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.

ALBERTA VICTIM OF CANADA’S VOTE BANK POLITICS; AND, UNEMPLOYED SUFFERING DUE TO DELAYS IN EI DISPENSATION

Amidst all the recent brouhaha related to auto industry’s near closure situation in Ontario province, the plight of huge unemployed work force of Alberta has got submerged and forgotten. No doubt thousands of workers were axed by GM, Chrysler and Ford and potentially many more may have been affected indirectly, but the fact remains that Alberta also saw massive lay offs from Q4 2008 till Q2 2009 – it is still going on.

The precipitous fall of crude prices led to cancellation of many oil sands projects. Coupled with this, falling prices of natural gas caused big cut down in new wells to be drilled. This dealt a double whammy to the Albertans and resulted in job losses not seen in decades. As well, there have been thousands of bankruptcies in the province which was riding wave of prosperity until a year ago.

But the unfortunate part is that while auto sector workers have got all the attention from the Federal government in terms of bail out funds and other help, no body has bothered to look at the plight of the massive number of laid off workers of Alberta. A substantial portion of people were laid off from the engineering companies and these people have no other job options because there are hardly any oil and gas projects elsewhere in Canada.

The Federal government seems to be keener in looking after the Ontario workers because the number of Parliament ridings is far more in that province than Alberta. Obviously, the vote bank politics is prompting the government attitude rather than the compassion or humane side of things. The Alberta workers have been left to fend for themselves with very little government support coming forth.

To make matters worse, the EI support to the laid off workers has been very slow to come. There doesn’t seem adequate staff to cope with the deluge of EI applications in Alberta. EI support cheques should start arriving within couple of months of having got laid off, but reports suggest longer waiting period for the laid off workers.

People in the other part of the world may have a perception that in Canada things happen in a non-partisan, fair and equitable manner but in reality that seems to be more of hogwash, complete rubbish. Hypocrisy rules the roost in Ottawa it would appear, securing vote bases for future parliamentary elections seems to be more important than the predicament of the suffering folks of provinces which do not send MP’s in droves.

Shameless self-seeking schmuck politicians do not exist in the developing countries only, they are present in Canada too; the difference may be only in terms of façade or polish that is maintained in this North American country.

One wonders when the conditions would turn around in Alberta, and the thousands of hapless engineers, skilled workers, and other laid off work force would get employment and lead a reasonably un-stressful life. It seems only God can provide some succour to the suffering and the dejected. The question is: when would He decide to shower His Grace!

ARE SOME CANADIAN & EUROPEAN OIL COMPANIES LESS MONEY SAVVY THAN SOME OF THE US COMPANIES?

The present economic downturn has hit Canada too fairly badly, and jobs are evaporating by the day. The January job loss figures indicate that Ontario province suffered the most. This is understandable due to the contagion of auto industry ills crippling the big three American auto companies affected the companies to the north of the border.

But the province which till middle of last year was riding a wave of big investments is also suffering from increasing number of full time job losses – Alberta. Till last year Alberta’s economy was riding high, fuelled by big investments in oilsands projects. But suddenly a lightning bolt hit these projects in Q4 last year.

As per Canadian Energy Research Institute (CERI) its own 2008 forecast of oil sands production of 3.4 million billion per day by 2015 has been scaled back to 2.9 million billion per day, gathering pace to 3.7 million per day to 5.4 million billion per day by 2030, compared with its previous target of 5 million billion per day.

CERI further states that Canadian oil sands is going to stagnate, capital investment over the next 11 years will be cut 31% from a forecast made only 3 months ago and will need WTI prices above USD 70 per barrel to resume growth and expansion.

A number of mega oilsands projects have been put on hold, and almost all the projects are being reviewed from the point of view of CAPEX cost reduction. What is hurting the job market is the stalling of engineering work done in Calgary and Edmonton, and absence of new construction jobs related to oilsands.

But what is most curious is that the mega projects of some Canadian oil companies like Petrocanada and Suncor, CNRL have had to face major axing consequent to these companies hitting panic buttons. Their balance sheets and cash flow have suddenly come under such tremendous pressure that they have had to cancel large chunks of the projects, and mothball the remaining alive portions.

European player Shell cancelled its second upgrader expansion and put on hold their upstream expansion part. Other Europeans companies like Total and Statoil were chickening out even before the lightning struck the oilsands. These two companies had already been dithering for quite sometime.

Interestingly, on the other hand, Canadian oil companies developing their oilsands assets in collaboration with US based oil companies, like Encana (partnering with ConocoPhillips) and Husky (with BP) don’t seem to have run in to such panicky situation. Albeit, they also have had to scale back investment in some of their new projects but not in that drastic manner as Petrocan and Suncor have had to do.

But most interestingly, Imperial Oil whose majority shareholder is ExxonMobil (69.6%) didn’t have to press any panic button. Imperial is going ahead with their Kearl project, said to be a $7-8 billion Imperial Oil and ExxonMobil Canada project. Exxon are known to be notoriously conservative in their investment and economic rate of return analyses.

However, this can’t be said about another American company – ConocoPhillips – whose in-situ oilsands project in Surmont (in partnership with Total) has been put on a very slow track. It is not clear whether cash flow considerations were the only reason for slowdown or Total’s lack of enthusiasm was a contributing factor too.

At any rate, however, the above throws up a question: Why did the US based companies not have to drastically alter their oilsands project development plans? Why did they not seem to be pressing panic buttons and manifesting knee-jerk reactions? Are the US based oil companies better in their working out their investment strategies? Are their economic analyses models more stringent and powerful?

Surely, the world at large doesn’t get to know the details of project planning and investment decision making by various companies, therefore, one would not be in a position to provide conclusive answers to above questions. But then the folks losing their jobs in Alberta must be wondering why the heck the CEO’s of those companies, that went in to a paralytic limb late last year and started hacking down their oilsands projects, were paid the big bucks till recent past!!

It is the job of the top management to make sure that the investment decisions are rational, realistic and have been tried out for different scenarios. Why did some of the Canadian oil companies have to bite so much that they could not chew? If they didn’t have a US partner who could process their bitumen (if they went for bitumen only route) why did they not look for a partner before opting for the whole meal deal project implementation strategy, i.e., going all the way to upgraders in the first phase itself, or think of a safer project investment model?

One wonders what kind of intelligent thinking some of these companies did before committing such huge outlays! Do they realise that because of their unreasonable over-exuberance various engineering and construction companies in Alberta mobilised huge work forces, and now the same work force is being laid off in droves?!!

Some of those CEO’s will say in their defence that nobody in the world could predict the recession coming to US and the consequent slowdown in fastest growing economies like China and India, and hence their assumptions of oil price (we don’t know what they were) were justified. But that does not mean that they ought to have considered a high crude price and worked out their current and future revenues. Why were they not conservative in their assumptions and what prevented them to develop manageable portions of new projects – manageable with respect to revenue generation during project implementation phase?

May be there is lot to learn from the way ExxonMobil folks carry out their project development and economic analyses. It is not for nothing that this company has such a huge cash reserve that it could, if it wanted, buy any oil company in the world.

And, you know what, it is said that Exxon likes to implement new projects during economic downturns so that the project costs be kept relatively less. They can afford to do so –because of their strong cash position. So, you see – they set themselves up for making more money; because when good times return their revenues improve while their initial CAPEX had been lesser (because they set up their project during economic downturn). Makes sense, doesn’t it!

One feels sad to see so many engineers, tradespeople getting out of their jobs in Alberta only because some folks who in their own flawed wisdom – one can certainly they their wisdom was flawed – contributed towards huge growths in engineering and construction companies in Alberta. Currently, those companies don’t have projects to assign their folks to!

Now, all eyes are on US president’s visit. Will Mr. Obama’s visit on 19 Feb bring more bad news for oilsands projects, or, will he provide some words of comfort with regard to continued cooperation with Canada in developing this resource on a long term basis? Surely, US wishes to move away from dependence on foreign oil from ‘hostile regimes’. Be that as it may, the families of the jobless are praying for some good news – are the Gods listening?