Huge projects have tightened both the materials and labor markets.
The modern-day gold rush of oil companies and contractors converging on western Canada’s oil-sands markets is bogging down as high materials costs and outstripped labor resources force project delays and budget overruns.
“It is an overheated environment in Alberta now,” says Bill Wall, a petroleum market analyst for Canada’s National Energy Board, a Calgary-based oil regulatory agency. “The rapid increase of construction materials costs due to global issues and the lack of availability of project managers and others is seriously affecting the market.” Construction costs in the region have soared 40% to 60% in the past two years, causing “a number of project delays,” he explains.
With more than 175 billion barrels of oil reserves, second only to Saudi Arabia, Canada’s oil-sands deposits are harbored beneath a 55,000-sq-mile swath of northeastern Alberta tundra.Their potential has ignited an estimated $86 billion worth of projects now under way or planned in the region. The area’s workforce has swelled by nearly 6,000 people in the past two years as petroleum giants including Imperial Oil, Suncor Energy, Canadian Natural Resources Ltd., and Shell Canada execute several multibillion dollar oil-sands projects this year. Companies are boosting salaries and offering incentives to attract employees to Alberta’s remote locales.
Firms have had to build new airstrips to fly personnel to jobsites daily to curb staggering housing costs. Others are “creating smaller project modules, since there are many components to a large plant,” says Wall. This allows firms to secure workers and estimate materials costs within shorter time frames and curtail long-term price fluctuations.
The expense of extracting petroleum from oil sands makes the process notoriously cost-ineffective even in good economic times, analysts say. Extreme global demand currently is spurring new technologies that are enabling oil producers to view oil-sands prospects more favorably. “But there are only so many manufacturers who make the equipment needed,” says Geoffrey Cann, a director at oil industry consultant Deloitte Development LLC, Toronto. “And they are all running flat out.”
With oil prices hovering around $100 per barrel, it costs about $25 to extract one barrel of oil from Alberta’s oil sands, compared to $5 per barrel for Saudi Arabian oil, Cann explains. Capital costs to launch an oil-sands project in Alberta including construction of extraction facilities, upgrader plants, and support infrastructure have exploded from about $25,000 per daily barrel of oil four years ago to about $40,000 per daily barrel now, Cann says. In metal-intensive construction required for upgrader plant projects, dramatic increases in the costs of steel and nickel have been a factor.
“Anything with alloys, copper and nickel is a big materials cost problem now,” says Peter Stalenhoef, CEO of heavy industrial for PCL Constructors Inc., Edmonton, Alberta. PCL has several projects in the province, including construction management of a $4.1-billion upgrader project for Northwest Upgrading Inc. and management of a $1.3-million primary upgrader unit project for Canada Natural Resources. The latter is three months behind due to labor gaps. “We need 1,500 people a day but we are 300 people short, Stalenhoef says. “With project managers, welders and engineers in high demand, labor costs have escalated 5-6% this year.”
Many oil companies report building delays, with some owners opting out of planned projects to rethink strategies. “These challenges have slowed the pace of activity somewhat and a number of companies are reassessing the economics of their projects,” Wall says. Husky Energy Inc., Calgary, which announced plans last year to eventually produce 500,000 barrels per day from its large oil-sands holdings, stepped back this year and announced a delay in planned projects. President John Lau cites high capital costs and labor uncertainty.
That curve has become steeper on several projects, including a joint venture of Nexen Inc. and OPTI Canada Inc. to construct a steam-assisted gravity drainage extraction facility in Long Lake, Alberta. It was delayed six months this year amid a 10-to-15% budget hike as the project’s cost swelled to $5.3 billion from an estimated $4.6 billion. The project was initially set to cost $3.4 billion and be producing synthetic crude by early 2008. OPTI Canada CEO Sid Dykstra attributes the delay to the labor crunch, including a lack of pipefitters.
Also hit is Canadian Natural Resources’ 110,000-bpd Horizon oil sands project near Fort McMurray, Alberta. The firm said in October that it was more than $1 billion over budget with almostWith several large-scale projects being tripped up in mid-stride this winter by the worsening labor and materials crisis, owners and construction firms are attempting to keep work under way on upgrader, mining, pipeline, infrastructure and extraction projects aimed at tapping the oil sands’ potential. In July, Yiwu Song, vice-president of Chinese National Petroleum Corp., stunned Alberta’s oil industry by announcing the firm’s shift of its petroleum-extraction interests from Canada to Venezuela. “We realized that oil sands is highly capital intensive,” he said. Firms that are pushing ahead are paying the price, uncertain what the future may bring. “This is a new market and there is a significant learning curve associated with these large projects,” Cann says. a year left before completion. As a result, Wall says the board has reduced by 200,000 bbl the projected 2.8-million bbl of daily oil-sands production by 2015. Even so, with new oil sources much in demand, current market bumps won’t dampen future prospects “to any large extent,” Wall says. “Most of the major players will be involved for some time.”