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.

CANADIAN PIPELINE PROJECTS IN LIMBO? NO WORRIES, HERE IS AN ALTERNATIVE SOLUTION!

All logically minded and technically well informed people know that the Keystone XL pipeline is:

·       Good for both US and Canada from various standpoints (economic, political, technical);

·       Not a villain, by any logical stretch of imagination, in the climate change dynamics;

·       A safer way to transport bitumen to the US refineries which have been retrofitted at hundreds of millions of dollar to process this Western Canadian Select crude.

However, the US administration is playing football with this project for more than five years – one does not even know whether any decision would at all be taken never mind the timeline.

So, the POTENTIAL alternatives folks are talking about in regard to transportation of bitumen:

-     Transport by rail cars: TransCanada is thinking about it. But this mode of transport is under cloud due to recent accidents, e.g., Lac-Megantic disaster, bsides, there are other constraints too;

-     Northern Gateway Pipeline (ENBRIDGE): This project was not exactly conceived as an alternative to Keystone XL – this project officially started in 2004 (as per the project website). At any rate, however, this project is expected to face serious challenges from the First Nations and the environmental groups resulting in inordinate delays;  

-     West to East Pipeline (TRANSCANADA): Again, this proposal too is likely to run in to rough weather and delays due to involvement of various provinces (through which the pipeline is proposed to pass through).

-     Line reversal (ENBRIDGE): This project too is facing obstructions from various groups.

Is there no other solution that can circumvent all the above issues? Well, there is provided the concerned parties - namely, the Province, Industry (TransCanada and Enbridge) - and some others who are supportive toward harnessing Canadian resources for development of Canada, its people and its economy come together.

SO WHAT’S THE PLAN?

Preamble:

We know that Saskatchewan Premier Brad Wall is very supportive of oil sands developments in a sustainable manner as is Alberta Premier Allison Redford. We also know that West Coast newspaper mogul David Black is interested in setting up a refinery in BC (but apart from money constraints the main bottleneck for this project is the pipeline transporting Alberta bitumen to BC – again, the same issues that bedevil Northern gateway Pipeline). We also know that potential buyers of bitumen in Asia are all asking one question: What is the high tide exit point from Canada? Have all issues in regard to the exit point been resolved? If not, what is the definite timeline?

OUTLINE OF THE PLAN:

Form a consortium of following parties:

Ø  Province of Alberta

Ø  Province of Saskatchewan

Ø  TransCanada

Ø  Enbridge

Ø  David Black (who would bring on board the investors he says are willing to pony up money)

Project:

Ø  Set up an Upgrader facility to process bitumen from Alberta and Saskatchewan in future (from its Bakken formation)

Location of the project:

Ø  In Saskatchewan at some optimized site closer to Alberta-Saskatchewan border such that it should facilitate transport of bitumen from Alberta via pipelines and from Saskatchewan oil sands producers in future. Why Saskatchewan? First, to share the investment; second, tight oil is going to come from this province apart from bitumen from oil sands.

Estimated cost of the project:

Ø  $10-15 Billion depending upon extent of upgrading facilities installed, length of pipelines and associated tankages.

Products from the Upgrader:

Ø  Synthetic crude oil (SCO).

Pros of this project based on the proposed consortium:

Ø  Bitumen transport pipelines’ approval will be within Alberta and Saskatchewan jurisdiction: This means much lesser hassles in terms of approvals from the various authorities;

Ø  Product would be synthetic crude oil which can then be:

-     Piped to various refineries within Canada (Central Canada or East Coast); alternatively,

-     Piped to US or to Asia through BC coast – the opposition to pipelines is for bitumen transport, it will be much less for synthetic crude oil.

Ø  Investment will get shared and hence investment on the part of each party will be within manageable limits – TransCanada and Enbridge are already prepared to invest billions (>CDN$5.0 Billion). Both the provinces could also possibly fork out 2-3 of billion dollars each, Mr. Black can bring his investors’ billions too on the table. And, may be Ottawa might chip in with some billions (much less than 8 billion dollars Mr. Black requested for from Ottawa);

Ø  The project will produce value-added products in Canada – this will silence the critics who allege that by transporting bitumen to US or Asia, Canada is throwing many jobs away down the pipeline;

Ø  The refinery can be expanded later to process more bitumen produced in Alberta and Saskatchewan;

Ø  This project would minimize potential accident hazards (of rail car) and longer pipelines carrying bitumen;

Ø  The project would avoid litigations and consequent delays that the proposed pipeline projects are facing/expected to face;

Ø  The project would assure the international investors and buyers (of SCO) about the definitiveness of the project and availability of the product, and Canada would be able to take advantage of the window of opportunity;

Ø  There would be definitiveness for the large, medium and the small oil sands producers who are wondering how they will get their product (bitumen) to some market. Because of this uncertainty many projects are on hold, consequently, work load for EPCM companies in Alberta is moving toward a cliff, soon there will be a spike in folks seeking EI in Alberta unless there is some miracle;

Ø  There would be synergy between the two pipeline companies instead of unnecessary rivalry and competition;

Ø  BC can be persuaded to chip in with some investment in future for the pipeline from the Upgrader to BC coast for shipment to Asia. If they don’t, well, TransCanada, Enbridge and Mr. Black could possibly pool together money for such a pipeline (these companies could hopefully manage and adjust their cash flows suitably) – some new investors may also come on board sensing the opportunity;

Ø  Canada would not be hostage to decision making of others.

Timeline of the project:

Ø  From concept to commissioning: Maximum 60 months, in other words, by end of 2019/beginning of 2020 if the parties agree and get going this year (2014). This pretty much comes close to the realistic timelines of the Northern Gateway and West to East Pipeline project completion dates.

Well, if Google-X team can think of out-of-box solutions, so can the folks in Canada. It’s high time the concerned parties thought out of the box and gave a serious thought to the above proposal and brought some touch of finality to projects in Alberta (and Saskatchewan).

ALBERTA OILSANDS AND ENGINEERING COMPANIES NEGLECTING THE LAID OFF CANADA EDUCATED JUNIOR ENGINEERS

“Job losses surprise Tories”, screamed a headline from a Calgary’s newspaper on 8th August 2009. The news went on to state that since the economic downturn struck in October 2008, Alberta's jobless rate has climbed month after month, nearly doubling to 7.2 per cent in July 2009 (highest since June 1996) with the evaporation of 75,600 positions.

In Edmonton, the unemployment rate was 7.0 per cent in July, compared with 6.5 per cent in June. Calgary's rate increased to 6.9 per cent from 6.6 per cent. The figures are based on three-month moving averages. Meanwhile, the number of people failing to make payments on their debt jumped more in Calgary than any other Canadian city, according to Equifax Canada.

First, due to the incompetence and blunders of oilsands companies the Canada educated young engineers suffered when the projects got shelved, and then due to the combined effect of incompetence of recruiters and myopic view of employer companies, the aforementioned junior engineers are getting a raw deal.

Someone not familiar with Canada and in particular Alberta would wonder why this calamity befell Albertans. For them and others, here is a quick recap: During 2006-07, a number of oilsands companies launched highly ambitious plans for development of the vast hydrocarbon resource – called oilsands – that abounds Alberta.

It must be said that except Imperial Oil the top management of these oilsands companies made investment decisions in a stupid manner without doing commonsensical due diligence regarding risks to their long term investment plans. Like a bum high on pot, these numbskulls thought in their fool’s paradise that oil prices will remain high and their projects will have attractive IRR’s.

Due to the mega projects arising out of financially foolish decisions of these various oilsands corporations, the engineering companies in Alberta filled positions with people like crazy – a lot of these positions were filled by new immigrants who came in droves to join the gold rush.

However, in mid-2008 came the cataclysmic downturn stemming from greed filled devious financial products sold in US. The disaster that started in US caused a global meltdown which, among other things, brought a precipitous fall of oil prices from >US$120 to less than US$40.

This dealt a huge blow to the not well thought out ambitious oilsands projects alluded to above. Except Imperial Oil's projects, other projects started to get shut down or moth balled one after another from late 2008. Consequently, the engineering companies in Alberta started laying off people in hundreds.

In this massive layoffs the young engineers who did their undergraduate degree from Canadian universities are the worst affected. However, as the oilsands companies – small to big – reconciled to reality in Q2/Q3 2009 and started to develop new projects in slow and cautious manner, some laid off engineers started to get job offers.

But the job offers are very few and far between for engineers having 2-3 years experience in oilsands projects. These bright Canadian universities educated engineers are getting shunned by the myopic, dim witted and foolish attitude of both engineering and oilsands companies.

The aforesaid companies want engineers with 5-7 years or more oilsands’ experience. Since there is this racket in Alberta and Canada of hiring of people through recruitment companies, the young, dynamic Canada educated engineers are getting filtered out at the hand of the robotic recruiters.

These twits are just looking at numbers (of experience) rather than the core competency of the candidates who may have relatively less experience. The important aspect that is getting overlooked is that these young engineers cut their teeth in oilsands rather than drifting from some other oil and gas experience and that too from other countries.

Moreover, because of their Canadian engineering education these junior engineers have an edge over the so-called 5-10 years experienced jokers coming from outside Canada a large number of whom can’t even speak English properly.

Most of the recruiters don’t have necessary competence to discern whether a so-called 5-6 years experienced engineer, who may have done his Bachelors from some other country’s very pedestrian level university, has got necessary oilsands experience, or, is s/he bluffing her/his way through by camouflaging their experience under the façade of years of experience.

The poor young engineers who started their career in oilsands after completing their undergraduate course from Canadian schools are getting edged out at the very screening level at the hands of lousy recruiters, and second-rate interviewers of employer companies.

The question is: who will crack the whip to instil some sense in the minds of the employer companies to provide employment opportunities to the bright, Canada educated young engineers rather than opting for some foreign educated clown who has neither the communication skills nor the familiarity with the Canadian way.

It is so disgusting and painful to see the young, bright, capable (but less in so-called years of experience) Canada educated engineers suffering, for no fault of theirs, due to callousness, inadequacy, incapability of people charged with hiring processes. Probably only God’s intervention can bring some relief to these struggling young folks! Amen!

THANK YOU, MR. IGNATIEFF, FOR YOUR POSITIVITY ON OIL SANDS – ALBERTANS AND CANADIANS APPRECIATE IT!!

Canada’s Federal Liberal party leader Michael Ignatieff has come out with some very sensible views on oilsands – an issue on which his predecessor (Stephane Dion) had championed a revenue-neutral carbon tax which, oilpatch observers were worried, would have inflicted disproportionate damage on Alberta's carbon-based economy, and consequently on Canadian economy.

Dion’s party fared poorly in Federal elections last year and along with him went out of the door his thought-less policy too.

In an interview to a radio station on 16th Jan, Ignatieff admitted that any policy that comes from Ottawa can't jeopardize the oilsands - which is one of the only industries propping up the Canadian economy right now. "When you're in St. John's airport and you see a guy in cowboy boots and a cowboy hat getting on the plane you know what the oilsands mean to the entire Canadian economy," Ignatieff reportedly said.

The present Liberal leader admitted his party made mistakes with energy policy in the past, including the national energy plan. He said his goal was to develop environmentally and socially sustainable policies for the oilsands.

While speaking to a newspaper last week, Ignatieff went on to insist the federal government must consider offering the oil and gas sector a stimulus package in its Jan. 27 budget, comparable to the multi billion-dollar bailout of the Ontario-based auto industry. "The West should be rightly angry if we assisted only Central Canada," Ignatieff told the newspaper. "We can't put money into the auto sector in Central Canada without considering the legitimate concerns of the B.C. forest industry and the Alberta oil industry. There has to be regional fairness in the stimulus package."

Ignatieff’s views clearly go above partisanship, beyond petty politics; they are patriotic, pro-Canada. Ignatieff’s pan-Canada outlook got further articulated when he said that while oilsands has its environmental challenges, oilsands are a lucrative tool, both financially and politically, that increases Canada's stature around the globe and allows the country to stand its ground on several policy fronts against the U. S.

The above bodes well for not only for Alberta but the whole of Canada. His views are now more or less along the lines of views held by Alberta’s Premier Ed Stelmach, and Canada’s Prime Minister Steven Harper. These statements will no doubt be providing much needed hope to the people of Canada who can now justifiably look towards political stability in Ottawa.

Canada’s federal budget will come up for voting on Jan 29, and Harper’s minority government needs support of at least one opposition party to survive the voting. Harper has indicated that he will listen to Ignatieff’s suggestions on the upcoming budget with an open mind.

If Harper can accommodate some of Liberal party’s suggestions, he can undoubtedly rest assured that Liberals won’t let his government fall. That will mean stability in Ottawa, and political stability is what encourages the potential investors, including the big oil companies, who are currently sitting on the fence in wait-and-watch mode.

It is important to note that the sudden slow down in investment in oilsands projects was not prompted by slumping oil prices alone; in fact, it is farcical to believe that any short-term drop in oil prices should have disrupted many oil companies' investment plans, as it did; oil companies which are run by people of decent dose of competence base their decisions on the WHOLE life span of the project. The life span of oilsands projects range from 20-40 years, even more.

It does not require much intelligence to grasp that given the aggressive production cutting stance taken by OPEC countries (plus drop in non-conventional oil production), and stimulus packages announced by the G-7 countries, China and India, the aggregate demand of oil will start picking up by Q3 of this year. Coupled with the impact of production cuts, by the end of 2009 price of oil is expected to be any where between 60-100 dollars per barrel, probably more likely upwards of $70. The price of oil will remain on an upward looking curve thereafter.

So, the price of oil was not so much of a concern for the likes of Shell, TOTAL or Statoil et al. It was the uncertainties on policy level of both Canada and the new US administration regarding oilsands that impelled these companies to adopt more circumspect approach. Unless these companies are sure of policies on oilsands – of both Canada and US – and sure of a stable government in Ottawa ,which has a balanced view on oilsands, the oil companies would remain on the fence.

It may be mentioned for the benefit of those not familiar with Canadian politics that leader of an opposition party, known as NDP, had gone on record to say that given the chance his party will stop all oilsands projects. Such intellectually-challenged people were willing to cut their noses to spite their faces. Their political aspirations got better of whatever amount of intelligence they have to ignore the vital importance of a resource, like, oilsands to Canada as a whole – on economic and political fronts.

However, Liberal party’s aforementioned views on oilsands will certainly help Harper’s folks in formulating bi-partisan policy on environment, including policies relating to carbon capture. Once there is clarity on Federal environment policy, again, that will provide necessary confidence to the investors to finalize their investment decisions in regard to oilsands projects.

It is hoped that taking cue from Ignatieff, leaders of other Canadian opposition parties will set aside petty-minded politics and rally together to do what is in the best interest of the country. They will do well to remember there is much to gain, nationally and politically, in a prosperous Canada rather than in an economically and politically weak Canada.