Oilsands leaders blast 'lazy' contractors

Calgary Herald ^ | MARCH 13, 2013 | DAVE COOPER

[thackney]

As oilsands firms struggle to contain costs while producing some of the world's most expensive crude, "fat, lazy and inefficient" suppliers and contractors will have to be replaced, oilsands leaders said Tuesday.

Four officials attending the inaugural Edmonton Network of the Association for Corporate Growth on Tuesday were critical of supply companies they say have not yet grasped the new business reality - the need to "wring the towel" and reduce both capital and production costs.

Don Lowry, chairman of Canadian Oil Sands and the former CEO of Epcor, related the tale of obtaining a quote for a bathroom at a wastewater plant Epcor was building near Fort McMurray for an oilsands company.

"We were quoted $175,000 for it. That is the kind of example we see, sort of like the $2,000 hammer for the U.S. military," he said.

"In this case we simply paid $10,000 for an RV that had both a bathroom and a kitchen and solved the problem.

"I think they are so fat, lazy and inefficient up there that a room full of hungry, smart investors could find opportunities to take away business from those inefficient players."

Joe Bradford, vice-president of joint ventures with CNOOC, the Chinese-based oil giant that recently bought Nexen Energy and their Long Lake oilsands plant, said while the purchase was a vote of confidence in Canada, operations here must compete with others in CNOOC's worldwide portfolio for future funding.

"It is a bit of a mystery to our people in headquarters, and to us here, as to why there has been such massive cost escalation in Fort McMurray with projects that have run hundreds of per cent over their initial budgets," he said.

"People have said it is because Fort McMurray is remote, but it is not remote to CNOOC. Northern Afghanistan is remote.

"There is stable government here and you don't need army units guarding people. It is also not Nigeria," he added.

"Those kinds of prices (in Fort McMurray) are not justifiable and the situation has to change or the capital is going to start going elsewhere."

John Zahary, CEO of Sunshine Oil Sands, a firm with a majority of foreign ownership and huge oilsands leases, said external investors "find it mind-boggling and bizarre" that Canada seems to have such a problem building pipelines, and that companies are so challenged when it comes to controlling costs.

"When times are good our costs (for construction) doubled, and we need to fix that. We have priced ourselves out of the market before by having costs go up (think 2007 and 2008)," he said.

Sunshine's first project - a thermal steam-assisted, gravity drainage project 100 kilometres west of Fort McMurray - will be using modules largely built in the U.S. and assembled on site.

Mark Smith, CEO of Sur-mont Energy - a small, private firm with one project - said many producers are looking at ways to lower capital costs and speed up construction. Using pre-designed modules, construction times can be reduced by about six months.

"That certainty of cost, and being able to shave off six months to build a facility, is critical for many firms."

Lowry said one solution would be for shared facilities in the oilsands region.

"Right now everything is done individually, but other areas (of the world) which have gone through a commodity price cycle have gone to shared services," he said.

[shotgun]

There could be a lot of other variables involved here but at the end of the day $175,000 is way off base. I doubt if Saddam’s gold plated bathrooms cost that much.

One thing I know for sure is that during the later stages of construction as the project winds down and you approach a contractor with a owner requested change order is to expect an unbelievably and unrealistic cost.

Perhaps the contractor had been burnt during constuction or on previous change orders, the owner is late on payments or disputing other submitted costs, or the fact that the contractor just wanted to finish and move on to the next project because this area is remote and cold and there are supply chain problems. None of this justifies the $175,000 but these thigs play in to that.

[thackney]

In my couple decades of experience with major oil companies, I suspect that “simple” bathroom was required to meet all specifications applied to an processing unit.

I’ve had similar experiences where a major oil company request bids for small warehouse with a couple offices. But they will not waive their industrial specifications and use normal commercial construction. And then they are shocked with the price. Been down that road several times.

[lgjhn23]

I think both of you guys are probably right. That cost for the bathroom is high and he may be exaggerating...they’ve been known to do that, but without knowing what they spec’d out, it leaves me wondering.
Anywhere there is an oil boom, the cost of things are going to become inflated. Another thing is that these oil & gas companies all want this stuff built ASAP and work those contractors 7/12’s or more for weeks on end (we call it the “greed factor”)...and then turn around and wonder why they’re way over budget and productivity is in the crapper. When they point a finger at the contractor, the rest of those fingers are pointing right back at them. Poor, little or absolutely no engineering/design, deliberate under-estimated projects (both time & money), unrealistic working hours, harsh living and working conditions, etc. I suspect there is plenty of blame to go around.