Oilsands must address vilification
When you have a reputation like the oilsands — essentially the most vilified undertaking by the world’s most hated industry — you had better be engaged in reputation management.
Over the past few years, issues around pipelines, foreign investment, greenhouse gases and the cumulative effects of a multidecade rush to develop the massive but economically challenged resource have made reputation management critically important to the oilsands.
A new report suggests it’s increasingly significant to the bottom line.
The study by Ernst & Young that listed 10 risks and 10 opportunities for Canada’s oilsands industry was released Monday and, unlike previous editions, it cites reputation management — including areas such as community engagement and social licence to operate — as a threat to development.
Reputation — or at least the costs associated with a poor reputation — rates alongside inflation, growing U.S. oil production, access to new markets and a lack of blue-collar and whitecollar workers as industry-wide concerns for Ernst & Young.
“We concluded that this was becoming a huge strategic issue to the oil and gas industry and especially oilsands and unless they excelled at winning over the hearts of the various stakeholders their projects will not maximize the value of the underlying asset,” said Barry Munro, Canadian oil and gas leader for the global consultancy.
In an industry that has traditionally focused on the technical below-the-ground challenges of developing the deposits of gooey bitumen, the emotional abovethe-ground issues have tested the companies that have taken oilsands production from one million barrels a day in 2004 to almost two million.
Those challenges will grow substantially as production climbs toward the 3.3 million barrels a day forecast by 2020.
Two other reports released Monday focused on the impact of pipeline constraints.
A report by TD Economics called the expansion of the oil pipeline network a national priority for Canada given the significance of the oilsands to the economy.
It also warned concerns over the Keystone XL and Northern Gateway projects along with the Trans-Mountain pipeline expansion go well beyond technical or financial challenges.
“While the economics look attractive, or at least reasonable, for the various proposals, there is more to the world than economics,” the bank warned.
“All the current proposals have encountered challenges, primarily due to local fears of spills and other environmental concerns about enabling production growth in the oilsands.”
There are about 2.9 million barrels a day of long-haul pipeline proposals for Western Canada.
TD said the best thing Canadian governments could do for the oilsands is “ensure a timely and thorough regulatory process for approvals for pipeline projects.”
Presumably it meant to say the “review” process to evaluate pipeline proposals and calling it an “approvals” process was a simply a Freudian slip.
Regardless, it adds to the perceived arrogance of the oil industry.
The “approvals” process looks especially daunting for pipelines to the West Coast these days, given the vehement local opposition to both Northern Gateway and TransMountain — largely over environmental concerns.
In a research note, CIBC cautioned: “we assign no better than 50/50 odds that these pipes are built before the end of the decade.”
Ernst & Young also cited market access and infrastructure constraints as key risks to future development of the oilsands, as 16 new projects or expansions are set to come on stream over the next four years that would add more than one million barrels a day of production.
“Canada needs pipe — and lots of it — to avoid the opportunity cost of stranding over a million barrels a day of potential crude oil growth,” CIBC said.
It forecasts of annual growth of 100,000 barrels a day in conventional oil and 300,000 barrels of blended oilsands crude but cautioned pipeline capacity will be severely constrained by 2014.
For the next wave of oilsands projects to proceed there needs to be attractive returns on capital for the multibillion dollar upfront investment required, Ernst & Young said. Selling costly-to-produce crude at deeply discounted prices from world benchmarks impacts the bottom line and directly undermines the return on capital for oilsands producers.
Ernst & Young put the discounts on West Texas Intermediate benchmark crude at about 10 per cent to North Sea Brent, with bitumen discounted a further 40 per cent from WTI. It said accelerating production without giving up a competitive advantage will be a balancing act.
With the federal government restricting ownership in oilsands projects by state-owned oil companies, it shifted the investment landscape and made joint ventures and strategic partnerships more attractive to companies looking to accelerate development.
Ernst & Young concludes capital, both foreign and domestic, will continue to flow to the oilsands and they will continue to play a critical role in global supply, but success in the years ahead won’t come easily without gaining far more stakeholder support.
Under its best-case scenario, Ernst & Young forecasts the economic impact of oilsands development could reach $4.93 trillion but the firms’ Lance Mortlock warns from pipelines to people “the risks are becoming more pronounced.”