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‘We’re in a decade now of really getting our capital much more efficient,’ Shell Canada’s Lorraine Mitchelmore says of cost-cutting efforts in the oil sands.Todd Korol/The Globe and Mail

One of the largest companies in the oil sands is settling in for years of weeding out costs, as the low price of heavy Canadian crude forces a raft of changes on an industry seeking to remain competitive as a destination for global spending.

At Royal Dutch Shell PLC, that means chasing seemingly minor details, such as switching out drivers at break times more rapidly amid an all-out push to keep its house-sized oil sands trucks in motion. It's an effort whose expected duration shows how seriously the oil patch is treating the financial corner it is now in.

After years of spiralling costs, labour inefficiency and, now, steep oil discounting that has come from pipelines that are effectively full, much of the oil sands is taking a step back. Suncor Energy Inc. has abandoned a target of reaching a million barrels per day by 2020, and recently took a $1.5-billion writedown on a partially-built oil sands plant that now appears unlikely to be built. Capital spending in 2013 has been trimmed at a series of companies.

In an interview, Lorraine Mitchelmore, the head of Shell's Canadian operations, says the Anglo-Dutch company is similarly saying no to growth for its own sake, mirroring a period in the early 1990s when companies like Syncrude Canada Ltd. arduously sought to wring costs out of operations that had become too expensive.

"We're in a decade now of really getting our capital much more efficient," Ms. Mitchelmore said.

It's a question, she said, of fighting to keep interest in Alberta within an industry that has plenty of other places to put its money. "We have resources that we want to unlock. But we need to make sure it's competitive within the global [Royal Dutch Shell] portfolio."

Perfect comparisons are tough to make, but the Shell expansion of its Athabasca Oil Sands Project, work that added 100,000 barrels a day of capacity, is a strong contender for the title of most expensive oil sands project ever. The expansion saw a staggering escalation in costs, from an estimate of under $3.5-billion (U.S.) in early 2005 to $14.3-billion in 2010.

One of Shell's partners, Marathon Oil Corp., has publicly mused about selling out of the oil sands, and the expansion's sticker shock has muted expectations. In early 2011, Shell said it planned to add 85,000 barrels per day of production in the following seven to 10 years. Ms. Mitchelmore now says the company hopes to achieve 80,000 more "within this decade."

Over the past 15 years, the cost to produce a barrel from oil sands mines has nearly tripled, at a time when Canada-wide inflation rose 37 per cent. "The costs have gone up too fast in the last decade. And we need to bring that back in check," Ms. Mitchelmore said.

For Shell, attacking that problem means, in part, making better use of equipment it has already built.

In the U.S. last year, refineries averaged 87-per-cent utilization. Last year, Shell's Scotford upgrader, which "pre-refines" heavy oil sands crude into a lighter oil, produced 82 per cent of its design capacity. That was slightly better than Suncor's 79-per-cent average, but both are considered weak numbers. And companies have struggled to improve. At Scotford, for example, 2012 daily output was just 0.5-per-cent better than the year before.

The oil sands industry faces "reliability fear," said Michael Dunn, an analyst with FirstEnergy Capital. Companies built costly plants on the expectation that they would produce more oil than they have.

"They thought they would improve reliability and they haven't," he said. "And that turns into higher unit costs."

Ms. Mitchelmore declined to provide any hard numbers on the targets Shell is chasing. But a spokesman said the company has seen improvements from small changes.

For example, the company built a staging area to quickly swap out drivers on breaks, rather than have thousands of dollars sit stagnant in trucks. It has improved truck productivity by almost 20 per cent at one of its mines. Similarly, organizational changes in its truck maintenance operations – some as simple as keeping it orderly – have dropped maintenance times from five weeks to two weeks per truck.

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