Energy sector must plan ahead to avoid cost overruns that marked last oil sands boom, RBC says
Canada’s oil and gas sector faces risks of cost overruns and delays as more than $100-billion in energy infrastructure projects are set to begin construction over the next three years. An expanded oil and gas industry could add $44-billion a year to Canada’s GDP by 2040 and boost energy exports to non-U.S. countries from $10-billion to $100-billion. Labour shortages and competition for raw materials with other major projects pose key challenges to the build-out.
Canada’s oil and gas sector faces risks of a return to painful cost overruns unless it co-ordinates the necessary supply chains and labour availability for more than $100-billion in proposed energy infrastructure construction, the country’s largest bank warns.
The next three years could mark the beginning of several major oil and gas projects, from production to pipelines and carbon capture projects, said a report from Royal Bank of Canada RY-T. Put simply, it said, “Canada is about to find out whether it can still build.”
Getting major projects constructed has been one of Prime Minister Mark Carney’s highest priorities, as the country looks to reduce its reliance on the United States, which buys the lion’s share of Canada’s oil and gas exports.
In September, the federal government tabled Bill C-39, the Building Canada Strong Act, which in part aims to speed up development approvals for major projects. Mr. Carney also announced a corporate tax break that would allow companies to immediately write off the full cost of acquiring or building assets. Last week, Ottawa deemed the Pacific Link oil pipeline from Alberta to the West Coast a project of national importance in a bid to accelerate its regulatory approvals, and the Prime Minister travelled to B.C. to mark the greenlight for LNG Canada Phase 2.
The last oil sands construction boom ran between 2006 and 2014. Labour and materials costs soared as several projects were built at once, leading to overruns and delays on everything from mines to pipelines. The issues were exacerbated by the 2008 global financial crisis and a significant drop in oil prices.
The looming build-out of Canada’s energy sector is not necessarily a bigger version of that boom, the RBC report said. This time around, it stands to be more of a nation-building effort that would run for 15 years, span various commodities and see much of the construction take place in British Columbia, rather than northern Alberta.
By 2040, an expanded oil and gas industry could add $44-billion more a year to Canada’s GDP, nearly a 50 per cent increase from its current contribution of $95-billion, according to the report.
The road to boosting the sector includes building two liquefied natural gas terminals (in addition to two already under construction), two oil pipelines, a carbon capture facility, and the initial phases of oil sands expansions that could lead to an increase of up to a million barrels a day.
If the West Coast oil pipeline and new LNG terminals are built, Canadian energy exports to non-U.S. countries, primarily in Asia, could rise from roughly $10-billion in 2024 to about $100-billion by 2040, adding to U.S. sales rather than replacing them, the analysis said.
But construction stimulus “is a double-edge sword” that will require Canada to optimize economic benefits while minimizing strain on infrastructure, and manage demands on raw materials, logistics and labour. Otherwise, the country risks a repeat of the recent megaprojects in Western Canada, which were slower to build and wildly more expensive than planned.
The report pointed to the last oil sands building boom, which cost far more than an Alberta report had forecast, but boosted production by less than expected, and the Trans Mountain pipeline expansion, which ballooned in cost from an original estimate of $5.4-billion to $34-billion.
The challenge facing Canada with the latest build-out is that projects would tap the labour market around the same time other large-scale projects would be under way across the country, including data-centre and nuclear sites, and mining and hydrogen development, the report said.
Getting all of those projects, as well as planned oil and gas infrastructure, built, “will require an all-of-Canada approach,” it said, because the need for raw materials and parts, such as rolled steel, comes “at a time when these sectors are reeling from U.S. tariffs and market uncertainty.”
Thus, enabling domestic capacity of steel and aluminum production will be “critical to optimizing the benefits of energy investment,” the report said.
Training skilled workers will also be crucial to the build-out, the report noted. The federal government estimates more than 1.4 million new trades workers will be needed by 2033 as a wave of retirements hits.
The report said a “nimble and market-driven immigration system” could help address the shortage, as might a national-service-style program that encourages people to “come work for – and build – Canada,” and creates incentives for labour mobility.
