If nothing else, this unwelcome downturn is breaking down the oilsands sector’s complacency. The protracted low price environment is forcing companies to flex their creative muscles and reinvent themselves.
“Complacency in the long run will result in failure,” says Allan To, president of the Supply Chain Management Association of Alberta and senior commercial manager, category management, at Suncor Energy.
“This sector has experienced significant changes, and it has shown itself to be extremely resilient historically,” he says. “Looking out there to our supply community and the owner-producers, I see a lot of energy around people finding ways to survive, finding ways to reinvent themselves and finding ways to be successful. That’s what achieves greatness.”
Resilient people—or industries—see change as an opportunity and capitalize on it. Case in point: the movement to reimagine SAGD design as a standardized commodity, which greatly reduces the need for detailed engineering, thus boosting capital efficiency. This is particularly important for the ongoing investment needed to sustain operations, including the drilling and construction of new SAGD well pads.
The Future of the Canadian Oil Sands, a report produced by the Oxford Institute for Energy Studies, points out companies are increasingly treating SAGD like a manufacturing operation. Beyond modularizing plant components, producers are also standardizing wells and pads to improve cost efficiencies. Yet full standardization remains beyond the grasp of industry—for now, at least.
“Processes that are dependent on the local geology, such as optimizing steam to oil ratios in SAGD, are more difficult to replicate at scale, and true ‘manufacturing’ SAGD processes remain aspirational at this point,” the report reads. “Survival is a compelling motivator, however, and producers do realize that they need to rapidly improve operating practices or remain uncompetitive for investment.”
As SAGD moves from infancy to maturity, companies are embracing the principles of mass production to achieve economies of scale. As with cars or computers, the technology was engineered very specifically every time it was applied in the early days. “Now that we’ve run that many, many years over, some of that engineering has already been done. Let’s take some of that engineering away and standardize some of that design. That’s where things are going right now,” To says.
“The rate of adoption is a function of the imperative to change,” he continues. “Given that we are in an extremely low oil [price] environment and what we’re all seeing is lower and not only longer, but much longer, the imperative to change is that much greater. Those companies that can adapt in these tough environments are in the best position to ride it out and be successful.”
Standards and practices
Cost now trumps the desire of clients to impose their own standards and specifications on each project. The term “replication” is also used by some to describe this approach, but it’s misleading, says Rob McNeill, principal of Drifter Projects, a project management consultant that shepherds SAGD projects for mid-sized producers.
“Replication implies you rubber stamp something; you’re producing the same thing over and over, like a manufacturing process that would produce cars,” McNeill says. “It can never be like that when you’re dealing with resource extraction, because each resource is different and it requires you to think through what you’re trying to accomplish."
But he believes a high degree of standardization is still possible. “In well pairs and how the pads are constructed, that’s a very easy place to standardize. So then you’re using a similar design every time out and you save money,” he says. Other parts of the SAGD process call for continually incorporating lessons learned to improve efficiency and drive down capital costs.
Chad Hadler, director of technical services for modularized well pad provider Integrated Thermal Solutions, says deep industry experience has to inform a standardized product. He notes that employees at his company have seen over eight generations of well pads, and they have learned to integrate engineering, fabrication and field construction into a turnkey product. Each model is designed to fit a large spectrum of situations.
“We’re selling a solution and a product; we’re not selling a service,” he says. “They’re two different business models—the detailed engineering and separate teams managing installation, and separate teams managing the fabrication contracts. All of those jobs are typically reimbursable cost-plus jobs, which in my opinion was [the industry’s] big downfall and how Alberta’s cost per barrel for installation went up so high.”
In the perennial tug of war between lump sum and cost-plus contracting models, pruning out detailed engineering could give the former an advantage.
“Logistics will be streamlined. There’ll be fewer billable hours, but a more efficient product and outcome, for sure,” McNeill says. “In the hands of a producer that understands its resource and has carefully thought through its facility requirements, a highly standardized well pad design should require minimal engineering effort and a lot less time to execute.”
Simon Nottingham, vice-president of operations and general manager of Fluor Canada, says the engineering percentage of a project budget would typically range in the mid-teens, depending on the development. Reducing engineering to just adding updates to a standard design could drive that figure down to three or four per cent, he believes.
That might not be healthy for a pure engineering company, but for an engineering, procurement and construction (EPC) company like Fluor that has access to the global reach of its multinational parent, engineers will simply be redeployed to the next growth area, he says.
In the bigger industry picture, McNeill anticipates engineering firms will replicate the cycle of acquisitions, mergers and divestments that has long characterized Alberta’s oil industry.
“We’ve gone through a cycle here where the big engineering firms swallowed up a bunch of the medium sized engineering firms, and unfortunately, that doesn’t improve efficiency,” McNeill says.
In some cases, an engineering firm may actually dwarf the resource company that hires it. For a relatively nimble and decisive company with a few hundred employees, it can be difficult turning over responsibility for the design, construction and commissioning of a project to an organization five or six times its size. The inherent bureaucracy of the larger company just doesn’t match well with the smaller one. “You really lose a lot of efficiency trying to make the cultures mesh,” he says.
Chester Nagy, who founded Plains Fabrication & Supply in 1988, has dealt with that shadowing and the bureaucratic hurdles from his side of the blueprints, too. Nagy is active in PAAD (Productivity Alignment and Delivery), the partnership of owners, EPCs and suppliers collaborating to improve industry productivity, and he’s on the Alberta board of directors of Canadian Manufacturers and Exporters.
One bad apple eroded trust broadly within the industry about 15 years ago, and a handshake was no longer enough to seal a deal, Nagy says. That opened the door for EPCs to add layers of bureaucracy in the execution of a project.
The industry got pushed into adding inspectors and paperwork, which he says is frustrating because fabricators used to be able to do the same job to the same standard of quality 20–25 per cent faster. The extra inspections and X-rays slow everything down.
“You’ll have five people looking at a dial that’s not moving for an hour,” Nagy says, “but if I don’t do [every extra inspection] one single time, I lose my licence. They created a redundancy of mistrust. It’s ingrained now; it’s hard to undo.”
Like this? Read more in the latest issue of Oilsands Review. Interested in well pad standardization? Join us June 21 for a Speaker Series breakfast featuring keynote speaker Mark Conacher, director of well pad development at Suncor Energy.