Costs, labor top list of oil sands risks

Cost increases and labor shortages appear atop a list of risks facing producers in the Canadian oil sands, balanced by opportunities that include growing global oil demand and the economic importance of oil sands production to Canada.

The new assessment appears in a new Ernst & Young report entitled “Exploring the top 10 opportunities and risks in Canada’s oil sands.”

An Ernst & Young press statement noted that the price of steel has increased 30% since 2010 and continues to climb. Low unemployment rates in the oil sands industry are expected to further increase labor costs, it said.

Other risks cited by the report are the need to break into new markets, large upfront capital investment, changing policy and regulations, complexity of tailing ponds, large water requirements, greenhouse gas emissions, public relations and perception issues, and land disturbance and reclamation.

Ernst & Young said the Canadian oil sands “are emerging at the center of global growth as new industry players look to replace reserves.” It cited a prediction by the Canadian Petroleum of Petroleum Producers that oil sands production would reach 2.2 million b/d by 2015 and 3.5 million b/d by 2025.

Besides demand growth and their importance to the Canadian economy, the oil sands offer opportunities from the prominent role they play in the production mix, attractiveness of Canada as a place in which to do business, expected long-term strength of crude oil prices, the evolution of the US as a key customer, the controlled way project activity is increasing, continuation of the development of infrastructure, diversification created by “smaller players, and the increasing role of technology.

New approaches

New business approaches are emerging in the oil sands, according to an Ernst & Young executive.

“This year we won’t see companies risking it all on single-stage, capital-intensive projects,” said Lance Mortlock, senior manager in the firm’s oil and gas practice. “While companies are still spending the same capital, many are concentrating on decoupling the value chain by moving away from fully integrated projects and completing segments in smaller, incremental phases.”

Rather than building and maintaining extraction and upgrading facilities, Mortlock said, many companies are concentrating on one operation and relying on collaboration for the other.

“Companies need to abandon the boom-and-bust mindset and take a holistic approach to cost management and forge ahead with long-term investments,” he said. “Increased collaboration between industry players on new and innovative technologies can drive down costs, support improved recovery rates, and mitigate environmental impact.”