Nothing is ever a minor matter in an oil sands mega project

Nothing is ever a minor matter in an oil sands mega project, where even ordering a spare tire is a logistical juggling act.
In five years, Canadian Natural Resources will need about 100 new tires for its giant dump trucks, the latest and most cost-efficient model for hauling bitumen from its mine to the start of the upgrading process. But in dealing with the efficiency issue, the company creates another: coping with the worldwide shortage of tires for the massive machines.

Only a handful of the tires -- each of which costs $ 100,000 and are 3.42 metres high -- are made each month, meaning that Canadian Natural needs to tell manufacturers now about orders it will start using only in 2010. And that means the company must co-ordinate its efforts not only with the tire makers, but with other operators in the oil sands, one more checkmark in the thousands upon thousands of decisions that will end up as a $ 10.8 bn project called Horizon.
"One item influences another, which influences another,so you do have to have very good co-ordination, integration and planning," says Real Doucet, senior vice-president of oil sands.

The entire oil sands sector is riding the wave of rising crude prices, which has drastically improved the economics of the mega projects. Yet that has only intensified the pressure to be ruthless in controlling costs, since the oil sands have to vie for capital investment with energy projects across the globe. At the same time, budget discipline has become all the harder, as steel and other costs have risen in step with crude prices.
Tires are one of the easier entries on Mr Doucet's massive to-do list, but they are an example of the magnitude of the challenge that lies ahead for Canadian Natural's Horizon project, whose first phase alone will use 25 mm hours of labour.

The construction work is just beginning at the Horizon mine, 75 km north of Fort McMurray. At the moment, describing Horizon as an oil sands mine is more of a statement of intent than of reality. Excavationto expose the bitumen deposits has not yet begun, with the site a vast expanse of dirt girded by forest.
The company has built its own road and bridge to connect its project to Fort MacKay to the south, and an airstrip that can accommodate a 125-seat Boeing 737. But the true test of Canadian Natural's strategy starts this spring, as Horizon's construction begins in earnest.

The company has vowed to prove to its peers, and to its investors, that an oil sands mining project can be brought in on budget. The industry was on the verge of writing off mining projects as little better than money pits in the early part of the decade, with oil sands executives publicly calling into question their viability unless capital budgets could be tamed.
Canadian Natural is aiming to do just that. The heart of its strategy is flexibility through rigorous planning. That might seem paradoxical to an outsider, but to Mr Doucet, now working on his fourth mega project, it is a lesson learned from the billions in cost overruns at other companies.

The $ 6.8 bn budget for the first phase of Horizon includes $ 700 mm in contingency reserves, a sum that reflects the company's fallback plans for disasters-in-waiting such as a contractor being unable to find enough skilled hands to fulfil contract obligations or the price of steel soaring further.
"Every bottleneck we see will translate into some contingency," he says.

The contingency plan for labour has two lines of defence. The company's preference -- Mr Doucet dubs it Plan A -- is for each contractor to hire the skilled workers it needs within Alberta.
If that proves untenable, then Plan B kicks into action: Shifting workers around to fill in any gaps with particular contractors.
If there are overall shortages, the Plan C is activated: Launching a recruitment blitz in the Atlantic provinces.
And finally, there is Plan D, overseas recruitment. Each fallback plan has its own cost estimate, and all three of those estimates go toward calculating the overall $ 700 mm contingency.

If all goes well, the detailed plans will be wasted effort. But Mr Doucet says the money and time spent on drawing up those scenarios are a necessary investment, since it would not be possible to simply start from scratch when a problem arose. Without contingency planning, "you're dead in this business," he says.
The company has taken the same methodical approach to one of the other main pressures squeezing the oil sands sector: rising steel prices. Part of its strategy was to simply act early, locking in contracts two years ago on the entirely correct expectation that the cost of steel would increase, partly because of the rally in crude prices spurring the energy sector's exploration activity.

Canadian Natural has discovered that buying in bulk has its limits. Horizon will eat up 130,000 tons of structural steel in its first phase of construction, high enough that the size of its orders has ceased to be a bargaining chip to drive down price, Mr Doucet says.
"A project like this is beyond economies of scale." So the company has gone beyond that traditional dickering, working instead with its suppliers of fabricated steel components. In essence, Canadian Natural is piggybacking its orders on the goodwill that those manufacturers have built up with steel suppliers to reduce the hit of rising prices, placing its own orders for steel through those companies.

Other parts of Canadian Natural's strategy to keep control of costs are becoming standard in the oil sands industry. The company has broken up the first phase of Horizon into 21 components, none of which are worth more than $ 700 mm, in order to make sure that any delay by one contractor doesn't slow down the entire project.
Not everyone in the industry agrees that the blueprint for mega project construction needs redrafting, however. The executive heading Syncrude Canada says budget overruns have more to do with unrealistic cost projections than poor execution during construction.
"I temper even the use of the word overrun," says Charles Ruigrok, appointed as CEO of Syncrude less than four months before the joint venture said the cost of its Stage 3 expansion had mushroomed to $ 7.8 bn, nearly double the original budget.

Canadian Natural has moved on that front, too, with nearly $ 1 bn spent on mapping out Horizon before the project was formally launched in early February. So far, Mr Doucet says, the biggest surprise has been the lack of nasty surprises, particularly not being afflicted with any labour shortages.
With workers getting set to start stripping away earth this spring to expose bitumen ore, Horizon is on budget and on time. The tires are on order. Plan A is in full gear.
"Whether that will happen all the way to end is another story," he laughs.

Canadian Natural Resources plans to sink $ 10.8 bn into its Horizon oil sands project before it expects positive cash flows in 2011.
Projected figures beyond 2005 based on a crude oil price of $ 28/barrel, and an exchange of $ 1 = C$ 0,78, after tax and after royalties, 2.5 % escalation factor.