Canada’s oil sands are known by oil and gas players around the world – and for good reason. Some analysts suggest that Canada’s oil sands production will reach more than 4 MMb/d by 2020, up 150% from today. To get there, more than US $150 billion will be spent over the next decade to develop these immense reserves.

Why the oil sands?

Canada is one of the most attractive markets in the world for inbound investment. The country offers a politically stable economy, strong legal and business systems, unparalleled proximity to the US market, and access to world-class expertise. Canada also is perceived to be open to foreign investment, which is critical given that some estimate more than 80% of the world’s remaining hydrocarbon reserves are located in jurisdictions where foreign investment is restricted. This, coupled with demand growth drivers, has interest in Canada’s oil sands from Asian players on the rise. But companies will have to manage a number of new risks to be successful.

Facing challenges head on

Chief among the risks facing Canada’s oil sands industry is rising supply and falling demand from the US. The US continues to be the Canadian oil sands’ number one customer, but game-changing technology such as horizontal wells using multistage fracture stimulation is enabling producers to tap into new oil reserves in the US. This means Canada must look toward foreign markets for new customers.

To export more supply, the industry will need to develop the proper infrastructure to access these global markets. Oil sands volumes are already set to surpass Western Canada’s current infrastructure by 2015. Without the proper infrastructure in place to move product – both to Asia and south of the border – companies risk selling at a discount, harming investment returns, driving up the cost of capital, and leaving billions of revenue on the table, resulting in a loss of royalties and taxes for various Canadian governments. Significant capital investment in the construction of new pipeline infrastructure is imperative for the oil sands to reach their potential.

Maintaining a social license to operate was not likely one of the top issues a decade ago, but today successful oil sands operators need to excel at managing this challenge or risk stranding their capital. The oil sands have become the target of environmentalists and other special interest groups from around the world. Companies must focus on demonstrating their ability to meet the highest environmental, safety, and sustainable business practices to gain the necessary approval for new infrastructure. The industry also will have to demonstrate that the development of the Canadian oil sands will be good for all Canadians, both economically and socially.

Finding the labor to advance projects is another challenge companies are facing. High levels of development and construction activity are causing shortages of skilled labor across Canada. Exacerbating this challenge is the increased need for skill sets that are specific to in situ extraction, including steam plant operators, water treatment specialists, engineers, and drilling coordinators. These specialized skills and shortages are leading to higher salaries, training costs, and perquisites, which will drive up project costs.

Structured for success

More and more industry players are turning to joint ventures and strategic partnerships to mitigate challenges and maximize success in Canada’s oil sands. Collaborating enables both parties to share leading practices in areas around technology, environmental reclamation, and social and economic performance, as well as create a common labor pool. This teaming also is giving companies access to the capital they need to advance projects and open new markets outside of the US.

There is no denying the significant role Canada’s oil sands play in the global oil and gas industry. But success for oil sands players will not come easily this year. Understanding each and every challenge facing the industry is the first step in turning today’s risks into results.

The views expressed herein are those of the author and not necessarily those of Ernst & Young LLP.