NASCAR racing may have little in common with the business of extracting oil but the motorsport has offered some valuable lessons to energy companies exploring Canada's vast oil sands.
Ensuring a car's pit stop to refuel is as seamless and fast as possible is critical in a race. Similarly, efficient use of time is just as important for the companies mining Canada's bitumen-like resource where house-sized trucks deliver ore to processing units. The key is to keep the trucks, which hold thousands of dollars in ore, moving. But drivers need breaks, so by employing a NASCAR-style pit stop where they can be swapped into the vehicle on a rolling basis has helped companies cut time and boost productivity.
It might seem a minor change for an industry that has invested billions of dollars to mine Canada's resources but it provides a snapshot of the sector's financial predicament. After years of spiralling costs – memories still linger of the 2006-08 boom when projects were bedevilled by labour shortages and sharp cost increases – the industry is taking a step back. Efficiency has become critical at a time when oil sands are facing competition for investment from other sources such as shale oil and gas. At the same time, the low price of heavy Canadian crude – due in part to pipeline bottlenecks – has added further pressure.
"Three key trends – rising shale prospects stateside, the shift in consumption growth to Asia, and a growing list of oil-producing countries open to foreign participation – all pose challenges if Canada is to maximise the value of its resource base," said economists from CIBC World Markets.
"We have been in a growth period for 10 years," said Lorraine Mitchelmore, president at Shell Canada and country chair. "This decade we will be focused on operational excellence. We are taking a step back to make sure we are really efficient."
Shell is among several majors that has backed Canada's oil sands. Heavy oil such as bitumen – which is heavy and dense and so does not flow easily and is hard to extract – represents slightly more than 4 per cent of Shell's portfolio in terms of production. Key, said Ms Mitchelmore, is to make sure "heavy oil is competitive in itself and with other sources [of energy such as natural gas]".
Located across an area the size of Florida, Canada's oil sands have put the country on the map as an energy superpower, drawing in tens of billions of dollars in investment and positioning it as an important long-term supplier to the U.S. as well as Asian economies despite fierce environmental opposition. Described as tar sands by its critics, the bitumen-rich resource is a highly viscous form of petroleum that is trapped in sand and clay. However, the extra amounts of steam injection and refining necessary for their recovery results in higher greenhouse gas emissions.
Aside from the environmental opposition, oil sands are facing intense competition from the U.S. shale oil and gas boom which is forcing companies to keep tight control on costs.
A recent high-profile casualty was the Voyageur Upgrader project in Northern Alberta. Suncor Energy took a $1.5-billion writedown on the project. Its French partner, Total, said in March it would sell its 49 per cent interest to Suncor. The 200,000 barrels-a-day facility was designed to "upgrade" bitumen from several oil sands developments into refinery-ready light crude. However, it would have had to compete with a surge of crude oil coming from North Dakota in the U.S. with similar characteristics to the upgraded bitumen.
The companies are also working together on two other projects, Joslyn in Canada's Athabasca Oil Sands region and the Fort Hills open-pit oil sand mining project in Alberta.
"In terms of Voyager, it was too late in the project and the market had changed too much to sustain it," said André Goffart, managing director of Total Exploration and Production in Canada.
"The mines are making good progress," he added. "We are preparing to sanction Fort Hills in the second half of this year. We have worked on optimising the production per U.S. dollar invested."
Mark Oberstoetter, North American upstream analyst at Wood Mackenzie, the consultancy, said: "Since the cost blowout of 2008-09, there has been a focus on cost prudence, especially in the big mine projects. Cost inflation remains a concern."
One of the big challenges for producers is the discount at which Western Canadian heavy oil, which represents about 45 per cent of total crude production, trades at compared with the benchmark West Texas Intermediate. It sold at a discount of as much as $43 (U.S.) a barrel during last winter compared with a historical average of $17 a barrel, according to CIBC analysis, due to bottlenecks on both the transportation and refining side. The spread has since narrowed due to refinery restarts and a heavier reliance on flexible but costlier-to-operate "rail pipelines".
Getting the oil to market is critical and the more options the better – south to the U.S. Gulf Coast through the disputed Keystone XL project, west to the British Columbia coast or even east to markets in Ontario and Quebec.
Most of the focus is on the Keystone pipeline, designed to bring heavy oil in the form of diluted bitumen from Canada to refineries on the U.S. Gulf Coast; earlier last week the House of Representatives approved a bill as expected declaring a presidential permit was not needed to approve the Canada-to-Nebraska leg of the pipeline.
Producers can still move their bitumen to the coast by rail but the focus is on whether Keystone will get the go-ahead. If it does not happen, it "might result in delays at those projects that have not been sanctioned yet such as Fort Hills or Joslyn," said Skip York, vice-president of Americas downstream consulting at Wood Mackenzie.
"The logistics are critical in the development of the oil sands. If Keystone is delayed this year, I believe the industry will not be able to keep up with the current pace of development," Total's Mr Goffart said.
Most stakeholders believe the industry will find a way to access tidal waters for its product. And with extraction technologies constantly evolving, no one is predicting that companies will abandon oil sands.
Joe Oliver, Canada's Minister for Natural Resources, said: "This year . . . will be pivotal". "At stake is Canadian prosperity and security. At the extreme, which I can't imagine happening, if we can't build the infrastructure then the resources are stranded."
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