By David Yager,
Entrepreneur. Consultant. Journalist. Political Activist.
Canada’s oilsands producers in the Fort McMurray region are watching the weather to determine if and when they can move the necessary people back to their operations to resume production and put some one million barrels per day (b/d) of bitumen back on line. Several operators are already moving personnel back to the region.
Only a week ago it looked like oilsands operations north of the city had been spared. Then the fire changed direction requiring the evacuation of the same plants and camps in which displaced residents of Fort McMurray had sought refuge only a week earlier. The 5,000 square kilometer boreal forest wildfire, accurately named “the beast”, has a mind of its own. To put the size into perspective, greater Houston only covers 1,500 square kilometers.
While hundreds of firefighters employing hundreds of millions of dollars of support equipment have proven their ability to protect dwellings and assets, only the weather will determine where the beast goes next. Recent colder weather, gentler winds and a bit of rain has helped slow this monster fire that raged out of control in early May due to a dry winter, hot windy weather, and decades of well-intentioned fire suppression that has left more fuel on the ground than mother nature would normally allow.
Much has been written about the plight of evacuees, the loss of 10 to 15% of the homes in Fort McMurray, oilsands producers, remote work camp providers, the short and long term economic damage, and the impact the loss of a million b/d of oil production has had on recovering world oil prices. The current prognosis is the fire poses no immediate threat to the city nor the bitumen recovery operations north of Fort McMurray so the return of workers and the startup of production is underway.
The Government of Alberta and the Regional Municipality of Wood Buffalo (in which Fort McMurray and the producing operations are located) have announced a staged schedule commencing June 1 by which people can return to their homes, if they still have one. Crews are working feverishly to restore natural gas, electricity, the hospital and other essential support services and infrastructure so people can indeed live and work from their homes.
But of all that has been written about the wildfire and the destruction it has created, nobody has noted the main industrial park (Mackenzie) and others in southeast Fort McMurray and north of the river were largely spared, and what this means to the pace of recovery. (This is of particular interest to your writer because his last company has occupied an office/shop/warehouse in this part of the city since 2005). These key industrial hubs avoided major fire damage not because of location but because of their construction. Businesses don’t want or need trees in their yard so the setback from the forest was substantial. Industrial buildings often have metal clad roofs and siding as opposed to houses with flammable asphalt shingles on top and vinyl siding on exterior walls. They are usually spaced a significant distance from each other to allow for parking lots, storage yards and loading and unloading room for big trucks.
While likely nobody thought of this during construction, industrial parks are actually designed to be relatively fireproof from the outside, although they have house contents which are more flammable and hazardous. Amazing how forward-thinking industry can be even by accident.
What Tier 2 oil and gas production requires to be economically developed is Tier 1 support from the service and supply sector. Tier 2 reservoirs are those which will not yield oil or natural gas from a simple vertical drain hole in the rock as was the case for the first century of global hydrocarbon recovery. Tier 2 reservoir exploitation takes place almost exclusively in North America and it includes bitumen or oilsands, shale gas and light tight oil (LTO). Each of these requires significant mechanical intervention, processing and/or stimulation processes to yield a saleable product. They also require substantial support infrastructure from the service and supply sector to be economically viable.
Why shale gas and LTO succeeded is well known. Unlocked using extended reach horizontal drilling and multi-stage completions and hydraulic fracturing, this business got started because the oilfield services (OFS) industry already did these things and had service locations nearby. In the areas where this type of recovery has grown – from the Eagle Ford in Texas to the Marcellus in Pennsylvania to the Montney in northwest Alberta – it works because everything required is no more than an hour away. If a mud motor or MWD system craters; if a replacement pumping unit is required for the frac spread; when fluid storage systems or frac sand is required in large quantities; North America’s world-class OFS sector is nearby and eager to help. If it doesn’t exist yet OFS will design and build it. This industry has invested billions of its own capital in recent years to ensure shale gas and LTO developers have the new generation of rigs, multi-stage packers, fracking systems and everything else required to develop this resource in volumes that have changed the global oil and gas industry.
What it not as well understood is oilsands developers have succeeded because OFS has done the same thing in northeast Alberta, particularly Fort McMurray. When Great Canadian Oil Sands (GCOS, now Suncor) began producing in 1967 there was no local supply chain. Everything had to come from Edmonton first by train and later by road, four hours away under ideal travel conditions. The Syncrude consortium opened the second oilsands plant in 1978. The two facilities started producing oil in volumes that justified additional investments in support infrastructure.
Nearly 50 years after economic (well, most of the time) bitumen recovery began the service and supply support infrastructure in Fort McMurray is significant and critical to ongoing operations. Fort McMurray is the industrial support epicenter for some 1.5 million b/d of bitumen recovery within a 90-minute distance to the north and south (the remaining 900,000 b/d of oilsands production further south is supported primarily from Bonnyville and Lloydminster which were unaffected by the current wildfire).
The growth of the industrial support capability in Fort McMurray has made every incremental oilsands development after GCOS and Syncrude more cost-effective. While not all the workers may live in Fort McMurray, the myriad of industrial suppliers of everything from electric motors to instrumentation to valves and services ranging from transportation to waste disposal to pressure testing all have shops and technical staff in Fort McMurray. This has greatly reduced the specialized inventory oilsands developers must carry on site and the vast array of skilled technicians required to fix or trouble-shoot anything and everything.
But one example is Levitt Safety Limited, Canada’s longest established private and independent safety equipment supply company. Several years ago Levitt secured a contract to install and service fire suppression systems in the giant oilsands-hauling equipment used in the bitumen mines. Levitt then opened a service shop and bought housing for its staff in Fort McMurray. On-board fire suppression is a proven way to reduce costs should a fire break out on these massive and expensive pieces of equipment. This works for oilsands developers because they get world-class equipment and service without having to maintain specialized inventory or expertise in-house. Levitt supplies other specialized safety equipment to numerous other oilsands producers.
Fortunately, and like most, Levitt was spared major damage. President and CEO Bruce Levitt reports his warehouse is okay as is the worker housing. But of course ramping up to full and normal operations will take time and money.
There is no possible way the continued expansion of all the oilsands production in northeast Alberta which has taken place in the last 50 years could have occurred without the simultaneous growth of the industrial support infrastructure in Fort McMurray. Because they produce and process (and even refine in the case of bitumen upgrading) at the same location, the numbers of individual things oilsands developers need and industry supplies are mind-boggling compared to conventional oil and gas, even shale gas and LTO. Producers and their suppliers have grown in tandem and are utterly symbiotic in the way they co-exist.
Which is why the preservation of the majority of Fort McMurray’s industrial infrastructure in the path of “the beast” is so important to the expeditious recovery of oilsands production. For the most part it is all still there. While the housing stock in Fort McMurray has been reduced, this can be augmented by work camps surrounding the community which, until recently, were suffering from low occupancy rates. They will ensure there is a place for the myriad of technical support workers to eat and sleep until the community is fully rebuilt.
But most importantly, the shops and warehouses stocked with components, parts and service equipment for just about everything an oilsands plant needs to function are still standing in Fort McMurray and are ready to resume business. This means that when the producers start producing they will be able to do so without having to bring technicians and support components from further afield like Edmonton. This will significantly reduce costs, an incredibly important factor for an industry that has been clobbered by the oil price collapse then a natural disaster.
It’s been a tough few years for the oilsands. First it became the oil the anti-carbon crowd loved to hate. Then development costs skyrocketed. Next came the market access pipeline protests and blockages. This was followed by the oil price collapse. Now “the beast” has halted production from Syncrude for the first time since it began operations in 1978.
It’s just got to get better because it can’t get worse.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: [email protected]