activities that insure a portion of the company's asset base and investments in clean technology.

•

Intersegment revenues and expenses are removed from consolidated results inEliminations. Intersegment activity includes the sale of product between the company's segments and insurance for a portion of the company's operations by theCorporate captive insurance entity. The sale of product between the company's segments is primarily related to crude refining feedstock sold from Oil Sands to R&M.

OIL SANDS

2019 Highlights

•

In 2019, the company achieved an SCO production record of 485,600 bbls/d across its Oil Sands assets. Suncor's curtailment optimization strategy maximized the value of the company's allotted barrels under the Government of Alberta's mandatory production curtailments program effective January 2019. The company was able to optimize the transfer of allotted curtailment credits among the company's assets and purchase third-party credits to maximize production of higher value SCO production, demonstrating our focus on value over volume.

•

Oil Sands operations increased SCO production to 313,300 bbls/d and achieved upgrader utilization of 90% in 2019, compared to 280,300 bbls/d and upgrader utilization of 80% in the prior year.

•

Syncrude celebrated its three billionth barrel of production and achieved the second best year of production in its history, despite mandatory production curtailments. Syncrude production of SCO was 172,300 bbls/d with 85% utilization, compared to 144,200 bbls/d and 70% utilization in the prior year, due to improved upgrader reliability and lower unplanned maintenance. Syncrude cash operating costs per barrel declined significantly to $37.95 in 2019, compared to $47.25 in the prior year, due to improved reliability and lower maintenance.

•

Suncor's share of production from Fort Hills increased to 85,300 bbls/d, compared to 66,100 bbls/d in the prior year, due to the ramp up of operations throughout 2018, partially offset by mandatory production curtailments.

•

In 2019, construction began on interconnecting pipelines between Suncor's Oil Sands Base Plant and Syncrude in anticipation of an in-service date in the second half of 2020. The bi-directional pipelines are expected to enhance integration between these assets and increase reliability at Syncrude.

•

In 2019, Suncor announced a $1.4 billion investment in a new cogeneration facility at Oil Sands Base Plant to deliver low-carbon power generation and replace existing coke-fired boilers. This investment is expected to provide reliable steam generation while contributing to the company's environmental and incremental annual free funds flow growth goal.

Strategy and Investment Update

Suncor holds one of the largest resource positions in the Athabasca oil sands. Management is committed to delivering safe, reliable, low-cost production, while being leaders in growth, technical innovation and environmental sustainability. The company has developed a unique asset base within the oil sands and has established a regional advantage given the close proximity of the company's assets to one another. This collection of high-quality assets, combined with a long-life, low-decline reserves base and industry-leading expertise, provides the opportunity to continue to advance technology and innovation investments and high return growth projects while growing annual free funds flow.

The company's ability to leverage technology and innovation is at the core of our strategy supporting our financial, social and environmental goals. Investments to replace its coke-fired boilers with a cogeneration facility at its Oil Sands Base Plant is expected to provide reliable steam generation required for Suncor's extraction and upgrading, at a lower cost and with significantly lower carbon emissions. The facility is also expected to generate electricity that will be transmitted to Alberta's power grid, providing a lower carbon power alternative while delivering value to Suncor.

30  2019 ANNUAL REPORT  Suncor Energy Inc.

Additional technology projects, including the continued deployment of AHS, and innovative tailings technology advancements, including Permanent Aquatic Storage Structure, demonstrate the importance technology and innovation have in increasing efficiency and lowering operating costs while improving our environmental and safety performance.

Suncor remains committed to increasing reliability and enhancing the integration of our existing assets for profitable growth. The investment in the bi-directional interconnecting pipelines between Syncrude and Oil Sands Base Plant will provide increased operational flexibility, enabling higher reliability, utilization and profit optimization for all Syncrude partners. The pipelines are expected to be in service in the second half of 2020.

Cost management and capital discipline in Oil Sands will continue to be top priorities as the company expects to manage controllable operating costs through initiatives that include co-ordinated maintenance strategies, equipment standardization and the adoption of digital technologies. Capital discipline continues to focus on managing investment opportunities, including asset synergies and sustainability priorities, strategically investing in projects that are economically robust, sustainably minded and technologically progressive. With these factors in mind, the company has identified opportunities to debottleneck Firebag, including the completion of our emulsion handling project this year, integrate well pad development and expand our Solvent steam-assisted gravity drainage program. Our near-term expectation is to have actual Firebag production at nameplate capacity of 203,000 bbls/d in 2021, assuming no production curtailment, with the potential to add up to 30,000 bbls/d of lower capital intensity and lower carbon production by 2024-25.

Through Suncor's midstream and logistics network, the company secures market access, optimizes price realizations associated with the marketing of crude oil and byproducts and natural gas supply, manages inventory levels, and limits the impacts of external market factors, such as pipeline disruptions, lack of egress or outages at refining customers.

Financial Highlights⁽¹⁾

(1)

2018 and 2017 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)

In 2018, the company recorded an after-tax gain of $60 million on the sale of the company's interest in the Joslyn oil sands mining project.

(3)

In 2017, the company received after-tax property damage proceeds of $55 million related to a facility incident at Syncrude.

(4)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

2019 ANNUAL REPORT  Suncor Energy Inc.  31

Bridge Analysis of Operating Earnings($ millions)⁽¹⁾

(1)

For an explanation of the construction of this bridge analysis, see the Advisories – Non-GAAP Financial Measures section of this MD&A.

Operating earnings in Oil Sands operations were $1.622 billion in 2019, compared to $885 million in 2018. The increase in operating earnings is primarily due to improved western Canadian crude oil differentials, including a substantial narrowing of heavy crude and SCO differentials, which more than offset lower benchmark pricing from the prior year and resulted in higher Oil Sands price realizations. Strong Syncrude reliability and the ramp up of production at Fort Hills throughout 2018 contributed to the overall increase in Oil Sands production in 2019 compared to the prior year, despite being limited by mandatory production curtailments. Operating earnings were unfavourably impacted by higher operating costs, higher royalties and DD&A associated with the increase in production.

Oil Sands had a net loss of $427 million in 2019, compared to net earnings of $945 million in 2018, and was impacted by the same factors as operating earnings described above. In addition, 2019 net earnings included the impact of a non-cash impairment charge of $2.803 billion after-tax on the company's share of the Fort Hills assets, described below, partially offset by a one-time deferred income tax recovery of $910 million associated with a staged reduction to the Alberta corporate income tax rate of 1% each year from 2019 to 2022.

Funds from operations for the Oil Sands segment were $6.061 billion in 2019, compared to $4.964 billion in 2018, and were influenced by the same factors that impacted operating earnings, adjusted for the impact of non-cash DD&A.

Production Volumes⁽¹⁾

(1)

Bitumen from Oil Sands Base operations is upgraded, while bitumen from In Situ operations is upgraded or sold directly to customers. Yields of SCO from Suncor's upgrading processes are approximately 79% of bitumen feedstock input. Yields of SCO from Syncrude's upgrading processes are approximately 85% of bitumen feedstock input.

Oil Sands operations production decreased to 412,800 bbls/d in 2019 from 418,300 bbls/d in 2018, primarily due to mandatory production curtailments. Mandatory production curtailments largely impacted the company's non-upgraded bitumen production and resulted in an increased yield loss as the company maximized production to its upgraders in order to produce higher value SCO. In 2019, SCO production increased to 313,300 bbls/d, with upgrader utilization of 90%, compared to SCO production of 280,300 bbls/d and upgrader utilization of 80% in the prior year, reflecting strong reliability in 2019 and reduced maintenance.

Fort Hills bitumen production increased to 85,300 bbls/d in 2019 from 66,100 bbls/d in 2018, due to the ramp up in production throughout 2018, partially offset by the impact of mandatory production curtailments. Fort Hills remains

32  2019 ANNUAL REPORT  Suncor Energy Inc.

adversely impacted by mandatory production curtailments due to the continued, disproportionate effect of curtailment as it is applied on a 2018 production basis when the asset was ramping up to full production rates. In 2019, the company was able to partially mitigate impacts of curtailment on production by internally transferring credits from Oil Sands operations during planned maintenance and purchasing third-party curtailment credits.

Suncor's share of Syncrude production increased to 172,300 bbls/d in 2019, compared to 144,200 bbls/d in 2018, marking the second best year of production in the asset's history, even with mandatory production curtailments. The increase is primarily due to strong reliability and lower maintenance resulting in upgrader utilization of 85% in 2019, compared to 70% in the prior year. In 2019, Syncrude was able to partially mitigate the impact of curtailment on production by purchasing curtailment credits from partners and third parties.

Sales Volumes and Mix

Sales volumes for Oil Sands operations decreased to 412,700 bbls/d in 2019, compared to 421,500 bbls/d in 2018, reflecting the same factors impacting production volumes.

Bitumen sales at Fort Hills increased to 86,100 bbls/d, net to Suncor, in 2019, from 57,300 bbls/d in the prior year, consistent with the increase in production.

Bitumen Production from Operations

Oil Sands operations bitumen production increased to 506,100 bbls/d in 2019, compared to 498,800 bbls/d in 2018. The increase is primarily due to strong upgrader reliability and the associated increase in mined bitumen volumes, partially offset by lower non-upgraded In Situ production due to mandatory production curtailments after maximizing the volume of Firebag bitumen upgraded into SCO.

Bitumen production at Syncrude increased in 2019 to 205,400 bbls/d from 172,000 bbls/d in 2018, and was impacted by the same factors as production described above.

2019 ANNUAL REPORT  Suncor Energy Inc.  33

Price Realizations

Average price realizations at Oil Sands operations increased to $62.87/bbl in 2019 compared to $54.91/bbl in 2018, primarily due to the narrowing of heavy crude and SCO differentials resulting from mandatory production curtailments in the province of Alberta, and the impact of a weaker Canadian dollar, partially offset by a decrease in the WTI benchmark price.

Average price realizations for Fort Hills bitumen were $48.96/bbl in 2019 and were higher than In Situ bitumen realizations due to a higher proportion of sales being made in the U.S. mid-continent and the U.S. Gulf Coast, where Suncor is able to utilize its logistics network to access favourable pricing in the U.S. market, combined with the higher quality associated with paraffinic froth-treated bitumen produced at Fort Hills. Average price realizations were higher than the prior year due to the improved heavy crude oil differential and the impact of a weaker Canadian dollar, partially offset by a decrease in the WTI benchmark price.

Suncor's average price realization for Syncrude sales increased in 2019 to $73.45/bbl, compared to $70.19/bbl in 2018, due to narrower SCO differentials and the impact of a weaker Canadian dollar, partially offset by decreased WTI benchmark pricing.

Royalties

Royalties were higher in 2019 relative to 2018, primarily due to higher bitumen pricing and production volumes.

Expenses and Other Factors

Total operating and transportation expenses for 2019 were higher relative to 2018, as described in detail below. See the Cash Operating Costs section below for further details.

At Oil Sands operations, operating costs increased when compared to the prior year as a result of higher costs associated with increased production of higher value SCO barrels, an increase in contractor mining costs for increased ore volumes processed, higher commodity costs and unplanned maintenance costs.

At Fort Hills, operating costs in 2019 were higher compared to the prior year due to the ramp up of production in 2018 and an increase in planned maintenance.

Suncor's share of Syncrude operating costs were lower than the prior year, primarily due to lower unplanned maintenance costs resulting from improved reliability.

Oil Sands transportation costs in 2019 were comparable to the prior year.

DD&A expense for 2019 increased when compared to 2018 due to additional depreciation associated with the transition to IFRS 16.

34  2019 ANNUAL REPORT  Suncor Energy Inc.

Cash Operating Costs

(1)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

(2)

Significant non-production costs include, but are not limited to, share-based compensation expense and research expenses. Non-production costs at Fort Hills also include, but are not limited to, project startup costs, excess power revenue from cogeneration units and an adjustment to reflect internally produced diesel from Oil Sands operations at the cost of production.

(3)

Oil Sands operations excess power capacity and other includes, but is not limited to, the operational revenue impacts of excess power from cogeneration units and the natural gas expense recorded as part of a non-monetary arrangement involving a third-party processor.

(1)

Oil Sands operations cash operating costs is a non-GAAP financial measure. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

Oil Sands operations cash operating costs per barrel⁽¹⁾ averaged $28.20 in 2019, compared to $25.25 in 2018, reflecting higher contractor mining, commodity and unplanned maintenance costs, as well as higher costs associated with the production of higher value SCO barrels. Total Oil Sands operations cash operating costs increased to $4.267 billion from $3.871 billion in the prior year.

In 2019, non-production costs, which are excluded from Oil Sands operations cash operating costs, were higher than the prior year, primarily due to an increase in research and development costs and share-based compensation expense.

Oil Sands operations inventory changes in 2019 reflect a build of higher value SCO, partially offset by a draw of bitumen inventory.

Fort Hills cash operating costs per barrel averaged $26.15 in 2019, compared to $31.20 in 2018, reflecting the impact of the production ramp up throughout 2018.

Syncrude cash operating costs per barrel decreased to $37.95 in 2019, compared to $47.25 in the previous year, due to improved upgrader reliability and decreased maintenance costs. Suncor's share of total Syncrude cash operating costs decreased to $2.385 billion from $2.490 billion in 2018. Higher non-production costs compared to the prior year is due to an increase in share-based compensation expense.

Non-Cash Asset Impairment

Due to continued volatility in the crude oil price environment and resulting declines in forecasted heavy crude oil prices, the company performed an asset impairment test on its Fort Hills cash generating unit (CGU) in the Oil Sands segment. As a result, the company recorded a non-cash impairment charge of $2.80 billion (net of taxes of $0.91 billion) on its share of the Fort Hills project using the following asset-specific assumptions:

•

WCS price forecast of US$40.75/bbl in 2020, US$45.60/bbl in 2021, US$49.65/bbl in 2022, US$51.55/bbl in 2023 and US$52.90/bbl in 2024, escalating at 2% per year thereafter over the life of the project up to 2060, adjusted for asset-specific location and quality differentials;

•

the company's share of production ranging from 96,000 to 106,000 bbls/d over the life of the project;

•

cash operating costs averaging $22/bbl to $24/bbl over the life of the project (expressed in real dollars) reflects operating, selling and general expense adjusted for non-production costs, including share-based compensation, research costs, and excess power revenue; and

•

risk-adjusted discount rate of 7.5% (after-tax).

The recoverable amount of the Fort Hills CGU was $7.7 billion as at December 31, 2019, which also includes the cost of carbon compliance in accordance with current provincial and federal regulations which starts at $30/tonne in 2020, reaches $50/tonne by 2022 and escalates at the rate of inflation thereafter. The estimate of the recoverable amount is most sensitive to the WCS price forecast and

2019 ANNUAL REPORT  Suncor Energy Inc.  35

discount rate. A 5% decrease in price would have resulted in an increase to the impairment charge of approximately $1.2 billion (after-tax) on the company's share of the Fort Hills assets. A 1% increase in the discount rate would have resulted in an increase to the impairment charge of approximately $900 million (after-tax) on the company's share of the Fort Hills assets.

Planned Maintenance

Planned maintenance at MacKay River originally scheduled for the third quarter of 2020 has been accelerated to the first quarter of 2020 to coincide with an outage that occurred in the fourth quarter of 2019, in an effort to minimize impacts to annual production. Planned Upgrader 2 maintenance at Oil Sands operations and an annual turnaround at Syncrude are planned for the second quarter of 2020. Maintenance at Oil Sands operations Upgrader 1 is scheduled for the third quarter of 2020, extending into the fourth quarter of 2020. The anticipated impact of these maintenance events has been reflected in the company's 2020 guidance.

EXPLORATION AND PRODUCTION

2019 Highlights

•

E&P funds from operations increased to $2.143 billion from $1.779 billion in 2018, and operating earnings increased to $1.141 billion, compared to $897 million in the prior year.

•

Drilling activity at Hebron is ongoing with six new production wells coming online during 2019. Production at Hebron averaged 23,500 bbls/d in 2019, net to Suncor, compared to 13,000 bbls/d in 2018.

•

First oil was achieved ahead of schedule at Oda, with production averaging 3,700 boe/d in 2019. In the fourth quarter of 2019, Oda averaged production of 7,800 boe/d.

•

In 2019, the company sanctioned the Terra Nova ALE project, which is expected to extend the life of Terra Nova by approximately a decade and is planned for execution by the end of 2020.

Strategy and Investment Update

The E&P segment delivers geographically diversified cash flows and focuses primarily on low-cost projects that deliver significant returns, cash flow and long term-value.

The Terra Nova ALE project is scheduled to commence in the second quarter of 2020, with the vessel returning to service in the fourth quarter of 2020. Production at Terra Nova is planned to resume once the project is completed. The project is expected to extend the production life and capacity of the existing Terra Nova asset by approximately a decade. Execution of this work provides an opportunity to complete enhancements to the Floating Production, Storage and Offloading vessel to increase production capacity and efficiency to enable reliable operations over its extended life.

The company has ongoing development activities offshore the east coast of Canada and in the U.K. North Sea, intended to leverage existing facilities and infrastructure to provide incremental production and extend the productive life of existing fields. These activities are planned to continue in 2020, with development drilling at Hebron and Hibernia, the West White Rose Project, Buzzard Phase 2, and the Fenja project in Norway. The Rosebank project is currently in the pre-sanction phase with a sanction decision planned for late 2022.

Through Suncor's midstream and logistics network, the company secures market access, optimizes price realizations associated with crude oil marketing, manages inventory levels and limits the impacts of external market factors.

36  2019 ANNUAL REPORT  Suncor Energy Inc.

Financial Highlights⁽¹⁾

(1)

2018 and 2017 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)

Production, revenues and royalties from the company's Libya operations have been presented in the E&P section of this document on an economic basis and exclude an equal and offsetting gross up of revenues and royalties of $303 million in 2019, $395 million in 2018, and $310 million in 2017, which is required for presentation purposes in the company's financial statements under the working-interest basis.

(3)

In 2018, the company recorded a net non-cash loss of $90 million, after-tax, related to an asset exchange with Canbriam.

(4)

In 2017, adjustments to the company's deferred income taxes related to tax reform legislation in the U.S. for North America Onshore assets.

(5)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

Bridge Analysis of Operating Earnings($ millions)⁽¹⁾

(1)

For an explanation of the construction of this bridge analysis, see the Advisories – Non-GAAP Financial Measures section of this MD&A.

Operating earnings were $1.141 billion for E&P in 2019, compared to $897 million in the prior year, with the increase largely due to the receipt of $264 million, after-tax, for insurance proceeds related to the company's assets in Libya and prior year losses recorded on an equity investment in Canbriam, which was sold in 2019. Operating earnings were

negatively impacted by lower price realizations consistent with the decline in the Brent crude benchmark, higher DD&A and increased royalties. The insurance proceeds received may be subject to a provisional repayment that may be dependent on the future performance and cash flows from Suncor's Libyan assets.

2019 ANNUAL REPORT  Suncor Energy Inc.  37

Net earnings were $1.005 billion for the E&P segment in 2019, compared to $807 million in 2018, and were impacted by the same factors as operating earnings described above. In addition, net earnings in 2019 included an after-tax impairment charge of $393 million against the company's interest in White Rose, as discussed below, and a one-time deferred income tax recovery of $70 million associated with a staged reduction to the Alberta corporate income tax rate of 1% each year from 2019 to 2022. Net earnings in 2019 also included an after-tax gain of $139 million on the sale of the company's interest in Canbriam and an after-tax gain of $48 million related to the sale of certain non-core assets.

Funds from operations were $2.143 billion in 2019, compared to $1.779 billion in 2018. The increase was largely due to the same factors that impacted operating earnings above, adjusted for the impact of non-cash DD&A.

Production Volumes

E&P Canada production volumes increased to 59,900 boe/d in 2019 from 53,900 boe/d in 2018, primarily due to the ramp up of Hebron production throughout 2019 and the continued staged return of White Rose to normal operating rates, partially offset by an unplanned outage at Hibernia during the year.

E&P International production volumes averaged 46,900 boe/d in 2019, compared to 49,500 boe/d in 2018, with the increased production from Oda, which began production in 2019, more than offset by natural declines in the U.K.

Price Realizations

Average price realizations from E&P Canada and E&P International in 2019 were lower than 2018, due to the decrease in benchmark prices for Brent crude in 2019 and the timing of cargo sales.

Royalties

E&P royalties were higher in 2019 due to an increase in East Coast Canada sales volumes.

Expenses and Other Factors

Operating expenses were marginally higher in 2019, compared to 2018, primarily due to the addition of Hebron operating costs and an increase in maintenance expense.

DD&A and impairment expenses increased in 2019, compared to the prior year, primarily due to the ramp up of Hebron production volumes, partially offset by decreased production in the U.K.

Exploration expense increased in 2019, as compared to 2018, as a result of exploration charges for non-commercial drilling results off the east coast of Canada and in the U.K. North Sea.

Financing expenses and other were favourable in 2019, compared to 2018, due to prior year losses recorded on an equity investment in Canbriam, which was sold in 2019.

Non-Cash Asset Impairment

Due to an increase to forecasted capital expenditures within the White Rose CGU, the company performed an asset impairment test as at December 31, 2019. As a result, the company recorded a non-cash impairment charge of $393 million (net of taxes of $128 million) on its share of the White Rose assets using the following asset-specific assumptions:

•

Brent price forecast of US$65.00/bbl in 2020, escalating at 2% per year thereafter over the life of the project up to 2036 and adjusted for asset-specific location and quality differentials;

•

the company's share of production of approximately 8,700 bbls/d over the life of the project;

38  2019 ANNUAL REPORT  Suncor Energy Inc.

•

the company's share of future capital expenditures of $1.4 billion including the West White Rose expansion; and

•

risk-adjusted discount rate of 9.0% (after-tax).

The recoverable amount of the White Rose CGU was $360 million as at December 31, 2019, which also includes the cost of carbon compliance in accordance with current provincial and federal regulations which starts at $30/tonne in 2020, reaches $50/tonne by 2022 and escalates at the rate of inflation thereafter. The estimate of the recoverable amount is most sensitive to the Brent price forecast and discount rate. A 5% decrease in price would have resulted in an increase to the impairment charge of approximately $85 million (after-tax) on the company's share of the White Rose assets. A 1% increase in the discount rate would have resulted in an increase to the impairment charge of approximately $35 million (after-tax) on the company's share of the White Rose assets.

Planned Maintenance of Operated Assets

The Terra Nova ALE project is scheduled to commence in the second quarter of 2020, with the vessel returning to service in the fourth quarter of 2020. Production at Terra Nova is planned to resume once the project is completed. The project is expected to extend the production life and capacity of the existing Terra Nova asset. The anticipated impact of the asset being offline has been reflected in the company's 2020 guidance.

REFINING AND MARKETING

2019 Highlights

•

The R&M segment delivered record funds from operations of $3.863 billion and operating earnings of $2.912 billion in 2019, compared to funds from operations of $3.798 billion and operating earnings of $3.154 billion in 2018.

•

R&M delivered refinery crude throughput of 438,900 bbls/d in 2019, compared to 430,800 bbls/d in 2018, driven by strong refinery utilization in 2019. Average refinery utilization was 95% in 2019, compared with 93% in 2018.

•

Refined product sales were 539,400 bbls/d, with record volumes sold in the marketing channels in 2019, including a new annual record for Canadian retail sales reflecting continued strong product demand.

•

R&M continues to be a key component of the company's integrated business model, allowing Suncor to significantly shield volatility in crude differentials in the Oil Sands segment through lower refinery feedstock costs. In 2019, approximately 56% of the company's crude feedstock processed at the company's refineries was internally produced SCO and diluted bitumen.

•

In 2019, Suncor also completed an electric vehicle fast-charging network across Canada, demonstrating the company's continued commitment to projects that are sustainability minded and technologically advanced.

Strategy and Investment Update

The R&M network serves to maximize Suncor's integrated returns by extending the value chain from oil sands production to the end customer and is a key component of Suncor's integrated business model. The company aims to operate its refineries at optimal levels of utilization to provide reliable offtake and secure pricing for a portion of the production from the Oil Sands segment.

In 2019, Suncor continued to leverage its strong Petro-Canada™ brand through a nationwide campaign to increase sales volumes and non-petroleum revenues through the company's network of convenience stores and car washes and will continue these efforts in 2020.

Through Suncor's midstream and logistics network, the company secures market access, optimizes price realizations associated with refined products and crude oil supply, manages inventory levels and limits the impacts of external market factors.

2019 ANNUAL REPORT  Suncor Energy Inc.  39

Financial Highlights⁽¹⁾

(1)

2018 and 2017 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)

In 2017, the company recorded an adjustment to its deferred income taxes related to tax reform legislation in the U.S., with the most significant impact resulting from a decrease in the corporate tax rate from 35% to 21%.

(3)

After-tax gain related to the sale of the company's lubricants business.

(4)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

Bridge Analysis of Operating Earnings($ millions)⁽¹⁾

(1)

For an explanation of the construction of this bridge analysis, see the Advisories – Non-GAAP Financial Measures section of this MD&A.

R&M contributed annual operating earnings of $2.912 billion in 2019, compared with $3.154 billion in 2018. The decrease was attributable to lower refining margins attributed primarily to significantly narrower crude differentials, lower marketing margins, and higher DD&A, partially offset by a FIFO gain in 2019 compared to a FIFO loss in the prior year associated with the significant decline in crude and refined product benchmarks near the end of 2018.

Net earnings in 2019 were $3.000 billion, compared to net earnings of $3.154 billion in 2018, and were impacted by the same factors as operating earnings described above. 2019 net earnings also included a one-time deferred income tax recovery of $88 million associated with a staged reduction to the Alberta corporate income tax rate of 1% each year from 2019 to 2022.

R&M achieved an annual funds from operations record of $3.863 billion in 2019, compared to $3.798 billion in 2018, due primarily to the same factors that impacted operating earnings described above, excluding the impacts of non-cash DD&A.

40  2019 ANNUAL REPORT  Suncor Energy Inc.

Volumes

(1)

Refinery utilization is the amount of crude oil and natural gas plant liquids run through crude distillation units, expressed as a percentage of the capacity of these units.

(2)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

Refinery utilization averaged 95% in 2019, compared with 93% in 2018. The increase in utilization was primarily due to a decrease in planned maintenance in 2019 compared to 2018, with the Edmonton refinery undergoing its first full plant turnaround in its history in 2018.

Total refined products sales were 539,400 bbls/d in 2019, compared to 527,400 bbls/d in 2018, with record volumes sold in the marketing channels in 2019, including a new annual record for Canadian retail sales reflecting continued strong product demand.

Prices and Margins

Refining and Product Supply prices and margins, including FIFO inventory valuation, were slightly higher in 2019 compared to 2018, and were impacted primarily by the following factors:

•

An overall less favourable business environment, driven by narrower crude differentials.

•

In 2019, the impact of FIFO inventory accounting, as used by the company, relative to an estimated LIFO⁽¹⁾ basis of accounting, had a positive impact on refining margins and net income of approximately $461 million after-tax, compared to a negative impact of $468 million after-tax in 2018, for a favourable year-over-year impact of $929 million.

Marketing gross margins in 2019 were lower than in the prior year, primarily due to finished product market conditions.

Expenses and Other Factors

Operating and transportation expenses were higher in 2019 compared to 2018, primarily due to an increase in business development costs and share-based compensation expense.

DD&A increased in 2019 compared to the prior year due to the implementation of IFRS 16.

Planned Maintenance

The company has a number of planned maintenance events, including a two-week planned maintenance event at the Commerce City refinery in the first quarter of 2020, a two-week turnaround at the Sarnia refinery scheduled in the second quarter of 2020, a four-week turnaround at the Edmonton refinery scheduled in the third quarter of 2020, and a six-week turnaround at the Montreal refinery in the third quarter and fourth quarter of 2020. The estimated impact of these maintenance events has been reflected in the company's 2020 guidance.

(1)

The LIFO inventory valuation methodology is a non-GAAP financial measure. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

CORPORATE AND ELIMINATIONS

2019 Highlights

•

A total of $2.614 billion in dividends were paid in 2019, an increase of 17% per common share over the prior year, making 2019 the 17th consecutive year of annual dividend increases for Suncor.

•

The company repurchased 55.3 million of its own common shares for cancellation during 2019, representing 3.6% of the total outstanding common shares, for $2.274 billion, and reduced debt by $425 million, reflecting continued flexibility in the company's capital allocation strategy.

•

Suncor sanctioned the Forty Mile Wind Power Project, which is expected to drive value through sustainable low-carbon power generation and the retention of generated carbon credits for utilization in Suncor's upstream business.

•

In 2019, the company increased its investments in clean technology, including an aggregate of $73 million in equity investments in Enerkem Inc., a waste-to biofuels and chemicals producer.

•

Subsequent to the end of the year, Suncor's Board of Directors approved an 11% increase in the quarterly dividend and a renewal of the share repurchase program. This increases the quarterly dividend from $0.420 to $0.465 per common share and provides approval for up to $2.0 billion in share repurchases beginning March 1, 2020.

2019 ANNUAL REPORT  Suncor Energy Inc.  41

Strategy and Investment Update

Returning value to shareholders continues to be a top priority for Suncor, as demonstrated by the company's history of dividend increases and commitment to its share repurchase program. Since the start of 2017, the company has completed $12.4 billion in share repurchases as of February 25, 2020, which is approximately 21% of the total outstanding common shares of the company. In 2020, the Board of Directors has approved up to a further $2.0 billion in share repurchases, reinforcing the company's ability to generate cash flow and its commitment to return cash to shareholders.

Investment in wind power and being a part of the emerging biofuel industry is a key component of Suncor's climate change action plan. In 2019, Suncor sanctioned the Forty Mile Wind Power Project in southern Alberta. This 200 MW renewable power project has an estimated total capital spend of $300 million, with 25% of the capital spent in 2019 and the remainder to be spent over the next two years. This investment approach in renewable energy is expected to generate significant value through sustainable power generation and retention of the generated carbon credits for utilization in Suncor's upstream business. This project enables Suncor to make meaningful progress towards its sustainability goal of a 30% GHG emissions intensity reduction by 2030.

In 2020, the company expects to continue to accelerate its digital transformation and implement new digital technologies across the enterprise to help improve the safety, productivity, reliability and environmental performance of our operations. As part of its digital transformation, Suncor has entered into a strategic alliance with Microsoft. This alliance enables Suncor to utilize Microsoft's full range of cloud solutions to empower a connected and collaborative workforce, build an agile data platform to increase analytics capabilities, and partner with experts while gaining access to leading edge technologies.

Financial Highlights⁽¹⁾

(1)

2018 and 2017 have been restated to reflect the change to the company's segmented presentation of its Energy Trading business, with no impact to overall consolidated results. The Energy Trading business is now included within each of the respective operating business segments to which the respective trading activity relates. Suncor's Energy Trading business was previously reported within the Corporate, Energy Trading and Eliminations segment.

(2)

In 2017, the company recognized an after-tax loss on forward interest rate swaps of $20 million due to changes in long-term interest rates.

(3)

In 2017, the company redeemed US$1.250 billion, US$600 million and $700 million of higher interest long-term debt that was originally due in 2018, reducing future financing charges for a net economic benefit. As a result of early redemption, the company incurred an after-tax charge of $28 million, net of associated realized foreign currency hedges.

(4)

In 2017, the company recorded an after-tax gain of $83 million related to the sale of its interest in the Cedar Point wind facility.

(5)

In 2017, the company recorded an adjustment to its deferred income taxes related to the tax reform legislation in the U.S., with the most significant impact resulting from a decrease in the corporate tax rate from 35% to 21%.

(6)

Non-GAAP financial measures. See the Advisories – Non-GAAP Financial Measures section of this MD&A.

42  2019 ANNUAL REPORT  Suncor Energy Inc.

Corporate and Renewables

Corporate incurred an operating loss of $1.113 billion in 2019, compared with an operating loss of $876 million in 2018, reflecting lower operational foreign exchange gains in 2019 in comparison to the prior year, an increase in share-based compensation expense, higher interest expenses and lower capitalized interest. Suncor capitalized $122 million of its borrowing costs in 2019 as part of the cost of major development assets and construction projects in progress, compared to $156 million in the prior year, with the decrease resulting from the staged commissioning of Fort Hills in 2018.