A budget overrun on the $15-billion Fort Hills project could prove disastrous for the entire oilsands mining sector
In the oilsands industry, mistakes are measured in the billions of dollars.
When Imperial Oil Ltd.’s Kearl oilsands mine began operations in 2013, the project cost was pegged at $12.9 billion—well above the original estimate of $7.9 billion. Yet it was hard not to greet the news of this $5-billion bump with a shrug. So what if another oilsands megaproject has blown past its original budget by a figure just shy of the gross domestic product of Prince Edward Island? Don’t they all?
Photo: Suncor Energy Inc.
Indeed, overruns are so endemic to the industry that they’re less a trend than a fact—just the price of doing business in the overheated Alberta economy. But can the market continue to tolerate such high costs? Earlier this year, the Canadian Energy Research Institute estimated that a greenfield mining project would require a West Texas Intermediate (WTI) oil price of $99.49 per barrel to earn a 12.5 per cent return on investment. The price was $97.63 as this issue went to press.
This is the reality that must be dealt with by Mark Becker, vice-president of Suncor Energy Inc.'s $15-billion Fort Hills mine project.
“Some of the recent projects have had large cost and schedule blow outs and demonstrated how to [build a mine] non-economically, but we’ve got this last chance to demonstrate that it can be done,” he said at the Innovation in Construction Forum in Edmonton this past June. “If we’re not able to do it on Fort Hills, I don’t think the financial markets—or anyone else—is going to believe it can be done.”
Of all the undeveloped oilsands mines out there, Fort Hills may have the strongest resource. The project can boast a high ore grade of 11.4 and 3.3 billion barrels of recoverable bitumen. But Suncor and its partners Total E&P Canada Ltd. and Teck Resources Limited are assuming the project will need oil prices of $95 per barrel WTI to turn a profit. Every penny will need to be watched carefully if the 180,000-barrel-per-day mine is to meet its late 2017 opening target still under budget.
To avoid cost inflation, the company will take a staggered approach to construction. The primary extraction area will be completed a year ahead of the secondary extraction area to ensure better coordination of construction and engineering resources. Much of that work will also be split across regions. For example, SK E&C Co. Ltd. in South Korea will be handling the engineering of the $3.8-billion primary extraction facilities. Meanwhile, WorleyParsons Ltd. and Fluor Corporation will take care of the secondary extraction area, but half of the work will be shared with their offices in India and China.
“It’s the first project I’ve been on in the last 10 years that I haven’t been short of engineering resources,” Becker said.
Same old labour issues
Like so many other oilsands megaprojects, labour will ultimately be what makes or breaks Fort Hills. Currently, there are 2,000 people working at its location 90 kilometres north of Fort McMurray. At peak, over 5,000 people will be on site, with many more contributing from locales as varied as the engineering offices of downtown Calgary and the fabrication yards of Seoul, South Korea.
Still, 5,000 workers is no small matter for a labour market under as much pressure as Alberta’s. In May, the Petroleum Human Resources Council (PHRC) compiled a report bringing together its own labour statistics with data from BuildForce Canada, the Construction Owners Association of Alberta and the provincial government. According to BuildForce’s numbers, an estimated 46,260 oilsands construction workers are employed in the province this year.
That workforce is expected to peak at 62,680 in 2019 before subsiding as more projects move from construction to operations. But with other projects on the table—Teck is looking at making a final decision on its own 240,000-barrel-per-day Frontier mine in late 2015 or 2016—the labour market could face added strain in the near future.
“The closer you are to the year, the better your data is, so we don’t know what new projects are coming on further down the road,” says Carla Campbell-Ott, executive director, PHRC. “Those numbers could continue to grow, but we don’t know that.”
Anyone building an oilsands project will also have to compete with already operating projects for many of the same trades. Boilermakers, carpenters, electricians and labourers will likely be some of the workers in highest demand, but many other skills are required across all sectors of the oilsands industry, from projects just breaking ground to functioning facilities doing turnaround work.
“Heavy equipment operators and welders will be needed in other parts of the oil and gas industry as well as other parts of construction, so it becomes part of a much larger picture,” she says. “Fort Hills is one piece of a very large pie.”
To combat discouraging labour forecasts, companies are looking to alternative approaches like modularization, or “the IKEA approach,” as Campbell-Ott calls it. Fort Hills is an example of that idea in action.
Becker says that 50 per cent of some project areas will be built off-site. In many cases, vessels, piping fabrication and structural steel will be sourced from South Korea and the Philippines. Some modules will be shipped as complete units, while others will be sent as sub-assemblies to be put together in larger units at Edmonton’s mod yards.
Overseas sourcing sometimes spurs controversy, and Becker acknowledged those concerns. But he insisted the company is not looking overseas simply to save money on labour. Sticking with Edmonton-area companies and avoiding the headaches of transoceanic transport would likely be cheaper, he said. There was just no way to keep everything local and still meet the project timelines.
“The fact of the matter is we don’t have enough qualified resources. We don’t have enough skilled trades, even with temporary foreign workers. We don’t have enough shop space to support all the projects,” he said. “It costs a lot to ship [from overseas], but we do get the projects done on time.”
That said, the temporary foreign worker (TFW) program could supply up to 30 per cent of the total project workforce—assuming ongoing controversies over the program don’t hinder Suncor’s ability to bring in overseas labour. In recent months, the TFW program has faced criticisms that some companies—in many cases, fast-food restaurants—are abusing it, prompting the federal government to introduce more stringent guidelines. However, Becker is confident that oilsands megaprojects will still have access to TFWs regardless of any rule changes.
Canadians, including First Nations, remain the top choice of labour for the industry, Campbell-Ott says. Yet there are many reasons that the TFW program is needed to round out the workforce on projects like Fort Hills. Some regions of the country may have higher unemployment rates, but that doesn’t mean those workers can simply pack their bags and drive to Fort McMurray. Many may be tied to their home region for personal reasons—caring for an elder parent, perhaps—and can’t move. Plus, the industry ultimately needs skilled workers, not just random bodies, and those skills are not always readily available in the ranks of the unemployed.
Threats to productivity
Where projects like Fort Hills may feel the effects of changes to the TFW program is in the surrounding support industries. It’s hard to argue with a shortage of boilermakers or other skilled trades, but numerous industries requiring lower skill levels have also been taking advantage of the program. If a Fort McMurray hotel leaning on foreign labour finds itself suddenly cut off from the program, then what happens if it starts hiring from people who would staff the work camps? When the labour market gets tight in one area, everyone else feels it, Campbell-Ott says.
“If the camps can’t operate, then a project can’t go forward quite yet or costs escalate. Attraction through the dollar is the first method of operation, and if that’s the case, then projects become too expensive,” she says.
All of which means Suncor is going to need to make sure it gets the most out of the workers it has—a considerable challenge in light of the decade-long decline in productivity that has plagued not only the company but the entire oilsands industry. In June, Becker said productive tool time on Suncor projects was at 37 per cent of a shift, with 11 per cent dedicated to planning, 14 per cent lost to unproductive time and a whopping 38 per cent spent just waiting around—and therein lies the potential for improvement.
Better planning will be crucial to cutting down on that wait time, but the final productivity of the project will ultimately be dictated by the on-site culture. To set the tone, Suncor is favouring agreements with contractors that incentivize productivity instead of the less-efficient reimbursable model that pays by the hour. Instead, the company will try to employ unit-rate deals—paying per tonne of steel, for instance—or other arrangements like an alignment of interest and lump sum that offers bonuses for coming in under budget.
But the contract prices being offered tend to reflect the deterioration of productivity, Becker said. That’s why the company wants to build a “performance culture” in the field to combat the productivity gap. Workers on site will discuss daily goals and what to do when those targets are missed. Incentives will be put in place to reward teams that meet their objectives. If a worker on a 10-hour shift currently only achieves 3.5–4 hours of productive labour, then the company wants to bump that number up to 5–5.5 hours.
“Believe me, improving productivity is well worth in the hundreds of millions of dollars,” he said.
Campbell-Ott agrees that boosting productivity is crucial if the industry is to proceed with major new projects, but she also emphasizes the need to expand the labour force.
“You always want to be more productive, but when you look at all the projects taking place, we need to increase our supply of skilled workers—big emphasis on the skilled,” she says.
Given the fact that many of these construction trades will be needed once the projects are operational, Campbell-Ott wants to see every sector working on building up the labour supply. As an example, she highlights one industry-driven initiative where companies bump up the number of apprentices receiving on-the-job training by partnering two to every journeyman whenever possible. It may sound small, but a new generation of workers must begin somewhere. After all, there’s nothing that can be done to improve the productivity of a worker that doesn’t exist.