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Total's Joslyn site, seen from the airNathan VanderKlippe

To build an oil sands mine, you start by tearing away the forest. You rip down trees, peel back the top layers of earth, and then cleave ground into carefully engineered trenches to divert rainfall and snow melt.

It's a complex effort, compounded by the enormous scale and cost. Here at the Joslyn project 90 minutes northwest of Fort McMurray, French giant Total SA is clearing the way for a new $8-billion mine that is a major backbone of the next chapter in the oil sands.

It is a future that is already being stamped onto the landscape with heavy machinery by dozens of companies across hundreds of kilometres of boreal forest. It promises a coming decade that will see the oil sands double in output, elevating Canada to greater prominence on the global energy stage.

But the oil sands' next chapter is suddenly in the midst of a major rewrite. Joslyn itself has become a symbol of both the eager ambition the world's oil companies have brought to northeastern Alberta, and the question marks surrounding how those ambitions will be realized. The economics of Joslyn, along with two other projects that are pillars of oil sands growth, have been placed under review by partner Suncor Energy Inc. The company has abandoned lofty growth targets in favour of a rigid focus on costs, and has even said it could abandon some projects.

That scrutiny comes amid a broad moment of reckoning for an industry that has spent most of a decade in frenzied construction. Now, amid sagging share prices and profits held back by price shocks, the oil sands industry is being forced to contemplate how profitably it can build new projects. No one expects growth to stop. It may, however, slow as question marks rise over a sweep of spending plans formulated by companies now concerned that weaker global demand and surging U.S. production will soften future oil prices.

The oil sands have been in this place before. In 1989, Syncrude Canada Ltd. was faced with such high costs that its profits largely vanished. Syncrude spent half a decade arduously wringing out better performance from its assets – a time in which its new project growth largely ground to a halt.

Some now believe the oil sands is due for another dramatic check. In a decade and a half, the cost to produce a barrel from an oil sands mine has risen from under $14 to, in some cases, over $40 – a tripling in costs over a period when Canada-wide inflation rose just 37 per cent. Meanwhile, capital costs for oil sands mines jumped more than fourfold in the past decade. And selling prices for Canadian producers are under pressure due to transportation bottlenecks. Raymond James calculated earlier this year that heavy oil producers were receiving just $45 (U.S.) a barrel, though recent prices have been stronger.

"Industry has to have a bit of a recalibration again," said Jim Carter, who oversaw the cost-cutting at Syncrude, where he was president from 1997 to 2007. That means "focusing on those operating costs, and making it more efficient as opposed to adding more capacity."

Mr. Carter is not the only one suggesting a pause might be needed in the oil sands, a time to pare back the big numbers industry has long promoted – how many barrels a day they would produce in five and 10 years time, and how many billions they would spend to get there – and focus instead on how much inefficiency it can shed.

In part, that's because larger factors, including concerns about oil prices, have had a real impact on the viability of future oil sands projects. "What may have looked like a fairly low-risk proposition may all of a sudden be the subject of a lot more discussion," said Leo de Bever, chief executive officer at Alberta Investment Management Corp., or AIMCo, which manages some $70-billion in provincial funds.

Plus, there is the concern that some of the best oil sands lands have been developed. For Gwyn Morgan, the former head of Encana Corp., poorer resources combined with tight labour markets spell trouble: "Because of some reduction in average quality combined with escalating cost, new projects must be justified by a higher price forecast than most previous ones," he said.

None of those men want to be seen as criticizing the oil sands, an industry that they both expect to continue growing and sustaining Alberta's economy. But there is, as Mr. de Bever puts it, "reason for a rethink" today.

So the oil sands sit at an important juncture. The industrial complex that surrounds Fort McMurray now pumps over two million barrels a day, but is on the cusp of a tremendous expansion. According to numbers gathered by the Pembina Institute, an Alberta-based environmental consultancy and advocacy group, another million barrels a day are under construction, plans for a further two million barrels a day have been granted regulatory blessing and companies have applied for approval on an additional two million barrels a day. Across the oil sands, more than five million barrels a day is under way in some form, equivalent to nearly 6 per cent of total current global consumption. For Canada, those potential barrels represent tens of billions of dollars in construction spending, and even more in long-term revenues and royalties.

In other words, the stakes for getting the next chapter right could hardly be higher. But that may require building less, and doing it better.

"We're the high-cost barrel around the world," Mr. Carter said. "And if we want to stay competitive, we have to be constantly vigilant on our operating costs, and also on the cost of building facilities as well."


Even in its early stages, the scale of a single oil sands project is almost cartoonishly exaggerated. Take Joslyn, whose plans call for a 100,000-barrel-a-day mine that will constitute Total's first major foray into building and operating an oil sands project. The contracts for early works alone – the process of readying the site for major construction – occupy 30 three-inch binders. The effort required to conduct that early work has consumed just shy of a half million person-hours, including the logging of 1,600 hectares of forest. Once the trees are down, heavy equipment comes in to "clear and grub," knocking down remaining shrubs and trees, and transforming a green area into a blank canvas of earth.

At one spot on the Joslyn site, it took three months to conduct that process over an area 3.5-by-2.5 kilometres in size. Workers equipped with bulldozers and large dump trucks are clearing and grubbing a hectare every 1.7 hours. In some areas, they then strip away the top layers of earth, sorting into three different types of piles, according to its composition. The material is stored in windrows up to five metres tall and 500 metres long, where it will remain until it is needed to rebuild the landscape years from now. Joslyn has regulatory approval to disturb up to 5,000 hectares at a time. That's an area 12 times Vancouver's Stanley park, although the company is nowhere near that today.

Those on site speak casually about the work ahead: a long stretch of giant electrical transmission towers will have to be picked up and placed elsewhere. A paved road passes over what will one day be the mining pit. It will have to move, too, and 18 kilometres of new highway built. At another area of cleared land – this one three by one kilometres in size – plans call for a camp to be set up. It will have 4,000 rooms.

"It's a megaproject, for sure," said Rolfe Timm, the site manager for Joslyn, a position that places him in charge of the extraordinary number of moving parts needed to build the mine. The oil sands, he said, "were on the map before, and we're really getting on the map now."

Mr. Timm spent much of his career building coal mines. But, he said, "the complexity is much higher in the oil sands."

That complexity is one of the reasons for investor unease about not just Joslyn, but the array of projects that stretch out across the horizon from it, over a huge area of northeastern Alberta. They are enormously difficult to design and build. They are enormously costly. And that has not gone unnoticed, by investors or executives.

So even as Mr. Timm prepares for another winter of work on the site, he knows the preparations away from his field headquarters have grown complicated. In late July, Steve Williams, CEO of Suncor, announced that he was applying "rigorous scrutiny" to the company's coming projects. That includes those projects it has partnered with Total to build: Joslyn, another mine called Fort Hills, and an oil sands processing "upgrader" called Voyageur.

It's a major shift for Suncor, which has abandoned growth targets in favour of pursuing profitable growth – even if it means cutting loose some of its plans. Mr. Williams was explicit: "In principle, there is the opportunity to not progress those projects."

For Mr. Timm, that means things are in a state of flux. People in what he calls "the project world" are "taking a step back and they're having a hard look at their projects, and they're making sure the cost side of the business is optimized and they get the return for the investments," he said. It's what "any good business people do."


Today, they call it "sweating the assets." Three decades ago, it was "getting more bacon out of the pig."

Either way, it is a gruelling process, and not always done by choice. That was the case at Syncrude in 1989, a year when it cost $17.17 to make a barrel of crude that sold for $21.40. Layer on a 50 per cent royalty, and there was barely anything left to pay back capital. Something had to give. Jim Carter was in charge of figuring out what.

"We had to get the costs down if we were going to make it attractive for further investment," he said.

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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