ALBERTA's EMPLOYMENT FIGURES IN 2014 LIKELY TO BE DRAGGED DOWN DUE TO OUTSOURCING OF ENGINEERING AND FABRICATION WORK

A report released by Conference Board of Canada last week predicts a bright outlook for Alberta’s economy in 2014 but cautions that it may be stunted by pipeline risks. As per the report, Alberta will lead the country in employment growth in 2014 at 2.8 per cent whereas Canadian employment growth is forecast for 1.4 per cent. The report also forecasts Alberta’s economy to grow more quickly than any other province in 2014, but adds that the lack of pipeline development continues to present a significant downside risk to the forecast.

Alberta’s growth is obviously predicated on momentum in oil and gas sector. According to a report by a Calgary investment bank, capital spending in the Alberta oil sands will rise to a record of about $32 billion in 2014 (more than half of which will go to in situ projects). Canadian Association of Petroleum Producers (CAPP) predicted oil sands production will grow to 5.2 million barrels per day by 2030, up from 1.8 million barrels per day in 2012.

All the above should be good news for Alberta, isn’t it? Are the employment figures going to be really that good even if the pipeline constraints (to move the bitumen from oil sands projects to refineries and/or export) get removed? Probably not! Why? What is the problem?

Here is the reason: The greater portion of engineering cost of a project and thus potential for greater employment lies in the detailed engineering phase (of the project). Unfortunately, substantial chunks of detailed engineering (DE) work is being increasingly outsourced to low cost work centres (LCWC) of Engineering, Procurement and Construction (EPC) companies operating in Alberta/Canada. The EPC companies in Alberta are under tremendous pressure from the owner companies to farm out work to their LCWCs (in China, India, Philippines and such). If an EPC company does not have a LCWC, it is scrambling to set up one because it knows it would be thrown out of the bidding race if it did not have one.

Aside from DE phase being the greater source of employment in the EPC companies, fabrication and supply of equipment and construction of modules also constitutes a huge chunk of total project cost and this area too is a major source of employment. Unfortunately, dark clouds are hovering on this area too since significant amounts of work is being parceled out to other countries, e.g., South Korea and China.

Now, the owner companies may argue that the fabrication yards in Alberta are completely loaded up hence they are parceling work to Asia. This may be partly true, but the important question to ask is: Why are the fabrication/modularization yards not being expanded and/or new fabrication/modularization yards being set up in Alberta?

The answer that one gets is: Fabrication/modularization in Alberta is more expensive than Korea and the Asian yards are sometimes faster too (in completing the work). These assertions are open to genuine challenge and may not hold water if one takes in to account the transportation costs (from Asia), owners’ project management costs (at Asian yards), on-site rectifications necessitated by engineering / fabrication lacunae, possibility of expediting the fabrication in Alberta yards with suitable incentives and so on.

One may say the EPC companies in Alberta/Canada are already full to their capacity which is why DE work needs to be outsourced to LCWCs. That was true in 2005, 2006 but NOT now at this point in time. At the present time, the EPC companies in Alberta/Canada have enough slack to absorb most of the work that is likely to be generated in 2014 and beyond.

The fact of the matter is that the mad scramble to farm out work to LCWCs is causing layoffs in Alberta because the current situation of EPC market in Alberta is sluggish and very weak. Almost every day one hears some technical and/or non-technical personnel (estimators, cost controllers, document management folks, planners, schedulers etc) being let go off. This is ironical for Alberta (with so many new projects expected); indeed it is unacceptable and downright reprehensible and condemnable!

So what should be done? Well, the Province MUST step in and put the boot on the owners neck (like US did with BP during the gulf oil spill in 2010). Some actions on the lines mentioned below must be taken ASAP:

·       60-70% of TOTAL engineering work (DBM+FEED+DE) must be carried out in Alberta. Jobs may be outsourced to LCWCs only if there no capacity in Alberta (and Canada).

·       Not only engineering must be done in Alberta, substantial amount of orders for equipment, and fabrication/modularization must be placed in Alberta first (and in Canada).

·       There should be a continual gap analysis on capacity available in Alberta for supply of equipment, modules and how much of it is utilized. Owners must explain to provincial government why they went to an outside country for supply of equipment, modules etc. if there was underutilized capacity available in Alberta and Canada.

·       There should be tax incentives given to the owner companies for engineering and material sourced from within Alberta and Canada.

Just as a background to people regarding engineering costs: As a ball park figure, contractor engineering is generally in the cost range of 8% to 14% of total project costs (TPC) for greenfield projects, 10% to 18% for brownfield projects.

So, let us consider a project of a billion dollar TPC. The LCWCs at best may provide a saving of 30-50 million dollar during the DE phase. However, anecdotally a lot of it tends to get negated due to engineering and procurement re-work, necessitated to rectify errors and omissions of LCWC engineering, during the construction phase. At the end of the day, the net saving hardly amounts to 15-25 million – a piddling saving of 1.5-2.5% of TPC. Therefore, the notion that sending DE work to LCWCs brings about substantial savings is actually grossly misplaced and overblown, this is something the owner companies need to get in to their heads.

Summary: If the tax incentives can cover some of perceived saving – owing to out sourcing work to LCWCs – the owners would feel incentivized to keep maximum amount of work within Alberta and Canada. That being said, the EPC/EPCM companies should also try to effect economies in man-hour costs as far as possible. In any case, the owner companies got to be requested, cajoled, and coaxed to make sure the EPC work is maximized in Alberta. They must remember that they have a CSR (corporate social responsibility) toward the province (Alberta) whose resources they would be exploiting to generate profit for their investors for helluva long time – after all, the oil sands projects have a pretty darn long productive life.

BALOONING DEFICIT, INABILITY TO FLEX MILITARY MUSCLE, FALLING RATINGS PUT OBAMA IN TIGHT SPOT – MAY SURPRISE PEOPLE WITH A DIFFERENT PERSONA

Let’s start with President Obama’s list of predicaments regarding international issues that is enabling his political detractors to portray him as a wimp:

De-nuclearization of Iran: United States is trying its best to avoid any option of use of force. Reason: With 17 trillion dollar deficit, US is virtually broke. It simply does not have money to spend on any military excursion – even the minor ones will add to the back breaking penury of US. Moreover, there is tremendous aversion in the American public toward another direct involvement. Furthermore, in case of Iran, any military option, which should be perhaps be a recourse of last resort, to be effective would need to be at a scale which would be prohibitively expensive for America and too heavy for war-weary American people’s will.

As a result, US is trying to tough talk its way to some face saving outcome with Iran. But, unfortunately, Iran apparently knows the monetary constraints of US to engage in any military action and would take advantage of the same anticipating correctly the trajectory of American diplomatic maneuverings of Kerry and the like.

However, a lot of American politicians from both sides of the isle are apprehensive of and uncomfortable with the approach US is adopting and do not seem to be very optimistic about a meaningful outcome. The Democrat front-runner of 2016 presidential election Hillary Clinton has said (as reported by NBC News website) “The odds of reaching that comprehensive agreement are not good,” Clinton said, per the Washington Post. “I am also personally skeptical that the Iranians would follow through and deliver. I have seen their behavior over the years…”.

Syrian crisis: US policy on Syria has been predicated on being hesitant to get directly involved, again, due to virtual financial bankruptcy of the US economy and war weariness of the American people. President Obama said Syria had “red line” when Assad regime used chemical weapons against the rebels. The world thought US would take some punitive actions through air strikes but at the last moment Obama went to the Congress to seek authorization for such an action which was turned down (by the Congress) as expected. There was huge disappointment with the ‘hawkish’ elements, like, Republican Senator John McCain and others. Obama looked timid, dithering and mousy.

The Assad regime seems to be reclaiming territories lost to the rebels. However, it is said that Obama administration’s reluctance toward any deeper involvement stems from presence of Muslim extremist elements fighting against Assad’s forces. It seems Obama administrations would prefer less extremist minded Assad prevail rather than Al-Qaida or Taliban type forces to win – this may not be a bad idea but unfortunately, for Obama, his detractors do not want to see that way.

Ukraine crisis: Russians have annexed Crimea and are now seem to be consolidating their position in the newly acquired region. The US and the European allies have imposed sanctions and articulated lot of tough sounding verbiage. However, all this does not seem to have caused any perceptible impact on Putin and his coterie. Obama detractors in the US are, again, criticizing him imputing Putin’s actions to his alleged ‘weak’ stance at the international stage.

It must be said that there was simply nothing that US or the Europeans could do in Crimea because of proximity between Russia and Crimea, and logistical challenges for the western powers to undertake any preventive action militarily. The only thing that may, however, be pointed out is that West was probably too lost in the euphoria and celebration of having caused the pro-Russian President of Ukraine and his cronies to flee, and failed to anticipate Russian reaction to it. The West remained oblivious of Russia’s sensitivities to developments in Ukraine which Russia considers as their backyard and also the century old historical linkages between the two.

US troops presence in Afghanistan beyond 2014: President Obama has yet to make a decision on the size of a post-2014 US force in Afghanistan after a 13-year war that has become highly unpopular among the American public. Outgoing President Karzai surprised the international community and many Afghans in December 2013 when he ignored the recommendation of an assembly of tribal leaders and other dignitaries to sign it, saying he would leave the final decision to his successor after 5 April elections.

A bipartisan delegation of US Senators to Afghanistan called on President Barack Obama this week to announce a decision on his plans for future troop levels in the country, on the assumption a much-delayed security pact eventually will eventually be signed with Kabul. One of the delegation members, Senator Kelly Ayotte of New Hampshire, a Republican, said Obama should not wait for that to give an idea of what the US presence would look like after the Nato-led combat mission ends at the end of this year. This issue is confounding Obama and his reticence on the subject is providing ammunition to his opponents to criticize him for his indecisiveness.

Then there are some other issues that is causing headache to Obama:

Strains in relations with Israel: Israeli Prime Minister Netanyahu is not very happy with the American policy trajectory on Iran and pressure on Israel to make some hard choices before 29^th April toward resolution of Israel-Palestine imbroglio.

Since the global powers reached an interim agreement with Iran last November, Netanyahu’s warnings about Iran have been largely ignored. A frustrated Israeli leadership now appears to be ratcheting up the pressure on the international community to take a tough position in its negotiations with Iran. A front-page headline in the daily Haaretz this week reported that Netanyahu has ordered “to prep for strike on Iran in 2014” and has allocated US$2.87 billion for the groundwork. Earlier this week, Defence Minister Moshe Yaalon hinted that Israel would have to pursue a military strike on its own, with the U.S. having chosen the path of negotiations.

Whether Israel would translate its rhetoric in action remains to be seen and seems improbable, nevertheless the above mentioned developments were meant to jolt the global powers as a wake-up call.

Drop in approval ratings: Wall Street Journal/NBC News poll in March shows President Obama's job approval moved down to 41% in March from 43% in January, marking a new low. Some 54% disapproved of the job he is doing, matching a previous high from December, when the botched roll-out of his signature health law played prominently in the news. The latest survey also showed the lowest-ever approval in Journal/NBC polling for Mr. Obama's handling of foreign policy.

Democrats’ worry about losing Senate in November elections: As per NBC News, prominent figures still associated with President Obama and his White House team are sounding the alarm bell that the Democratic Party could lose the Senate -- if not more -- in November. Former White House Press Secretary Robert Gibbs said that the Democrats’ control of the Senate was “definitely” in danger.

NBC News also reports that due to falling approval rating of Obama some vulnerable Democrats are already shunning Obama’s assistance. The president reportedly acknowledged his lackluster approval ratings during his meeting with Senate Democrats at a retreat recently.

The Democrat candidates Mark Begich in Alaska, Mark Pryor in Arkansas, Mary Landrieu in Louisiana, and Kay Hagan in North Carolina are especially keen on distancing themselves from Obama because of his overt opposition to Keystone XL pipeline project. The above mentioned four senators joined the Canadian Ambassador to US, labor union leaders and others in February this year to express support for this project. Obama has stated that he would give his decision by end of April. If he rejects this project, these four senators’ political future and Democrats’ hopes of retaining majority in Senate would be almost surely be compromised.

‘Weight’ of Nobel Peace Prize: President Obama seems to be continually weighed down by Nobel Peace Prize conferred on him – he seems to be struggling with himself on every issue that involves potential of military option; he seems to feel hand cuffed and suffer from dissonance within himself due to this prize (and unsaid expectation that came with it). As well, Obama seems to be very worried about the legacy he would leave behind and how history would judge him on various issues – be it US interventionism, or stand on environment, or bipartisanship at Capitol Hill and so on.

So, what might Obama do now? It is quite clear that President Obama needs to do something different to shake off the following perception:

·       Professorial, less of a man in command at helm

·       Speaks too much (from scripted speeches)

·       More words, less of actual action (esp. regarding international matters)

·       Afraid of re-calibrating his stance on issues (which explains his being fearful of environmental lobby)

·       Paralysis by over analysis

·       Unreliable, shifty, dithering, indecisive

·       Worried about legacy and Nobel Peace Prize expectation

In order to deal with the above mentioned perception issues and not get relegated to being a lame duck president for two years, Obama needs to change tack, take decisive stands (e.g., he should okay Keystone XL instead of being cowed down by some of his so-called donors). Hopefully, the Democrats would see an invigorated, crisp, concise, bold person who is not worried about how history will judge him. After all, two years is too long a period to remain in a semi-retired ineffectual state waiting for the term to be over. One is remembered in history not because one shied away from unpopular stands but because one overcame one’s shyness to take a right stand.

WITH CRIMEA ALREADY DE-FACTO OCCUPIED BY RUSSIA, WHAT ARE THE OPTIONS FOR WESTERN WORLD?

Not sure whether it is living in denial or utter stupidity, the Western media (TV channels) is still NOT characterizing the situation of Crimea as of Saturday 01 March as de-facto occupation by the Russian forces - the situation is being described as “so many thousands of Russian military personnel are reported to be present in that peninsular region of Ukraine”. Anyway, the fact of the matter is that, for all intents and purposes, Crimea is now under de-facto occupation of the Russian forces.

One reason for being in state of denial could be that if the Western media reports that Crimea is under de-facto occupation of the Russian forces, it would in the same breath convey admission of failure of western world to protect that region. It would be embarrassing, obviously.

Be that as it may, the question is: What can the western world do? It is to be kept in mind that Russian President Putin has obtained backing of the upper house of his Parliament to use force in Ukraine (not just in Crimea) to ‘protect Russian people in that country’, so, any use of force has been validated by the Russians never mind that the such a permission may not have admissibility in the eyes of international law.

Why Crimea is important for Russia?

·       This region provides only warm water port to the Russians. Mind you, for centuries Russians have felt handicapped by unavailability of warm water ports. The Russians were very clever in having an agreement with Ukraine allowing them to station a naval fleet in Crimea; Russia keeps a major naval base in the Crimean city of Sevastopol, where its Black Sea Fleet is based. Apparently, Russia's lease on the Sevastopol base lasts until 2040’s.

·       Also keep in mind, the majority of the Black Sea coastline is held by NATO allies except for Georgia on the east, which is actively seeking NATO membership, and Ukraine in the north. Therefore, without a naval base in Crimea Russia is severely crippled as a global military power.

·       The Russians have a historical wound too in regard to Crimea. Many will have heard of Crimean War of 1853-1856 – the war was a result of rival imperial ambitions, when Britain and France, suspicious of Russian ambitions in the Balkans as the Ottoman Empire declined, sent troops to Crimea to peg them back. Russia had lost; they have not forgotten that humiliation.

How the de-facto occupation of Crimea helps Putin?

·       It gives him a reason to be part of any negotiations that Ukraine might have to undertake to resolve the current crisis.

·       The de-facto occupation of Crimea would potentially embolden the pro-Russia population in the Eastern regions of Ukraine, namely, Kharkiv, Luhansk, Donetsk, Zaphorizia, Odessa and to some extent, Kherson, Dnepropetrovsk, and Mykolaiv to rally and consolidate. This would also help Putin in having a stronger hand and leverage at the negotiating table.

·       The above-mentioned regions and Crimea may have to be given more autonomy in any eventual negotiated settlement which will work in Russia’s favour. Furthermore, the above mentioned regions would provide counterbalance to pro-western regions of Ukraine.

·       Russia would also like to have some guarantee for the safety and security of the gas lines passing through Ukraine to Europe. Having a strong indirect foothold in Ukraine would potentially provide Russians that assurance. These pipelines are a source of revenue for Russia as well as they are a lever for keeping pressure on the end user countries too, albeit, in a limited manner (remember, Russia had threatened to turn off the gas supply to some countries few years back due to gas price disagreement).

Options of western countries:

The western countries do not seem to have any effective short-term leverage against the Russians. The Security Council meeting on 1^st March practically yielded nothing. It does not seem it would be possible to get any stronger sanction like clearance from the UN Security Council because of veto power of Russia.

Some symbolical actions were taken by western countries, e.g., Canada recalled its ambassador from Moscow on 1^st March and suspended its engagement in preparations for the G8 Summit. President Obama spoke for 90 minutes with Putin wherein apparently he made clear that Russia's continued violation of Ukraine's sovereignty and territorial integrity would negatively impact Russia's standing in the international community

But the above are generally jejune demonstration that the western countries are doing something.

However, some long term measures may be viable:

·       Economic/Trade sanctions: This would require cooperation amongst western economic powers and the international institutions, like, IMF.

·       If alternative supplies of gas could be arranged for the European consumers, in that case the gas supply from Russia can be refused permission by Ukraine. This would hurt the Russians surely. However, this would take time.

·       Western powers can engender a military buildup in Putin’s backyard.  NATO membership for Georgia, with the advanced weapon systems and training it will bring, will contribute toward degrading Russian national security. The port of Batumi could also serve as an important military asset for the western powers.

Opportunity for Canada:

The Ukraine crisis is the best time for Canada to make a case to the end user European countries (of Russian gas supply) to import LNG from Canada and move away from Russian dependency. If the Europeans agree to this alternative, which would take 6-7 years to put in place, would give additional/alternative market for Canadian LNG (aside from potential Asian customers). Of course, for this to happen, British Columbia and the Federal agencies would need to hasten the process of approvals and policies in place so that the investing companies can make final investment decisions within 2014.  

Summary:

The Ukraine crisis looks like going to be a long drawn chess game between the Russians and the western bloc. There is a potential that Ukraine may exist as a divided country in the coming years. The western powers would have to work in concert and chalk out long term social, economic, and military strategy to checkmate the Russians. Unfortunately, Ukraine would be a pawn in this geo-political chess game.

The intelligence apparatus of the western countries seem to have been caught napping at the present time, however, they will have to pull their socks up for the long haul. It would not be easy to outflank, outwit the Russians, but if the western countries cooperate and play their cards well, they would be able to gain upper hand eventually. Patience and some guts would definitely be needed on the part of the western bloc in all this.