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Oil sands tailings management projects : low return, business critical Nicolaisen, Jennifer Oct 31, 2015

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Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 Oil sands tailings management projects: low return,  business critical  Jennifer Nicolaisen Independent Project Analysis, Inc, Ashburn, USA ABSTRACT In 2014, Independent Project Analysis (IPA) led Alberta’s first industry research study on the performance of oil sands tailings management capital projects. Although the industry has organized extensively to investigate and share technology strategies for tailings management, the implementation of those strategies through capital projects had not been previously evaluated. The research study findings suggest that Alberta tailings projects still have a long way to go in terms of maximizing their value for business. The key findings from the research study, which include a cost-capacity model for benchmarking the base capital cost of an oil sands tailings management project, are presented here. Most importantly, we describe the root cause of ineffective investments in tailings management facilities and assets: business’ failure to prioritize these projects and provide the time and resources required for capital effectiveness. Further, we explore the importance and implications of capital effectiveness in oil sands tailings management investments. Although waste management and compliance projects deliver no direct financial return to the bottom line, the indirect returns yielded from the effective and responsible delivery of tailings management assets are critical to staying in business in the 21st century.  1 WHAT ARE OIL SANDS TAILINGS? Oil sands operators produce large volumes of a waste by-product called tailings in the process of extracting bitumen from mined oil sands. The tailings consist of various densities of water, sand, silt, and/or clay, and may also include trace levels of residual bitumen and process solvents/chemicals. Tailings waste streams are generated through the process of bitumen extraction, which is illustrated below in Figure 1.  Fine TailsCoarse TailsFine TailsDilBitMining & Ore PrepSlurry ConditioningPrimary Separation VesselFlotation CellsFroth Separation Unit(s)Tailings Solvent Recovery UnitLegendBitumenTailings Figure 1 Regular tailings production  Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 Regular tailings refer to the coarse and fine tailings streams that are direct outputs of the extraction process. Coarse tails contain more than 10 percent solids and are usually separated from the underflow stream of a primary separation vessel (PSV) or hydrocyclone.  Fine tailings contain less than 10 percent solids and consist of two types: flotation tailings and froth tailings. Both types are often used for the construction of dikes and beaches on mining leases.   Flotation tailings streams have specific gravity in the range of 1.10 to 1.23 and are usually separated from the middling stream of a PSV or from the underflow of a flotation cell. Alternately, froth tailings are a type of fine tailings that have specific gravity of 1.10 or lower and are generated after operators separate tailings from PSV overflow streams in a froth separation unit (FSU). Froth tailings are isolated after tailings from the FSU have been stripped of any remaining solvent(s), usually in a Tailings Solvent Recovery Unit (TSRU). Some operators refer to the froth tailings stream as the “cyclone overflow” stream (COF). Historically, operators have deposited regular tailings in man-made ponds or end-of-life mines. The ponds function both as settling basins to separate solids from fluids in the tailings streams as well as holding areas from which clear water can be recycled back to the bitumen extraction process.  1.1 Fluid Fine Tailings Downstream of the extraction process, the differentiation in tailings densities that result from transportation, settling, or separation processes are called fluid fine tailings (FFT). There are two types of FFT: thin fine tailings (TFT) and mature fine tailings. When regular tailings are discharged into a tailings pond, the sand elements in the tailings tend to settle quickly. The sand can be used to form beaches or to construct dikes to contain the remaining fluid tailings. Silts and clays equal to or smaller than 44 micrometres in size are generally captured in the dikes and beaches and any remaining smaller particles flow with the water into the pond to form thin fine tailings at specific gravity of 1.10 or lower. TFT refer to any tailings that are downstream of the extraction process and that are not mature fine tailings. The smaller particles of silt and clay in TFT tend to remain in suspension and take decades or longer to slowly settle over time. Even after several decades, Industry has found that the tailings consolidate at best into a material with the consistency of soft mud, known as mature fine tailings (MFT). MFT typically comprise more than 30 percent solids and can have specific gravity in the range of 1.10 to 1.55. 1.2 Non-Segregated Tailings Because of the slow reclamation timeline associated with allowing TFT to consolidate into MFT, oil sands operators have recently been experimenting with various methods and processes for consolidating regular tailings more efficiently. The tailings densities achieved through these engineered processes are called non-segregated tailings (NST). As of 2015, the industry has proven three types of NST in commercial-scale production: composite tailings, thickened tailings, and tailings cake. Composite tailings (CT) are a type of NST created in a mixing facility by combining quantities of regular tailings with MFT (dredged from the bottom of a pond) and a coagulant like alum or gypsum. These are different from thickened tailings (TT), which are created in a mixing facility by combining any tailings stream with a polymer flocculant. The most common processes for TT production combine regular froth tailings with a polymer flocculant in a configuration adjacent to the TSRU. However, operators can also produce TT by combining either type of TFT with a flocculant at an in-line facility downstream of the extraction process.   Finally, operators can also use centrifuge machines to spin excess water out of TFT, which yields tailings cake by combining a polymer flocculant with centrifuged TFT. Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 2 THE OIL SANDS TAILINGS MANAGEMENT DILEMMA Over the past 15 years, significant environmental and scientific investigation has shown that the historically standard settling process for transforming TFT into MFT requires slow consolidation over decades, if not centuries. Canadian regulators have used Directive 74 (2009) and the Tailings Management Framework (2015) to require increasingly robust commitments for environmental compliance in tailings deposition and storage at bitumen mines. At a high level, the regulations require operators to: 1) Reduce the quantities of suspended fines generated during and after bitumen extraction and 2) Reclaim the large volumes of MFT that already exist on mining leases As bitumen production continues, the surface area requirements for tailings storage increase proportionately. Even without any production capacity expansion due to the current price depression in the crude market, tailings management projects are sustaining capital investments that are necessary simply to maintain production at each site. Fluid level balances across storage areas must be maintained, which means that massive volumes of TFT and MFT have to be dredged, pumped, and stored in facilities that result from the major civil earthwork efforts. The industry is actively pursuing new technologies and methods for removing water and consolidating tailings more efficiently. Operators and regulators are working in a constant feedback loop to identify technologies that satisfy compliance requirements and simultaneously complement site mining plans and facilities configurations. As a result, capital projects are often initiated to install systems in parallel to the development of an operating philosophy for those systems. Further, some projects in the early conceptual stages spend years in recycle while regulators refine the requirements and evaluate proposed compliance efforts.    As such, tailings management projects are increasingly resource- and capital-intensive with no direct return-on-investment. Changing requirements from operators and regulators drive projects that are highly unpredictable in terms of cost and schedule. Additionally, despite a perception that oil sands tailings management projects have “simple” scope, their technical execution can be challenging. The projects are often constrained by requirements regarding asset mobility in active operating areas, regulatory pressure on technology selection, and/or effluent characteristics that are unreliable and difficult to measure. At the request of several clients, IPA launched a study to develop a benchmarking methodology for oil sands tailings management (OSTM) projects and investigate the drivers of cost and schedule for these unique investments.  3 RESEARCH STUDY METHODOLOGY By collecting real project data from multiple owner companies, IPA established an industry baseline and built a database of OSTM projects. Three key operators in Fort McMurray contributed OSTM project datasets from five mining sites to the research effort. The data were used to develop a parametric, capacity-based benchmarking methodology and to identify the Best Practices in Industry for tailings management strategies.  The study was initiated in April 2014 and followed IPA’s world-class research study work process. IPA worked with the study participants to isolate data requirements for the research and to create new data collection tools that are specific to OSTM projects in Alberta. By creating a database that is comprised exclusively of recent, like-scope projects in Western Canada, the research was well positioned to yield findings that accurately reflect this niche sector of capital investment. Very little normalization and data transformation was necessary to facilitate a precise comparison.  Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 Between August and October 2014, the industry demonstrated its commitment to improving capital effectiveness by providing the detailed data necessary to serve the analysis. The study was complete in January 2015 when the research participants received the results. For the first time, Alberta’s oil sands operators were able to understand their competitive positioning among capital investments that, at least on the surface, do not facilitate overall business competitiveness. 4 WHAT DRIVES COST AND SCHEDULE ON OSTM PROJECTS? Data gathered during the study revealed a strong correlation between capital cost and tailings capacity, as shown in Figure 2. In this relationship, we have modeled the capacity defined as the combined capacity, in cubic meters, of all tailings fluid (including RCW) lines that the project installed or modified. 05,00010,00015,00020,00025,00030,00035,00040,0003Tailings Capacity in m3The measure of tailings capacity is the combined capacity, in cubic meters, of all tailings fluid (including RCW) lines the project installed or modifiedOSTM Costs Are a Function of CapacityRemaining Variance Explained by Scope ComplexityProject Capital Cost HigherLowerP>|t| 0.004n = 25 Figure 2. Project capital cost and tailings capacity However, the analysis also showed a significant amount of residual variance in the relationship. The variance is logical because the scope of OSTM projects is highly variable and depends on the operating configuration at individual mines. Because of this, IPA developed a cost effectiveness model to benchmark OSTM project costs that accounts for five elements of major scope that we observed on some or all of the projects in the sample:  1) Barges and/or dredges (various sizes, electrically driven and diesel fueled) 2) Pump stations (modular, stick-built, electrically driven, and diesel fueled) 3) Electrical infrastructure (substations, e-houses, trailing cable, and transmission) 4) Pipelines (various diameters, both irathane and non-irathane lined) 5) Major Earthworks (corridors, dikes, berm uplifts, emergency dump ponds, and ramps) As a result of this detailed investigation, the final cost effectiveness model controls for capacity-based complexity measures for each scope element. As such, we are able to control for projects that did not install one or more scope elements as well as projects that modified assets within the scope elements. Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015  X = f(barges/dredges) + f(pump stations) + f(pipelines) + f(earthworks) + f(electrical) + B1   The model provides cost benchmarks on a total cost basis and is therefore parametric in nature. As research continues and more observations of OSTM projects are added to the database, the model will gain strength. Further, if the industry develops the capability to track detailed cost data isolated for each of these scope elements, it would benefit from the ability to benchmark cost by scope element (i.e., industry average costs for pump stations, barges, or volumes of complex earthworks).  Using the same complexity measures, the study developed a similar capacity-based model to benchmark the execution schedule duration on tailings management projects. As a result of this study, oil sands operators in Alberta now have a resource for obtaining cost and schedule benchmarks for tailings management projects as well as understanding their competitive position in this industry. 4 OTHER FINDINGS The research study confirmed Industry’s suspicion that OSTM projects are less predictable than the global industry average. The average cost growth on projects in the dataset was +15 percent2 and the average schedule slip was 27 percent. There were a staggering number of major late changes on the projects: on average, projects incurred 7 major late changes during execution. As expected, this performance was driven by project planning inputs that were categorically worse than the global averages and significantly worse than Best-in-Class.  IPA has quantified the development, planning, and execution practices that are associated with Best-in-Class capital project delivery by studying thousands of projects built by companies in global process industries over the past 30 years. Among more than 17,000 observations of individual capital projects, research shows that certain planning elements are statistically correlated with improved capital effectiveness. Specifically, the Front-End Loading (FEL) Index is a rating that quantifies project readiness at the start of execution based on a spectrum of risk elements, including, but not limited to: site factors, engineering design status, and execution planning. The FEL Index ranges from a value of 3 (overdesigned) to 12 (inadequate) in which a score of 4.00 to 4.75 is Best Practical and correlated with significantly better project performance. As part of the OSTM research study, IPA calculated the FEL Index and other metrics for project readiness for each project in the study sample. Through the study, the industry participants were able to share lessons learned and better understand the practices that drive the poor performance on OSTM projects. However, the overall root cause of this poor performance lies in deficiencies in the planning process at the site or program level: superficially, OSTM projects deliver no financial return. Project design and execution management, therefore, suffer from a lack of resources and a firm basis for project planning.  5 BUSINESS-CRITICAL, LOW-RETURN PROJECTS Research has generally found that when projects have low or zero financial return-on-investment, organizations often assign them a lower priority in the capital portfolio. Although these projects may not yield direct financial return to the business, they are sometimes business critical (i.e., projects that comply with environmental regulations or tailings management projects that are required to maintain production). Frequently, businesses defer capital spend and                                                             1 In which X is cost or schedule prediction, f is function, and B is the constant or Y-intercept (adjusts mean of residuals to zero). 2 This growth metric reflects growth in the base capital estimate and excludes contingency. Including contingency, the average growth was approximately 0 percent, which shows that contingency is almost always completely consumed and there is an opportunity for better definition prior to the start of execution on OSTM projects. Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 authorize these projects as late as possible. With little to no direct return-on-investment, these projects should always be cost driven, but, by deferring capital spend until it is absolutely necessary, the projects often become schedule pressured and incur the additional costs associated with schedule acceleration.  In a 2002 research study, IPA observed a clear divergence in the approach that businesses take to projects that have minimal financial return, but critically affect ongoing production, like environmentally driven projects (Brown 2002). The study identified a “wait and see” group of projects that had long approval delays and that were initiated as late as possible on the pretext of anticipating change to regulations or the available technology. Conversely, a “proactive” group of projects were executed as a part of a corporate strategy to address a business-critical issue, from infrastructure development to compliance with government regulations.  The analysis showed that the “wait and see” projects typically had 22 percent worse cost effectiveness than projects that were executed using a “proactive” approach. Further, despite the schedule-driven nature of the “wait and see” projects,” those investments averaged 42 percent execution schedule slip.  Although the projects had no calculable return-on-investment, we calculated relative net present value (NPV) by making certain assumptions.3 The calculation facilitates the quantification of the effects of cost and schedule performance in one metric. Even if a project was never meant to have a positive financial return, we can use the theoretical metric to gauge the percent NPV change when a project delivers a performance typically associated with “wait and see” versus “proactive” compliance projects.  The subsequent analysis showed that business-critical, low-return projects executed on a “proactive” basis subtract less from the NPV than those executed on a “wait and see” basis. It also isolated a subset of “proactive and just-in-time” projects that stood to achieve even better NPV. These projects were planned as part of a corporate strategy to address a business-critical issue, and executed on a cost-driven basis with just the right amount of time to progress project readiness to a Best Practical level4 before asset delivery was critical.  Confirming the results of the 2002 research effort, which considered compliance projects from various industries around the globe, the 2014 OSTM research study yielded similar findings from the specific compliance subset unique to tailings management in Northern Alberta. Across oil sands mining sites, tailings management projects suffer from a lack of priority in the capital portfolio. They are business-critical, low-return projects that are almost universally executed with schedule-driven strategies.  Eighty-four percent of projects in the research study sample traded cost for schedule by spending capital funds on schedule acceleration practices, such as equipment expediting, supplemental overtime, or initiating engineering work with a poorly defined design basis, and consciously anticipating change orders. Because the projects will yield no direct ROI, there is no rational reason to spend any more than necessary on OSTM projects—so theoretically, it follows that these projects are “unnecessarily” schedule driven. Additionally, despite their best efforts to achieve faster schedules, the same projects averaged 27 percent schedule slip in execution.  Like the greater set of global compliance projects, OSTM projects performed better when implemented with better planning practices. Although the overall subset averaged significantly                                                             3 Assuming the following: 0 return-on-investment, 3-year deadline, no advantages for early compliance, $25 million cost, 10 percent cost of capital, and 25-month cycle time (including 9 months of FEL and 16 months of execution and startup). We included the characteristics of the “wait and see” and “proactive” projects to calculate the respective effects of each on the NPV. 4 As quantified by IPA’s FEL Index. Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 worse FEL planning than global Best-in-Class projects, Figure 3 shows how those OSTM projects that took the time to leverage their relatively better FEL were more cost competitive.  OSTM Cost Performance vs. FEL Index at Start of Execution0.000.200.400.600.801.001.201.401.603.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00Relative Cost Effectiveness MetricFEL Rating at Start of ExecutionPoorFairGoodBest InadequateWorseBetterP>|t| 0.0001Figure 3. OSTM cost performance and FEL index at start of execution 6 NON-FINANCIAL RETURNS The analysis shows that business-critical, low-return investments like OSTM projects still have an effect on asset NPV and that the effect can be optimized when the projects follow a proactive planning strategy and apply better FEL practices prior to execution. However, in many ways, the cost effectiveness of these investments is less important than their operability and environmental compliance. Although the projects have no direct ROI, they deliver major indirect returns to the business. 21st century businesses are increasingly responsible for the environmental effects of their operating activity. Regulation and environmental compliance drives OSTM project initiation and execution, and meeting those objectives is critical not only to staying in business, but to competitive positioning for future growth. This is because failure to comply with a regulation or, worse, asset failures that lead to environmental and/or safety disasters, can significantly sway the public’s perception of a company. Amplified by the power of social media, public perception increasingly influences investing decisions in financial markets. In this way, indirect returns from capital ineffectiveness on environmental compliance projects stand to seriously degrade shareholder value. Research shows that good project planning, as quantified by IPA’s FEL Index and other input metrics, is strongly correlated with safer projects as well as safer and more reliable operating assets. Modern businesses must maximize both the direct and indirect returns on capital projects and programs with compliance objectives. Maximizing these returns means that the organization must invest the resources necessary for projects to implement strong work processes that ensure the achievement of Best Practical FEL. Implementing Best Practices in project planning and following the recommendations resulting from capital effectiveness research is not only critical to the balance sheet, it is critical for exercising the social responsibility that is expected of businesses in today’s world. There are 220 Proceedings Tailings and Mine Waste 2015 Vancouver, BC, October 26 to 28, 2015 combined square kilometers of oil sands tailings storage in Fort McMurray and the operators who participated in IPA’s research study are committed to continuously improving the effectiveness of the capital being invested to fix that problem. 7 PHASE 2 OF OSTM RESEARCH Following the success of this first phase of research, IPA is taking note of a variety of suggestions that have been made for future research on the capital performance of oil sands tailings management projects. Future research topics include, but are not limited, to:  Assess technological innovation in oil sands tailings   Identify most effective technology strategies on compliance & capacity bases  Benchmark total tailings management system effectiveness  Expand database to include OSTM projects from all operators in Alberta’s oil sands  Compare OSTM projects to tailings management projects in other mining industries  Derive IPA’s full suite of quantities-, cost-, and hours-based cost metrics   Identify common challenges and Best Practices for composite tailings (CT) production  Enhance predictive cost modeling by increasing number of observations and adding cost data by scope area  Benchmark OSTM asset operability  Calculate NPV performance and identify relationships between NPV and project inputs  Quantifying corporate social responsibility and environmental returns on OSTM projects  Benchmarking other schedule phases    Sensitivity analyses to distinguish the performance of small-cap OSTM projects At this time, we are seeking preliminary interest from industry participants for Phase 2 of the research effort.  8 REFERENCES Robert Brown, Environmentally Driven Projects, IBC 2002, IPA, March 2002 

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