"We know more than we know we know aboutmanaging costs in Oil Sands projects!"
In Conjunction with the University of Calgary
“9th Annual Athabasca Oil Sands Conference”Edmonton AB, September 22 & 23, 2009
Presenters: George Brindle, PEng, MBA, Laricina Energy Ltd.Francis Hartman, PhD, PEng, University of Calgary
September 23, 2009
9th Athabasca Oil Sands Conference
2Thank you
• Thanks to our Graduate Student:Jason Scherpenisse, B.Sc. for his help in compiling andverifying the data referenced in this presentation.
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9th Athabasca Oil Sands Conference
3What do we know?
• What do we really know about In Situ project costs?
• History can provide valuable insights,
– The data is there, we have been at it for 30 years!
• In situ is not the only “new” industry / technology to bedeveloped and deployed to the field,
– Other industries can provide learnings as well.
• You need to do your homework beforehand to determinewhat works… and what doesn´t.
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9th Athabasca Oil Sands Conference
4Learning from past oil sands performance
• Current perceptions about costs in the oil sands.
– Costs are rising and cost inflation is unstoppable.
• What is really happening and what can we expect?
– A look at past cost records.
– Cost myths.
– Trends from other industries.
• Next steps for our study.
Outline
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9th Athabasca Oil Sands Conference
5Past cost trends
What does it tell us? What are the facts? What is conjecture?Source: Company reports and internal estimates
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9th Athabasca Oil Sands Conference
6The steel cost myth
– What has beenthe behavior ofsteel prices?
– Let´s compareto slopesobserved forinflation andNelson-Farrarthose years.
Source: www.bloomberg.com, www.thesteelindex.com, Statistics Canada, Bank of Canada
Historical Steel Prices (CRSC)
US
$/m
TNelson Farrar
Construction industryIndex
Core CPI
7.2%4.7%
4.9%
8.6%
1.6% 1.9% 2.1%1.6%1.7%
General CAPEX CostIncreases Alberta
16.58%
16.29%
12.55%
7.57%8.49%
– GeneralconstructionCAPEX.
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9th Athabasca Oil Sands Conference
7Recent steel prices connected?
– Let´s take a closerlook.
– What do theindices look likethese past fewyears?
Source: www.bloomberg.com, www.thesteelindex.com, Statistics Canada, Bank of Canada
Cold Rolled Steel Coil
General CAPEX CostIncreases Alberta
Core CPIUS
$/m
T
Nelson FarrarConstruction industry
Index
8.6%
1.4%1.5%
1.5%
1.7%1.9%
16.58%
16.29%
22.9%
25.1%
3.7%-11.3%
-14.7%
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9th Athabasca Oil Sands Conference
8The steel cost myth continued
• Steel is not to blame:– Steel represents only a smallportion (~8%) of total plant cost,19% of well cost
Cost break down on a typical SAGD plant
Cost break down on a typical SAGD well
• Labour costs are a muchmore significant component:– Field labour, 22%– Engineering, 12%– Shop fabrication, 8%– Of Total installed cost: 42%– Component to indirect and sub-contract supply.
Source: IMV Projects Limited and Laricina Energy Ltd.
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9th Athabasca Oil Sands Conference
9Labour costs are out of control?
• We’ve seen thefinger pointed atlabour. Is this blamedeserved?
Source: Statistics Canada
Total Wage for Industrial Work
• Compared toinflation…
Core CPI
1.6%1.9%
2.1%
1.6%
1.7%
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9th Athabasca Oil Sands Conference
10Does WTI Connect to Costs?
• Currently ahypothesis hasbeenpresented thatproposes thatcost willreducebecause WTIhas gonedown
• Is thatdeserved?
Source: Statistics Canada, Energy information Administration: Official Energy Statistics (U.S. government)
West Texas Intermediate (WTI)
Nelson FarrarConstruction industry
Index
Core CPI
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9th Athabasca Oil Sands Conference
11So what’s up?
How do scope and volume come into play?Source: Company reports and internal estimates, Stats Canada, Bank of Canada
CoreCPI
General CAPEX CostIncreases Alberta
General Inflation
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9th Athabasca Oil Sands Conference
12Is the scope understood?
• How does the volume/extent of our project affect ourcosts?
• Cost effectiveness is measured by output or capacity, butdo we know the volume of our work?
• How does the number of projects affect each projects´costs?
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9th Athabasca Oil Sands Conference
13Industry in rapid growth
• The in situ sector isrelatively new but hasrecently seen rapid growth,
– 3 operators/3 commercialplants in 1994 to 14operators/27 commercialin situ type plants by 2008
• Few companies have“repeat” experience
Thermal operators and plants by year(plant capacity > 10 000 bopd)
Source: Company reports and internal estimates
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9th Athabasca Oil Sands Conference
14Industry in rapid growth
• Most projects are FIRSTATTEMPT; and only aboutfour examples of SECONDATTEMPT
• Small pool of experiencedlabour and engineering talent
• Where have we seen thisbefore?
Source: Company reports and internal estimates
Thermal operators and plants by year(plant capacity > 10 000 bopd)
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15Learning from the power industry
• Cost to implementtechnology has frequentlybeen underestimated inmany sectors
• True cost to develop andimplement takes time anditerations to sort out
• Best documentedexamples of the “LearningCurve” from powerindustry
• The rate at which costsdecrease by incorporatingpast learnings
1980´s 1990´s
Source: Yeh, Rubin et al. And Colpier & Cornland
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9th Athabasca Oil Sands Conference
16Learning from the power industry
• Long term costs will befar lower than seeninitially
• Is this what we are seeingin the oil sands?
– How would we know?
– What would we look for?
1980´s 1990´s
Source: Yeh, Rubin et al. And Colpier & Cornland
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9th Athabasca Oil Sands Conference
17A hypothesis for SAGD learning curves
• Are there learningcurve issues?
• If we know the“learning curve”applies to in situ, whatquestions does acompany need to askwith respect to theproject developmentcycle?
Where is the technological plateau?
Source: Company reports and internal estimates, Stats Canada, Bank of Canada
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9th Athabasca Oil Sands Conference
18Next steps
• Have we closed the loop on learning at both individualand organizational levels?
• Do we have enough repetitive experience?
• Are we repeating the same mistakes?
• What are we doing to retain knowledge?– Are we succeeding?
• Characterizing project scope and size– What attributes are needed for success
• Does our project/property have the scale and size tocapitalize on long term cost reductions?
Questions that need to be asked,
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• One needs to learn from success stories both from withinOil Sands and outside,
– Small scale evidence is emerging from within the in situ sector
that some companies have asked the right questions.
• A growing number of in situ “repeats” will force morecompanies to do their “soul searching”,
– They will begin to ask the right questions
• We will be back in the November CHOA BusinessConference with some of our evidence!
Look back at the success stories,
Next steps
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9th Athabasca Oil Sands Conference
20Notice to Conference Participants
• Latest Presentation available for download at:www.laricinaenergy.com
Thank you!
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9th Athabasca Oil Sands Conference
21
This Laricina Energy Ltd. (the “Company”) Presentation is confidential and should not be distributed to any person other thanattendees to whom this Presentation was initially presented to by the Company. Some of the statements contained in thisPresentation may be forward-looking statements. Forward-looking statements may include, but are not limited to, statementsconcerning estimates of exploitable original-bitumen-in-place, predicted recovery factors, steam-to-oil ratios and well productionrates, estimated recoverable resources, expected regulatory filing, review and approval dates, construction and start-up timelinesand schedules, company project potential production volumes as well as comparisons to other projects, statements relating to thecontinued overall advancement of the Company’s projects, comparisons of recoverable resources to other oil sands projects,estimated relative supply costs, potential cost reductions, recovery and production increases resulting from the application of newtechnology and recovery schemes, estimates of carbon sequestration capacity, costs for carbon capture and sequestration andpossible implementation schedule for carbon capture and sequestration processes or related emissions mitigation or reductionscheme and other statements which are not historical facts. You are cautioned not to place undue reliance on any forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are based will occur.By their nature forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, bothgenerally and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-lookingstatements will not occur. Although the Company believes that the expectations represented by such forward-looking statementsare reasonable, there can be no assurance that such expectations will prove to be correct and, accordingly that actual results willbe consistent with the forward-looking statements. Some of the risks and other factors that could cause results to differ materiallyfrom those expressed in the forward-looking statements contained in this Presentation include, but are not limited to geologicalconditions relating to the Company’s properties, the impact of regulatory changes especially as such relate to royalties, taxationand environmental changes, the impact of technology on operations and processes and the performance of new technologyexpected to be applied or utilized by the Company; labour shortages; supply and demand metrics for oil and natural gas; theimpact of pipeline capacity, upgrading capacity and refinery demand; general economic business and market conditions and suchother risks and uncertainties described from time to time in the reports and filings made with security regulatory authorities,contained in other disclosure documents or otherwise provided by the Company. Furthermore the forward-looking statementscontained in this Presentation are made as of the date hereof. Unless required by law the Company does not undertake anyobligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information,future events or otherwise. The forward-looking statements contained in this Presentation are expressly qualified by this advisoryand disclaimer.
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