For oil sands companies, the pinch is on.
Or at least, it's starting.
After several years of recovering from the beating they took at the hands of plunging crude prices and collapsed credit, the swarm of energy producers spending billions of dollars on the oil sands are at the cusp of a familiar problem: soaring prices.
It's a problem industry has played down. Questions on conference calls about inflation have typically been met with reassurances that it's not happening, at least, not in any severe form.
But as a series of energy titans in the oil sands report earnings this week – in the queue are Suncor Energy Inc. , Imperial Oil Ltd. and Royal Dutch Shell PLC – they are doing so against a backdrop that increasingly has analysts and investors worried.
A growing number of indicators suggest that rising costs are, or are on the precipice of becoming, a problem – from both the most important inputs, like steel, and in even more critical areas, like labour.
Despite great efforts to tame budget numbers, the price tag of some projects is creeping toward the highs reached in 2008, the height of the last boom. Worker numbers are way up, an indication that a tight labour situation is already developing. The regional municipality of Wood Buffalo, whose borders encompass much of the oil sands, tracks the number of people in "project accommodation," or worker camps. That number rose to 26,284 in 2008, before dropping during the economic collapse.
Last year, it hit 34,490, nearly a third higher than the 2008 peak.
In one of the clearest warnings to date, Raymond James analyst Justin Bouchard published a look into the looming cost issue last week. He concluded that it's the single-greatest risk factor for the oil sands, due in large measure to the difficulties in securing adequate labour. In fact, it's such an important issue that it's possible, he wrote, that just one company, Cenovus Energy Inc. , will meet its published growth targets. Faced with increasing costs that are difficult to manage, smaller companies will be especially "hard pressed to meet growth expectations," he notes.
And he casts doubt on the likely effectiveness of industry tactics to tamp down inflation. Steps announced by Canadian Natural Resources Ltd., which include capping its workforce and splitting its oil sands development into smaller "bite-sized" projects, bear a striking resemblance to a strategy employed by Suncor in 2005, in the run-up to the last boom.
"We highlight these strategies simply to point out that this is a recurring issue without any easy solutions," Mr. Bouchard noted.
In other words, it's tough to make the argument that this time will be different.
It's worth noting, however, that some factors have changed. Companies have substantially boosted their efforts to use "modular components," which are essentially industrial Lego blocks that can be assembled in Edmonton – or even Asia – and snapped together in the field. They're a more efficient way to build.
International engineering firms are also using overseas labour to help bring down costs.
Still, investors are likely to take an increasingly hard look at oil sands in coming quarters, especially as robust crude prices keep the money pouring in to Fort McMurray.
Cost and getting work done on time are "what keeps you up at night with an oil sands project," said Rob Lauzon, managing director for Western Canada of Middlefield Group. "As long as oil is at $85, 90, $105 [(U.S.) a barrel]no one's worried about that side of the equation. It's making sure the projects come on-stream and take advantage of this $100 oil."