Deloitte

Deloitte

November 10, 2010 08:17 ET

Report Calls for Greater Collaboration Among Key Stakeholders in Canada's Oil Sands

Deloitte Unveils 10 of the Most Pressing Trends Oil Sands Companies Will Encounter in 2011 and Beyond

TORONTO, ONTARIO--(Marketwire - Nov. 10, 2010) - Canada's oil sands industry continues to be the target of mounting domestic and international scrutiny regarding its environmental footprint. At the same time, opportunities for sustainable growth, improved operations and continued strides in green technology innovation have never been stronger. A new report by Deloitte Canada suggests that, in light of growing pressure from environmentalists, escalating costs of production and legislative uncertainty on both sides of the border, companies operating in Canada's oil sands should consider unprecedented levels of collaboration to overcome these challenges and further improve business and environmental performance. 

"The negative perception of the oil sands has the potential to become a significant hurdle that could limit the sector's foreign investment opportunities and interfere with its future development prospects," says Chris Lee, Deloitte Canada's national Energy & Resources industry leader. "But the good news is that we are seeing more and more examples of companies who have traditionally been competitors joining forces to advance both the industry's image and long-term business viability by collaborating to improve infrastructure, green technology and public education about environmental improvements."

And there could not be a more crucial time than now to consider this proposition. According to the report, Gaining ground in the sands 2011, as demand for unconventional production heats up, oil sands players have begun re-positioning for another period of growth. Between the fact that roughly 75 per cent of the world's petroleum is locked up by national governments and the anticipated slowdown in deep water exploration that may reduce international supply, an explosion of new development and tremendous business opportunity in the oil sands could be imminent—if a corresponding escalation of costs can be avoided.

"Runaway costs were certainly a concern between 2003 and 2008, when the industry experienced its last major growth spurt," says Lee. "In addition to rising materials costs, oil sands companies incurred substantial bills for construction and infrastructure projects. Immense competition for human capital also drove labour costs through the roof. In many instances, the labour component of projects soared by more than 100 per cent—twice the increase seen in equipment, steel and materials."

According to Deloitte, in dealing with such challenges, oil sands companies have historically adopted a fairly individualized approach to business. When oil prices topped $100/barrel in 2008, for instance, this competitive spirit pushed costs to record highs, straining resource availability and infrastructure for companies across the sector. And now, as the market recovers, competition is again heating up and companies are bracing to contend with new labour, infrastructure and logistical challenges. 

"If oil sands companies can cooperate to reduce costs, coordinate logistics and streamline project management, the entire industry stands to benefit," Lee explains. "Collaboration through partnerships, joint ventures, alliances and associations has always existed in the industry, of course, but the opportunity before the players today is to push collaboration even further and optimize their efforts to engineer efficient, cross-functional solutions that mutually benefit everyone."

According to the report, enhanced collaborative activity may indeed be central to addressing growing pressure from environmental groups and the threat of decreased bitumen exports to the U.S. As Lee explains, "To truly push environmental considerations to the top of the agenda, oil sands players should be relentlessly looking to augment their engagement in joint ventures and industry working groups, such as the Oil Sands Leadership Initiative (OSLI), and also to find ways to strengthen collaboration with environmental groups and governments to refine legislation. All stakeholders—from the companies and their shareholders to governments and NGOs—need to be at the table."

Ten of the top issues facing the oil sands sector

The full story is told across a discussion of 10 of the most pressing trends oil sands stakeholders can expect to deal with in the foreseeable future. By identifying and assessing these issues, the report aims both to inform the debate and to help define the future state of the oil sands in Canada. The trends include:

1. Finding economic viability: The dynamics of supply and demand — Oil sands production is expensive. Before the 2008 economic downturn, when 46 projects were in production or proposed, the Canadian Association of Petroleum Producers (CAPP) forecast five-year capital expenditures of more than $75 billion. For projects to remain viable and continue, recent research showed that most new bitumen-producing projects can show profit at prices around $50 to $70 per barrel. Deloitte expects exports of bitumen, diluted with synthetic crude, to increase significantly as U.S. refiners bid for increasing supplies of heavy crudes to fill their existing upgrading equipment. At the same time, many industry watchers believe prices will continue to climb as demand for oil increases across the industrializing nations and as the output of international oil fields in Mexico, the Middle East and China decline. Yet oil sands companies cannot hinge their business cases for growth on just the anticipated long-term rise in the price of oil, as previewed in 2008 when prices surpassed $140/barrel. They must also contend with determined environmental backlash and stricter regulatory enforcement. Companies hoping to attract much-needed capital know they must be able to demonstrate not only a solid rate of return but also an improving environmental record. And they will almost certainly require more sophisticated risk management practices to manage financial and environmental risks in ways that maximize shareholder value.

2. The cost conundrum: It is time to get ruthless about managing capital costs — Labour costs are a significant proportion of any project—in fact, immense competition for human capital has, in the past, prompted some companies to turn the Western Canadian Sedimentary Basin into the "NFL of the oil patch" by offering large signing and retention bonuses to attract skilled labour to key roles. But small improvements in productivity could result in labour savings of millions of dollars and accelerate project completion. Currently, oil sands production totals 1.3 million barrels per day and will consume nearly 50 million hours of labour over five years. By streamlining workforce logistics, automating manual processes and taking a more measured and collaborative approach to development (such as reworking relationships with their major service providers to mutually share risks and rewards), companies can make real strides towards controlling costs for the sector as a whole.

3. From black to green: Minimizing the oil sands' carbon footprint — As international demand for energy continues to grow at a swift rate, how can businesses and nations increase energy production while decreasing carbon emissions? Despite the carbon intensity of oil sands production, the industry has taken significant strides in recent years to reduce its CO2 emissions. In fact, a study commissioned by the Alberta Energy Research Institute (AERI) found that, on a "wells-to-wheels" basis, greenhouse gas emissions from the oil sands are only five to 15 per cent higher than traditional crude and on par with, or below, emissions from California heavy crude. However, lack of legislative clarity around emissions reductions remains an issue. As the Canadian federal government waits to follow the U.S.'s lead, all environmental progress currently being made is taking place against an invisible target. To foster greater technological innovation, both federal and provincial governments should consider tax incentives and other programs designed to encourage more aggressive scientific research and development, while upping their effort to facilitate the international sharing of strategies for improving the oil sands' environmental performance.

4. Earth, water and air: Putting water usage and land reclamation at the top of the agenda — In the oil sands, few issues are as emotionally charged as those involving the use of water and land. Many oil sands companies are implementing technologies such as cyclic steam stimulation (CSS) and steam assisted gravity drainage (SAGD) to address the concerns associated with land disturbance. These approaches, however, tend to bring about new concerns: in situ methods require large amounts of steam to heat the bitumen, which in turn requires large amounts of fuel and emits more greenhouse gases. Additional work on this front does lie ahead, but the fact remains that the industry has made, and continues to make, significant strides to resolve these issues.

5. The people equation: When you are short on talent, you need to be long on ideas — Labour shortages spread like wildfire when the sector last experienced rapid growth, prompting companies to compete ruthlessly for the same resources, pushing labour costs to unsustainable levels. Now that the industry is on the verge of a new recovery, there is considerable concern that history is going to repeat itself. An estimated six million hours of work—from unskilled labour through project management and operations—will be required in 2011 to complete current oil sands construction projects. Fort McMurray, in particular, is under continuous pressure to develop its infrastructure on pace with the oil sands. But housing, schools, hospitals, roads and the like require government funding, which often seems to lag the actual need. In Fort McMurray, this challenge is magnified by the "shadow" work force that spends 80 per cent of its time working in the oil sands but does not consider the region home. And as companies stretch their resource requirements, coupled with normal attrition, they risk a less experienced work force, which can lead to safety and plant reliability issues. However, there are areas where companies could be working more closely together—such as on the coordination of air and ground transportation and on the development of housing and infrastructure—and with Fort McMurray officials.

6. Going global: National oil companies arrive in force — National oil companies (NOCs) from around the world have long expressed interest in Canada's energy resources, and, over the past few years, that interest has translated into considerable new investment at an ever-increasing rate. While investment by NOCs has given rise to political debate around resource ownership, national identity and energy security, this international investment has also provided significant economic benefit. For proponents of NOC investment, then, the question is not whether to limit that activity but how to structure deals in ways that maximize shareholder value. For instance, resource owners can continue to attract investment while allaying security of supply fears by encouraging minority investments and joint ventures versus controlling interest acquisitions. The federal government, meanwhile, could improve the transparency of its foreign investment policies so that both North American companies and NOCs better understand the playing field.

7. Where to upgrade: Assessing the economic and environmental implications — One immutable fact of oil sands production is that bitumen will always need to be upgraded. While the majority of that currently occurs in Canada, almost all of the growth is in the U.S., owing to a surfeit of underutilized facilities to which oil sand companies can ship their bitumen. But a number of emerging trends may change this equation. First, U.S. backlash against the oil sands may see some states limit the transport of bitumen or even synthetic crude into the U.S., impelling oil sands operators to find alternative markets where the upgrading and refining can take place. Second, ongoing NOC investment in the oil sands has prompted some officials of the Canadian government to say they would oppose bitumen upgrading in countries that lack a solid environmental track record. Third, and most important, the difference in price between heavy crude and light crude is currently too small to make grassroots upgraders economically viable. So, as oil sands companies seriously consider where to locate their upgrading facilities, they are looking south to existing refineries where upgrading already exists or expansions can be built for less. 

8. One customer is not enough: Reliance on the U.S. market takes a toll — By some estimates, oil sands production has more than doubled over the past decade—from 600,000 barrels per day in 2000 to 1.3 million barrels per day in 2009. Beyond the sheer scale of this expansion, it is particularly notable that more than one million of those barrels are exported to the U.S.. In fact, U.S. imports of Canadian oil sands are forecast to average 1.07 million barrels per day by the end of this year and could increase to 1.3 million barrels per day by 2012. At this pace, Canadian oil sands could provide as much as 47 per cent of U.S. crude imports by 2030. However, despite the huge appetite of U.S. consumers for Canadian crude, ongoing lobbying efforts and environmental opposition have resulted in political challenges that continue to cast uncertainty on future trade. In this sense, reliance on the U.S. market has begun to take a toll on oil sands producers. To minimize the impact of U.S. regulatory changes on the industry, pipeline companies, oil sands companies, and government agencies should try to find the common ground that will facilitate the expansion of access to Canada's West Coast. With rising interest from China and other Asian countries, these regions would seem the next logical choice for market expansion.

9. Sharing technology successes: Can the oil sands be a hub for technological innovation? — Media stories about the environmental impact of the oil sands abound, but less reported are the steps the industry is taking to minimize—and even reverse—that impact. For years, the industry has focused on developing cleaner and more sustainable technologies. In light of this innovation, the oil sands industry may be positioning itself to do more than reduce its own environmental impact: it may also begin to act as an incubator for the development of clean technology that can have far-reaching applications.

10. Autonomy may be the greatest threat — At a time when the oil and gas industry is under exceptional public scrutiny, the need for collaboration has become even more pronounced. This would include sharing best practices for improving the industry's environmental performance, sharing technology developments, and taking an integrated view of the full range of issues companies face in an effort to make the oil sands more attractive for growth and to maximize shareholder value.

Obtain a copy of the report

For a more detailed discussion of the top issues facing the Canadian oil sands sector, the full report is available at www.deloitte.com/ca/oil-sands.

About Deloitte

Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,700 people in 58 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Deloitte & Touche LLP, an Ontario Limited Liability Partnership, is the Canadian member firm of Deloitte Touche Tohmatsu.

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