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Last month I started talking with people about something
that concerns me, a lot. The economy in Alberta is inextricably
tied to our natural resources, and most of us make our living,
directly or indirectly, from stuff that comes out of, or
off of, the ground.
It sounds very simple, but really it is not. That is why
we have the highest number of geoscientists and engineers
per capita in Canada.
Really, it takes a lot of hard work and educated people
to make it happen. But that’s not all. Without organization,
enterprise, science, financial strength, engineering, manufacturing,
fabrication, construction, infrastructure and many other
things, including good, stable government, the stuff in the
ground would be worthless. Indeed, for many years, it was
worth nothing.
The conventional oil and gas business has been the backbone
of Alberta’s economy for so long that we sometimes
forget that it is a declining resource. What happens next?
In the 1960s Great Canadian Oil Sands took a chance on new
unproven technology, and on Alberta, in the hopes that it
would pay off.
The provincial government of the day supported this venture
with a royalty regime that recognized the risks and made
it possible to develop a resource that at the time had huge
potential. It still does. There are plans to double output
from the oil sands over the next 10 years, and this will
require an investment of some $50 billion.
Multiplier Effect
I have a hard time understanding numbers that big, so think
of it this way. In round numbers, that means jobs for 100,000
people for 10 years. The multiplier effect means that a
million people, directly or indirectly, will make their
living from this work over the next 10 years.
Sounds pretty good, doesn’t it? I like the potential
of Alberta; I have since we came here in 1980.
But it can be kind of scary if you ask yourself the question, “Well,
what happens if something goes wrong?” Remember the
National Energy Program? I do. I expect that everyone who
was in Alberta in the early 1980s remembers the impact of
the NEP.
The concern I have is not that our federal government could
mess things up again, although they could, even with a new
prime minister. My concern is much closer to home.
Mega-projects are proving to be very difficult to do. In
the past few years we have seen stupendous cost and schedule
overruns on some of these projects.
Now let’s be clear, I expect they will still make money,
and lots of it. But companies will make a return on investment
that is less than expected. And the results have been, and
continue to be, unpredictable. That makes for risk. And that’s
bad.
Conventional oil and gas is a risky business, but companies
have learned to manage it. Always there are reserve volumes,
commodity prices, operating costs, tax and royalty regimes,
environmental and other liability concerns, and of course,
the fundamental risk of drilling a hole in the ground and
not knowing if you will find anything of value or not.
Different Risks
The oilsands are different. We know the oilsands are there.
About 177 billion barrels of the stuff. That proven fact
takes away several of the biggest risks.
The tax and royalty regime are stable and predictable, and
that takes another big risk. Operating costs have been well
established, and have steadily come down over the years,
which takes away yet another of the risk items.
What’s left? In fact, one of the biggest risk items
is the capital expenditure required.
And that is where my concern lies.
If you read the headlines you will know that there is some
concern with cost overruns on these oilsands mega-projects.
With overruns in the billions of dollars you can understand
the concern.
As an engineer, I would just love to jump in, grab the problem
by the horns with my own two hands, and wrestle it to the
ground. There are lots of things you could work on. Scope
definition, scope growth, labour availability and productivity,
estimating, contracting strategy, execution strategy, and
project management as a whole, are just a few of the things
that would be on the list.
Personally, I would start with construction management.
Most of the overruns have come in the field with a large
increase in field labour person-hours. You may have seen
the headline: Bad Productivity. That headline is misleading.
Bad productivity is certainly a symptom of the underlying
larger problem, that being construction management.
A far bigger concern is that loss of confidence in the entire
industry centred on the capital cost overruns could result
in all of us losing $50 billion worth of loss, 100,000 jobs
for the next 10 years.
We need to do a better job of managing these projects, that
much is clear.
What is not clear is just exactly what is being done about
it. Different owners are trying, or will be trying, different
contracting strategies. I have heard owners talking about “construction
driven” projects and lump-sum contracting instead of
cost-reimbursable.
Solutions Will Come
I really expect that over the next few years these concerns
will diminish. We always find solutions to the challenges
that are presented, then move on the next thing. So this
will be no different.
APEGGA plans to initiate dialogue with some industry representatives
in the new year, as we are expected to do by providing leadership
in the practice of the professions in Alberta. If you have
any comments or concerns on this please drop me a note. I
look forward to hearing from you.
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