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Oil sands: Rising costs, labour biggest risks

Global economic issues, escalating costs and environmental issues are making it hard for oil sands companies to forecast and plan. More collaboration may be the answer, says Ernst & Young.


August 30, 2011
by PLANT STAFF

CALGARY: Global economic issues, escalating costs and environmental issues are making it hard for oil sands companies to forecast and plan. More collaboration may be the answer, says Ernst & Young. ey.com/ca.

The global consulting firm’s Exploring the top 10 opportunities and risks in Canada’s oilsands report says escalating labour, service and commodity costs are driving early signs of cost inflation in the oil sands sector while environmental issues dominate the risks list.

For example, steel has gone up 30% since 2010 and continues to climb, while low unemployment rates are also expected to drive labour costs higher as, Ernst & Young notes, numbers edge towards the 2007-08 levels where service costs escalated out of control.

“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,” said Lance Mortlock, senior manager of Ernst & Young’s oil and gas practice.

Rather than building and maintaining production and upgrading, Mortlock said companies should collaborate to alleviate costs and risks. Recycling water and dealing with the treatment of tailings ponds are two examples where oil sands companies are collaborating.

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

Ernst & Young notes the Canadian Association of Petroleum Producers (CAPP) predicts oil sands production will grow to 2.2 million barrels per day by 2015 and 3.5 million barrels per day by 2025.

Here are the top 10 emerging opportunities:

• Global demand is growing
• Oil sands are economically important to Canada
• Oil sands are playing a more prominent role in the oil production mix
• Canada is an attractive place to do business
• Strong long-term crude prices expected
• US as a key customer is evolving
• Project activity increasing in a controlled way
• Infrastructure development continues
• Smaller players create diversification
• Increasing role of technology

Here are the top 10 risks for oil sands companies in 2011:

• Cost inflation
• Skilled labour shortages
• 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
• Land disturbance and reclamation

Click here for a copy of the report.