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Human resources: the cost
of a labour shortage grows higher
The oilsands sector
is moving into a full-blown labour shortage, and
the associated cost implications for new projects will be on the rise in
2012.
“A number of indicators demonstrate that the labour
market in Alberta is already tight,” says Chris Lee, a partner with
Deloitte whose group recently prepared the report Gaining ground in the sands
2012: A deeper look at major trends and opportunities in the oil sands
sector. “Last time around [in 2007-2008], this resulted in a labour shortage, with certain trades hit especially hard,
and there was a significant switch of the risk to getting labour
from engineering, procurement and construction to the owners. Oilsands projects will continue to be a talent
drain.”
Lee says that particularly going into winter, when conventional oil and gas
drilling heats up, those projects compete with the oilsands
sector. And the challenge is not just in staffing for mining and upgrading
“megaprojects.” The relatively smaller-scale steam assisted
gravity drainage (SAGD) projects that are multiplying offer new complexities.
Construction of these projects generally takes place in
“bite-sized” increments replicated in stages.
“SAGD plants, steam generation, and so on require process-oriented
skills more akin to refining, pulp and paper, and water handling,” says
Lee. Not prevalent in the conventional oil and gas industry, “these
skill sets may be harder to attract to places like Fort McMurray. This all
adds up to increased labour costs in the next few
years – especially when you get into periods of high investment there
is a lot of competition for talent.”
The Petroleum Human Resources Council of Canada arrives at a similar conclusion
although it begins at another place. According to that not-for-profit
organization, the oilsands sector—which it
estimates will have to hire up to 15,000 new workers between now and
2020--has challenges attracting qualified people because of its remote
location, the competition for skilled labour when
several large projects start at the same time, and the industry’s
negative public image.
Non-labour cost inflation will stay relatively
low
Labour may be the highest piece of oilsands
project costs, but there are other inputs that can significantly alter the
bottom line. Greg Stringham, vice-president of oilsands and markets with the Canadian Association of
Petroleum Producers (CAPP), notes three of the major the indicators that
forecast non-labour inflation in the oilsands: the price of steel, the price of natural gas,
and the cost and availability of capital. Each of those three now reads
better than it did before the global crash.
Steel is a globally priced commodity, and prices could spike rapidly (as they
did in 2008) if there were sudden growth in some of the larger developing
countries. At the moment, however, its price is roughly the same (US$600 per tonne) as it was in 2007. Natural gas, of course, is
important as a fuel source. In 2007 natural gas was averaging between $5-$7 per gigajoule, but according to the Natural
Gas Exchange, has averaged approximately $3 per gigajoule since January 2010.
The price has dropped and it’s stable.
Stringham adds that, “In 2007 we had a
problem with the availability of capital. That isn’t a problem anymore.
There is much more East Asian interest in the oilsands,
and even some coming from India.” For companies that are capital
constrained, he says that, “We’ve seen many cases where the
industry finds capital through another company or even overseas.” Also,
of course, interest rates are near the bottom of the chart.
New business combinations and sales will help with expansions
Although it is difficult to predict merger and
acquisition (M&A) activity, it is clear that in 2012 the oilsands sector will see at least a few important new
transactions. Alan Tambosso, president of M&A
leader Sayer Energy Advisors, for example, confirms
that his company is brokering some raw oilsands
properties but can’t comment until after the deals are done.
But there are at least a couple of transactions already in the works and out
in the public domain, such as Connacher Oil and Gas
Limited’s initiative to find a joint venture partner to enable its
planned 24,000 barrel per day expansion of the Great Divide SAGD project, as
well as Cenovus Energy Inc.’s efforts to
execute a execute a transaction involving the proposed 90,000 barrel per day
Telephone Lake SAGD project and some surrounding leases. At the end of the
third quarter Connacher said it expected to receive
bids by the end of 2011, while at the same time Cenovus
said that interested parties were viewing transaction information.
There are also cases such as Oilsands Quest Inc.
and Andora Energy Corporation. The future of Oilsands Quest, its assets and proposed SAGD project in
northwest Saskatchewan, is now up in the air—the company has been under
a strategic review for months, and recently entered into creditor protection.
Andora Energy, a subsidiary of Pan Orient Energy
Corp. holds oilsands leases in the Peace River
region at Sawn Lake, and has plans for a SAGD demonstration. Its strategic
review process was initiated in February 2011 and closure of this process has
not been indicated.
And let’s not also forget the growing interest of international players
in the oilsands industry and their penchant for
M&A—that is unlikely to quit in 2012.
Deloitte notes that, “National oil companies with an expressed interest
or current investment in Canadian oilsands will
continue in 2012 to play an evolving, if somewhat unpredictable role in
development of the resource.”
That said, as Tambosso points out, one generally
doesn’t know what's in the M&A pipeline until the deal is done.
Learnings from other sectors help the oilsands move into the future
According to Deloitte, there are early signs
that the oilsands industry is moving away from
legacy “staunchly independent or even adversarial” oil and gas
attitudes and toward strategies that borrow models from other sectors in
order to address complex issues such as new technology development, and
environmental and social sustainability.
“Ideas about municipal water treatment jump to my mind,” says
CAPP vice-president Stringham, citing a 2010
initiative where CAPP worked with the Ontario and Alberta governments to
organize a “clean and green” workshop in which people from many
industries and sectors, including academia and researchers, discussed ideas
the oilsands sector could use to clean up its act.
“We basically started with the concept, ‘Bring your good ideas
for water treatment, for reclamation and for other kinds of environmental
processes and let’s see if there’s anything we can apply,” Stringham says. “Some of the ideas were already
being developed for the oil industry through existing partnerships but others
were brand new.”
Deloitte argues that by using ideas from the automobile, high tech and other
sectors, oilsands producers can take advantage of
contemporary manufacturing approaches. “These can reduce cycle times,
reduce operational costs and eliminate non-productive activity.”
Producers move closer to commercializing in situ frontiers
Two major frontiers for the in situ oilsands
industry—bitumen carbonates and SAGD in the Grand Rapids
formation—are coming closer to commerciality, and further progress is
expected for 2012. This could mean the potential unlocking hundreds of
billions of barrels of currently stranded resources.
Laricina Energy Inc. is operating in both of these
resource plays, deploying SAGD at Saleski in the Grosmont carbonates, and at Germain
in the Grand Rapids. The 1,800 barrel per day Saleski
pilot, which produced first oil in March, saw cumulative sales as of Sept. 30
of 26,300 barrels of blended bitumen.
"We are in the very early stages of unlocking this vast reservoir and,
given our progress to date, we consider the results positive," the
company says. In an investment note, Peters &. Co. described the oil
production as a "positive initial achievement" as the Saleski pilot is the first large-scale production test in
the Grosmont since Unocal’s operations in the
early 1980s, but it added that well rates need to improve to demonstrate
commerciality.
Laricina says that, "Based on our work to
date, we expect that in the second half of 2012 the SAGD performance curve
will be at a stage in maturity allowing us to initiate solvent injection,
thereby beginning the [solvent-cyclic] SAGD phase of our pilot plan."
Athabasca Oil Sands Corp. (AOSC) is also advancing piloting in the bitumen
carbonates. Earlier this year the company began an electric-heat pilot in the
Leduc formation which it said received favourable
results including indications of uniform heating of the reservoir and fast
ramp-up and wider well spacing. In October AOSC filed its application for a
6,000 barrel per day pilot of the technology, expecting to start construction
in 2012 and production in 2014.
Both Cenovus Energy and BlackPearl
Resources Inc. recently fired up SAGD pilots in the Grand Rapids formation.
As of the end of the third quarter, BlackPearl said
its single well pair BlackRod project was ramping
up production, currently at about 200 barrels per day. During the first
quarter of 2012 the company plans to file an application for a 40,000 barrel
per day SAGD project on those leases.
The Cenovus Grand Rapids pilot is located on the
company’s Pelican leases; it began producing in the third quarter of
2011. The company has filed for regulatory approval to expand the project up
to 180,000 barrels per day. According to executive vice-president Harbir Chhina, the
company’s original target at the pilot was to get “about 600
barrels per day at a steam to oil ratio of three on a cumulative basis, and
so if we’re seeing that ratio on an instantaneous basis we’re
feeling pretty good.” He adds, “We want to try other unique
things that we’ve learned from the last nine months or so in that
pilot.”
Laricina is currently building a 5,000 barrel per
day demonstration project at Germain, and recently
filed its application to increase capacity to 155,000 barrels per day.
Solvents continue to be all the rage for in situ producers
More and more in situ producers are piloting solvent-assisted SAGD projects.
“Solvents are the next big thing in situ development,” says
CAPP’s Stringham. “Almost every company
is experimenting with it now.” Companies using solvents include Connacher Oil & Gas, Cenovus
Energy, Japan Canada Oil Sands, Imperial Oil Ltd. and Suncor Energy Inc.
“Not only is it an effective tool for production. It’s also more
environmentally responsible” since it reduces the amount of heat needed
to mobilize the bitumen.
Fortunately for the companies wanting to use solvents, a lot of natural gas
exploration is being directed toward liquids-rich gas--especially in shale
gas development--because those liquids are much more valuable than dry
natural gas. And, the design for in situ oilsands
projects adding solvents is to recover as much as possible for re-use.
“For the most part once a company has its solvents,” says Stringham, “there isn’t much need for more of
the stuff. There is an initial demand upfront and a certain need for makeup
demand.”
Collaboration grows as key to managing environmental issues
In a recent interview, Suncor president and
chief executive officer Rick George said the oilsands
industry should “share anything to do with safety, the environment,
environmental improvement, anything on reducing our air, land and water
footprint.” Given that perspective, it isn’t surprising that
Suncor is one of the founding members of the Oil Sands Leadership Initiative
(OSLI)—a group of major producers that has agreed to share technologies
and best practices in these important areas.
According to CAPP’s Stringham,
“Collaboration is the big topic for improving environmental issues. It
is a growing initiative. Environmental issues are not a competitive issue,
but something that needs to be worked on collaboratively. The leading edge is
the Oil Sands Tailings Consortium.”
Deloitte’s report notes that, “The associations being forged now
will set in motion the expectations and rules of engagement that will carry
forward when addressing even bigger picture issues requiring even greater
universality and solidarity.” For this to happen, says the firm, the
industry will need “a wider representation of both large and small
operators…to truly push ahead.”
Legislation for a single regulator planned to be tabled
The administration of Alberta Premier Alison
Redford plans to establish a one-stop regulator for oil and natural gas
projects in 2012, Energy Minister Ted Morton said in early November.
Alberta's previous Progressive Conservative administration under Premier Ed Stelmach and Energy Minister Ron Liepert
promised to establish a "one window" regulator for the upstream
sector. For example, operators would presumably be able to file a single
application instead separate applications with the province's environment and
energy departments.
"That's something that we're going to continue to pursue. [Environment
Minister Diana] McQueen and I will work on that together," Morton said.
"And we have some draft regulation now that we hope to use as a
discussion matter with industry over the next several months, and would hope
to move to legislation sometime next year.”
Threats build close to home
University of Alberta economist Andrew Leach
says the biggest threats to the oilsands sector
right now are not in its carbon footprint. Rather, he zeroes in on two
problems closer to home: issues from First Nations communities, and
Canada’s endangered species legislation.
Leach acknowledges that oilsands development has
created a surge of employment in First Nations communities in the oilsands areas. However, there is a great deal of
hostility towards the industry in aboriginal communities where there are no
obvious economic benefits, for example along the proposed Gateway Pipeline
right-of-way. (Another hot button issue, of course, is the tanker traffic
shopping “dirty oil” along the B.C. coast.) Those issues could
stop the line.
Leach admits that he is no expert on land disruption and its effect on
wildlife. But what he does know about are economics and the value people
place on environmental damage, "... and if you're going to kill
something with your industry what you do not want to kill is something that
looks like Bambi, plain and simple…threats to woodland caribou could
threaten the industry’s social license to development.”
Alberta’s first BRIK refinery likely to be sanctioned
After being delayed in 2008 due to strained
economics, it looks like 2012 be the year that North West Upgrading
Inc.’s Redwater bitumen refinery will be
sanctioned, processing volumes both from partner Canadian Natural Resources
Limited as well as the Alberta government through its bitumen royalty in kind
program (BRIK). Detailed engineering for the first 50,000 barrel per day
phase of the project began in the first quarter of 2011.
Canadian Natural says that, “project development is dependent upon
completion of detailed engineering and final project sanction by the
partnership and approval of the final resulting tolls. Board sanction is
currently targeted for 2012.”
The $5 billion project would then be up and running by 2014, and although it
is a new step for the province in deploying BRIK, it does not necessarily
signal more Alberta-fed upgrading in the province.
During her recent leadership campaign, premier Redford said that “There
should be more bitumen upgrading in the province, but only if the market can
sustain it. The government should not generally play a role in this sector
except in special cases such as the Northwest upgrader.”
Oil prices: West Texas Intermediate takes a bow as the main North American
benchmark
“Where once we could look to West Texas
Intermediate [WTI] for direction in pricing, the global stage has
changed,” says Ralph Glass, a vice-president at AJM Deloitte.
“Today, the UK’s Brent reference price is the benchmark. Brent
prices have an impact on the North American market because internationally
priced oil is imported into both the U.S. and Canada.”
Glass says several international factors could affect oil pricing:
“These include uncertainty in respect to whether OPEC can increase
production significantly if world demand rises. How much success will Libya
have increasing its production levels? There are also issues related to political
stability in the Middle East and to Europe’s financial crisis.”
The quest to reach the Gulf Coast and tidewater is far from over
If Canadian crude had significantly expanded
access to tidewater for export, the prices it receives would compete with
Brent rather than WTI.
The November 2011 decision by U.S. authorities to investigate new routes for
TransCanada Corporation’s proposed Keystone XL pipeline expansion to
the U.S. Gulf Coast, delaying a decision for at least a year, was a blow to
the oilsands sector. There remains confidence,
however, that more Canadian barrels will eventually reach the markets they
need.
According to the University of Alberta’s Leach, “it’s
important not to take this decision as an anti-oilsands
measure. At least in part, it’s a reaction to high-profile oil spills
in the United States by Canadian pipeline companies.” He also suggests
that TransCanada may have been “a bit high-handed” when it
planned the line.
The transportation sector is scrambling to fix the problem. TransCanada is
working on selecting a new route. Enbridge Inc. hopes to increase Gulf Coast
access through its Wrangler Pipeline using existing rights-of-way from
Cushing, Ok. The plan is to have Wrangler in service in 2013. The company
also recently paid $1.5 billion for a half interest in the underused Seaway
Pipeline, with the idea of reversing the line so it can take oil south from
Cushing. Closing of this transaction and regulatory approvals are anticipated
in 2012.
This year will also be significant for Enbridge’s proposed Northern
Gateway pipeline to Canada’s west coast, as public hearings begin in
January. Approximately 4,000 people have registered to give oral statements.
According to Robin Mann, president of AJM Deloitte, “my sixth sense
says Gateway will go ahead. [Prime minister] Harper has his majority, and he
understands the significance of the line. He’ll make it happen.”
He adds that both Keystone and Gateway “are important, but I think
Gateway is more critical” since it will open up Asian markets to
Canadian oil.
Peter McKenzie-Brown
Language Instinct
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