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.

NEGLECT OF YOUNG CANADIAN UNDERGRADS GIVING RISE TO POTENTIALLY DISASTROUS SITUATION IN ALBERTA (AND CANADA)

The economic recession that engulfed the globe in mid-2008 has triggered a very disturbing situation in Canada, and Alberta in particular. There were massive job losses in Canada and Alberta not witnessed since 1980s and the people who were among the most severely hit were the young workers – in the age group of 18-26.

In Alberta the huge number of oilsands projects brought a fantastic economic upswing in the province from 2001-02 onwards. Fort McMurray, Calgary, and Edmonton were flush with jobs – with engineering jobs more concentrated in Calgary and Edmonton, and tradespersons’ jobs abounding in Fort McMurray. Hourly rates were going through the roof in the so-called ‘Middle East’ of North America, i.e., Fort Mc.

The burgeoning engineering companies in Alberta were offering jobs to fresh engineering undergrads to experienced alike at frenetic pace. The joke making round in 2005-06 was that if someone could spell ‘engineering’ that person was getting hired. There was a mad rush of immigrant engineers who claimed experience in oil, gas and other sectors.

But as the oilsands projects started to come to a grinding halt in 2008, massive lay offs ensued. And, bearing the brunt of this all were, among others, the young engineers. The saddest part is that these young engineers had cut their teeth in engineering in Canadian engineering schools. These young engineers who were aspiring to be the future torch bearers of Canadian expertise were given most shabby treatment by the oilsands related companies of Alberta.

During these trying times, most of the engineering companies and a number of operating companies of Alberta were and are found following dangerously short-sighted policy of relying on immigrant engineers, who have on paper more number of years of experience, to run their show.

A large chunk of these foreign educated Bachelor degree holders are pathetically ill equipped in terms of communication skills and Canadian outlook toward work culture and excellence in general. As well, most of the immigrant work force is relatively more aged.

Now, what is happening is that by not providing employment opportunities to the young Canadian engineers (EITs), the layer that would otherwise be ready to fill in the vacuum in the middle management level in the coming years when the baby boomers will be gone is not getting properly formed. These young undergrads not only bring the excellence of the Canadian engineering schools but also bring the mindset of Canadian work ethics and attitude right from the day one to their respective jobs.

The young men and women coming out of the various Canadian universities after completing their undergrad studies had formed the backbone of Canadian industrial resurgence in the late 20th century. These young men and women had brought with them the potential managerial skills so very vital to development and sustaining the edge in competition.

But that edge is getting severely blunted and lost especially in Alberta. Because, if the young engineers don’t get the experience they need in their formative years, out of the engineering schools, how will they develop the necessary oilsands and other oil and gas expertise which is fundamental to continuation of Canada’s reputation of delivering high quality output?!

Performance of a company and quality of work depends on the managerial competence of those entities. Canadian universities not only impart high quality education, they also provide a well rounded personality development, including solid grounding in soft skills, during the undergrad courses.

But if the young Canadian undergrads are not provided continued job opportunities how can they get groomed to be future managers of Canada? How will that competent layer be ready to fill the void created by the retiring baby boomers? A layer that is competent in communication skills and ingrained with Canadian work culture and values, a layer that is trained in Canadian excellence and trained to think like one! This situation is indeed potentially disastrous for Canada!!

But sadly, the incompetent and intellectually impoverished decision makers of the various engineering and operating companies are destroying the future of Alberta (and Canada) by not taking back the Canada educated engineering undergrads as soon as new job opportunities are coming up. The situations is getting further exacerbated by robot-like recruiters who cannot distinguish between ‘real’ talent and the ‘irrelevant’ talent which claims simply more number of years of experience on paper.

One hopes Alberta has not become totally devoid of sane and competent people, and that these people will realize the path of disaster the short-sighted blundering idiots are treading on. One hopes the companies in Alberta, especially the oilsands related, will refocus their attention on development of future layers of management based on home grown young undergrad talent by re-absorbing them in jobs.

If the handful sane elements in the provincial or federal Govt don’t intervene soon enough, the damage that will have been caused to future managerial competence of Alberta (and Canada) will be irreparable. Ruing at a later day will not undo the stupid actions of the present day. May God give the decision makers some modicum of intellectual sense!