International Speculator readers are an experienced and well-educated bunch. In that category we place a recently retired engineer from one of Canada’s two leading oil sands companies. We thought his views from the “inside” of the burgeoning oil sands industry would be useful… and they were. So that he could be completely candid, he will remain anonymous.
CR: As we understand it, the labor market is getting tighter for oil sands companies. How important are increasing labor costs to an oil sands company?
X: Labor runs at about 45 percent of production cost, skilled labor is scarce, and wages are rising. So, if you run 10% over on labor, and that impacts almost 50% of your budget, it’s significant.
CR: So, how bad is the labor situation?
X: Labor is already scarce. New projects are enticing experienced people from both Syncrude and Suncor – engineers, middle management and process operators in particular. There’s also a demographic problem, with a lot of experienced people approaching retirement age. The systems in use are very complex, and new technologies are continually being introduced. This increases the potential for operator error, with new recruits replacing experienced workers. We had a similar labor shortage in the early ‘80s and ended up hiring people who could, if pressed, do simple multiplication, but not much more. It was costly and took several years to rectify. However, the current situation is being somewhat mitigated by recruitment of new college graduates and increasing the focus on training programs.
CR: Does the labor situation create a risk to infrastructure?
X: Well, it does worry me that just one inexperienced or deliberately destructive person could cause significant damage to an oil sands plant. However, the companies do put their new operators through extensive training and have good measures in place to prevent major accidents. The companies also have a fairly intensive loss management investigation process; if there’s an injury or damage incident, they attempt to determine the root cause and institute measures to prevent reoccurrence. The main risk is that there is only one refinery in the area. In my mind, this does not preclude investing in oil sands companies – I have – but use good judgment in sizing your position to no more than, say, 3-5 percent.
CR: You’ve also said that increasing maintenance costs were a serious factor.
X: Yes, maintenance costs are increasing. The tar sands are a combination of oil, sand and clay, which make them, in effect, a large grindstone. We experience extremely rapid wear on truck boxes, bearings, pump liners, tailings pipes, crusher liners, etc., and the prices of steel, copper, and such are rising. So, replacement costs are all going higher, too. There are a lot of exotic wear-resistant materials in use, but they cost more than a congressman.
CR: To give the readers a sense of just how wearing the oil sands are to equipment, compare how much of a beating an oil sands company’s truck might take compared to those used in a traditional mining operation?
X: If you took a truck from Kennecott’s Utah copper mine and moved it up north, it would disappear before your eyes. To give you an idea of how abrasive oil sands are, I’ll give you an example from the old times. Years back, we had these big draglines. Those are like huge cranes with 90 cubic yard buckets, pulled through the sand with cables. The buckets had teeth on them, and the teeth had replaceable knock-out tips. The replacement tips weighed 500 pounds. When I first started, those tips were lasting just over 24 hours. With the weight and all, the sand just ate the metal like you wouldn’t believe. We’ve made a lot of improvements since then, particularly in the wear-resistant white iron alloys, but these are expensive advancements. Very expensive.
CR: Speaking of expensive, natural gas is a significant production cost.
X: Natural gas accounts for about $5.00 per barrel in operating costs. That alone makes the C$5.50/barrel production cost goal that Suncor has set for itself (as reported in the IS special October edition on Oil & Energy) highly improbable.
CR: What do you think of the new technology OPTI Canada is developing – do you think that will help them lower energy costs?
X: OPTI Canada’s OrCrude process converts some of their final product to an energy source to replace most of the natural gas they would otherwise be using. This won’t make it “free”, as there will be some cost to produce this alternate source of energy, but it should be substantially below the cost of natural gas. It should also eliminate their dependence on natural gas supply and price vagaries. I don’t know the extent of the cost savings, but it could be substantial. I looked at OPTI Canada’s web site last night, and I saw that they have some optimistic predictions on how their project will go: on time, on budget, etc. It would not surprise me to see that change. There have been three major oil sands projects that have reported significant budget overages.
CR: Do you have more general opinions on the steam-assisted approach as being advocated by OPTI Canada, and its ultimate likelihood of success?
X: By using SAGD (Steam Assisted Gravity Drainage systems), companies such as OPTI Canada may be able to reduce operating costs substantially, compared to the methods being used Syncrude and Suncor, whose heir deposits are at surface and best recovered by large tonnage open-pit mining. The SAGD process would appear to require a relatively small workforce to operate and relatively moderate maintenance costs. Because they would be heating the sands underground, then pumping up the resulting liquid, I would expect that there would not be much in the way of solids (clay and sand) being pumped, reducing the need for a huge tailings facility. This would reduce the need for about 1500 people at a comparable production level in a traditional oil sands project. One way to get a feel for just how successful SAGD might become would be to look at what Imperial does at their project expansion in Cold Lake. They are planning on using a system called “cyclic steam stimulation”, and are studying the feasibility of using SAGD instead. If they go with SAGD, you’ll know that people with a lot of money at stake think it’s good, and if they don’t, that’ll raise a red flag.
CR: Anything else?
X: Just that these things I’m advising caution on are no reason not to invest in oil sands companies. The Alberta oil sands have decades of reserves, and costs per barrel are in the US$12 range, so even with a drop in the price of oil to, say, $40/barrel, they are still cash machines. Prices above that go right to the bottom line.
CR: Thank you for sharing your insight with us.
X: You’re welcome.