Serious cost and schedule overruns in recently completed oilsands megaprojects have triggered alarm bells throughout the industry.
“It’s climbed the level of concern to the point where most owners, many of the engineering companies and construction companies, and vendors who are involved are aware that something will have to change next time around,” says Mike Smyth, president of the Association of Professional Engineers, Geologists and Geophysicists of Alberta (APEGGA), the governing body for more than 40,000 members across the province.
Most of the big risks in the oilsands are history. There are a confirmed 177 billion barrels of oil in the ground, eliminating many of the risks of exploration. And companies have operated in the oilsands for about 30 years, with huge cost-saving improvements in the last 15, which helps make operating costs predictable.
Capital expenditures to get megaprojects into the ground remain the wild card.
When capital costs spike, “the return on investment is the thing that takes the major hit . . . but companies are still making a pretty darn good buck,” says Smyth, referring to current oil prices of about $35 per barrel.
Cost projections for new projects are based on more realistic long-term prices. When lower oil prices are combined with the real costs of completed megaprojects, the picture becomes less economically attractive, says Smyth.
In his January address to APEGGA, Smyth identifies many areas, including labour availability and productivity, estimating, contracting strategy, execution strategy and project management as factors in cost overruns.
He points to construction management as the key issue. “When you have 10,000 people and you’ve got a whole pile of work to do in a short period of time, you’d better be prepared. And you’d better have a whole bunch of people organizing and getting ready for the guys who arrive on the bus every morning at 7:30. That’s the part that needs some work.”
Shell Canada and partners Chevron Canada and Western Oil Sands completed their Athabasca Oil Sands project last year with a final pricetag of $5.7 billion, 50 per cent over budget.
“We’re in agreement with Mr. Smyth,” says Shell’s senior vice-president for oilsands, Neil Camarta. “Our Alberta and Canadian trades people are world-class and do a fine job. The challenge does lie in overall
construction management – project definition, timing, estimating and labour availability are just some of the issues we are addressing to set the stage for successful project development.
“We learned a lot from our current project that we will apply to any future developments, and assume others will learn from us as well – just as we did watching those before us,” adds Camarta.
Well into the planning of its Horizon project, Canadian Natural Resources Ltd. assesses past projects in an attempt to capitalize on the components that went extremely well and examine the underlying causes for those that need improvement.
“We have to understand that none of these projects were failures or disasters,” says Real Doucet, senior vice-president for oilsands operations.
“All these projects are still having a strong economic return and they are still fully operational today. None of the companies went bankrupt.”
Overshadowing the plethora of issues involved is the need for all levels of management to be fully committed to a megaproject from the outset and fully disciplined to implement the necessary strategies, says Doucet. “Changing the course of an execution halfway down the line is suicidal – that we have learned from megaprojects before.”
Canadian Natural has addressed its main concern of lack of project definition by taking four years to define and articulate its Horizon Project, with a current team of more than 600 staff working on the plans. Some of the staff has transferred to the company directly from other megaprojects.
The company is also performing extensive risk analysis. “We have to be in a position to predict with reasonable certainty how these projects are going to unfold,” says Doucet.
It’s not a precise science and requires “sensitivity analysis,” as some assumptions must be made regarding transportation logistics, labour availability and commodity prices of oil, steel, copper and piping. The company’s target is to start construction of Horizon at the end of 2004, but if management does not feel ready to go, they will postpone that date, Doucet adds. “We will go when we are ready.”
The company is committed to meeting its targets and says it can do so because of the extensive backup
planning. “If the (backup) plans have not been thought of and articulated properly, then we’re into emergency, we’re into rework, we’re into default and we’re into high costs,” says Doucet.
Part of Canadian Natural’s plan includes the use of modular components and work performed outside Fort McMurray to help keep labour costs in check. But the transportation of these modular components becomes a tradeoff.
“There is no one solution that solves it all,” says Doucet. “It (requires) an optimization throughout the planning of the project and the execution.”
Structuring projects in smaller chunks is an advantage to companies already in position in the oilsands, as they can add on bite-sized pieces. “But if you’re planning a new project, sooner or later you have to eat the whole elephant,” says APEGGA’s Smyth.
“Manageable-sized pieces is definitely an advantage if you can do that.”
Smyth is confident of an optimistic outcome.
“We have a big advantage here in Alberta because now we’ve sort of climbed the learning curve – we know what we have to focus on. We’ve got the resources here in terms of the engineering talent . . . I’ve got no doubt that the next round of projects will come off without a problem,” he says.
FirstEnergy Capital Corp. research analyst Steven Paget is optimistic about the increased emphasis on front-end engineering, as he says obtaining capital becomes difficult when projects are under way and there’s a need for 50-per-cent more dollars.
The time lag between project projection and completion can adjust the impact of the cost overruns dramatically. “What was expensive at one point looked cheap four years later,” says Paget, comparing the costs to that of conventional oil recovery and taking into account the longer lifespans of the oilsands.
(Kenton Friesen can be reached at email@example.com)