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Total's Joslyn site, seen from the air (Nathan VanderKlippe/The Globe and Mail)
Total's Joslyn site, seen from the air (Nathan VanderKlippe/The Globe and Mail)

A reality check for the promise of the oil sands Add to ...

It took five years of whittling away, asking workers for ideas on how to improve efficiency, and even paying them back for some of the gains their ideas produced. They discovered that oily sand was falling off the edge of conveyors, causing them to “trip,” or shut off. So they built skirting. They changed conveyor gear ratios to speed them up. They tinkered with the chemical processes in their coker, which uses high heat to process heavy oil into a lighter product.

The result: Annual production rose from 54 million barrels in 1989 to 74 million in 1995. Major maintenance work at the cokers moved from once every 12 months to once every 24 to 30. And operating costs fell to $13.69 a barrel, using “essentially the same hardware.”

That experience, Mr. Carter said, is directly applicable to today’s oil sands, where the most expensive new projects require crude prices of $90 (U.S.) to bring home a reasonable return. Even some of the companies with what are historically the cheapest projects are facing mounting costs: Cenovus Energy Inc. has said it needs $35 a barrel on its current plants. Projects in years to come will need $65.

The higher the needed crude price, the more vulnerable the oil sands are – which is why Mr. Carter says it is increasingly imperative for companies to focus on pruning existing operations, rather than merely building new ones.

“We have to really refocus here and make sure we have our house in order in terms of our operating costs and our capital costs on major projects, otherwise we’re going to slow down the growth opportunity that’s available to us in the oil sands,” he said.

He isn’t alone. AIMCo’s Mr. de Bever points to the continued inefficiencies in producing oil sands crude, where the average in situ operation, which uses underground steam injections rather than an open-pit mine to produce bitumen, burns a barrel’s worth of energy for every five barrels produced. Mines are just a bit more than twice as efficient. But bitumen still requires substantial energy to transform into a transportation fuel – further widening the gap with the sellers of conventional crude, who use a barrel of energy to produce upwards of 100 barrels of oil.

And as companies take a hard look at their new projects, Mr. de Bever said the equipment they’re seeking to employ must be part of the conversation. After all, what gets built today will operate for 25 – and perhaps 40 – years.

“The technology needs a quantum leap in efficiency to really be attractive in the very, very long run,” he said.

The industry itself has acknowledged change is needed. In a recent speech, Suncor’s Mr. Williams suggested that technology was critical to his company “improving efficiencies.” The “leaning,” or cost-trimming, business of consultants like PricewaterhouseCoopers has doubled or tripled in recent years, as companies hire efficiency experts from other industries, including pharmaceuticals and automotive, to help in the oil sands.

Total spokeswoman Elizabeth Cordeau-Chatelain said the current “business review” of projects like Joslyn includes a look at “engineering decisions, you look at efficiencies, you look at cost, you look at all those things.”

What happens to Joslyn appears to be an open question. Ms. Cordeau-Chatelain said the company has not updated its 2013 time line for a decision on whether to build the mine. For now, it’s pressing ahead with a winter season that will involve clearing and grubbing more square kilometres of northern Alberta.

BMO analyst Randy Ollenberger suggests that among oil sands projects, Joslyn “is probably one of those ones that it is on the bubble” as Suncor tries to spread out its coming work to avoid inflation.

But, he notes, the current focus on costs comes amid a broader demand from investors that “we’d rather have the money than continue to see you push forward with all these projects.” In response, dividends and share buybacks have risen across the oil patch. But if the economy starts to pick up again, that’s liable to shift quickly. It’s entirely possible, Mr. Ollenberger said, that two years from now the economy may look better and markets may “be prepared to pay a premium for growth rather than a premium for yield” – a circumstance that could dramatically shift the calculus in the oil sands.

For now, though, Total says, those working behind closed doors are contemplating a series of difficult decisions.

“When you have three projects you’re looking at together, you have to figure out how to sort them out and what are the priorities,” Ms. Cordeau-Chatelain said. That means, she said, figuring out “what the best practices are to make them be the most viable projects going forward.”

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