Global economic uncertainty a reality in fabrication outlook

Written by Godfrey Budd Tuesday, 20 September 2011 12:49

Overall, apart from some clouds on the international economic horizon, the outlook continues to improve for the province’s oilsands-driven metal fabrication sector. The increase in overall activity that has occurred over the past year, however, is by no means evenly spread across the industry as a whole, or evenly across individual sectors, whether pressure vessel or structural steel fabrication. Depending on the shop, the level of activity ranges from fairly slow to super busy.

“Things have picked up quite substantially,” observes Bob Saari, executive director of the Alberta Pressure Vessels Manufacturing Association (APVMA). “The big shops tend to be awarded contracts for larger vessels and projects, so there are longer lead times for those. As a result, they tend to get busy later in the phase, as there is much more engineering to get them underway.”

Debottlenecking projects, which increase plant capacity in the oilsands, and other shutdown operations, he says, can have a greater impact on small to medium-sized fabrication shops, enabling them to experience a surge of activity sooner than their larger counterparts.

Saari doesn’t expect the latter to see a really big increase in activity until the second or third quarter of 2012. But, compared to a year ago, “People sounded much more positive this summer.”

The delayed rise in activity among some larger shops has been a disappointment for some. A year ago, both industry analysts and some senior fabrication executives had anticipated a significant rise in activity by this fall. As yet, it is not happening.

Still, there have been encouraging signs.

“This time last year, there was very little bidding activity,” says Don McFarlane, president and general manager of CESSCO Fabrication & Engineering Ltd. “But since last Christmas, we’ve seen a lot of bidding activity, but the level of work itself is still in a holding pattern.”

He points to several projects for which fabrication and construction are expected to begin soon, including Shell Canada’s Quest carbon capture and storage (CCS) project, the North West Upgrader and Husky Energy Inc.’s Sunrise project. Sunrise is a thermal in situ operation, also known as steam assisted gravity drainage (SAGD).

Other oilsands projects are also waiting in the wings. A total of about 50 have received regulatory approval, but are not yet under construction. Several of these are slated to begin construction soon, however. Currently, about 10 oilsands projects are under construction.

CESSCO has put out bids on a range projects, but McFarlane doubts the bids will translate into activity before the first or second quarter of next year. Several big projects still await company board-of-directors’ approval before getting the final go-ahead. On the other hand, he says, this year’s level of bidding activity has been good, compared to 2010. “Last year, there was almost nothing to bid on, so this is encouraging,” he says.

He adds, though, “Shop activity is still below peak levels and capacity. Our sector is still slow because of less work for the oilsands.”

Waiward Steel Fabricators Ltd., which was forced by the slowdown three years ago to lay off about a third of its workforce, is still running its structural steel fabrication operations well below capacity. Increased competition from outside the province is one factor.

“A lot of work is leaving the province and a fair bit is leaving the country,” says Don Oborowsky, chief executive offier of Waiward Steel.

Also, he says, oilsands operators are more cautious, insisting that engineering design work is more complete before going ahead and awarding contracts. In the past, companies like Waiward would make design changes to equipment—sometimes even after it had reached the site.

“That added to the cost,” he says. “Now, [operators] want drawings that are far more complete.”

As well as financial caution, another source of the more disciplined approach to engineering design stems from the practical difficulty for distant and overseas suppliers of making last-minute changes. More work for the oilsands, says Oborowsky, is being done elsewhere in Canada, in the United States and overseas in China and Korea.

Larger fabricators are also seeing margins on oilsands contracts pinched because of the diminished economies of scale that result from today’s smaller contracts. “The unit costs for a $25-million job are much less than for a $5-million job. From a management perspective, you need the same number of people in place for each, although [the bigger job] might take a bit longer,” he says.

The European financial crisis and the weak U.S. economy could potentially hurt oilsands development prospects, prompting industry players like Oborowsky to keep a keener eye on the price of oil. He notes that it has dropped nearly US$15 per barrel in recent months.

The danger zone for oilsands construction is thought to be somewhere between US$70 and $85 per barrel. Still, so far this year, the price has averaged US$90 per barrel, and the recent oilsands construction boom that ended three years ago took off in 2004, when oil prices averaged just under US$38 per barrel. But, partly because of that boom perhaps, and despite a steep downturn in 2009 that cut prices and day rates for many services, the province is now often seen as a more expensive place to do business than it was seven years ago.

Also, the global economic uncertainty is unlikely to boost a company’s tolerance for cost overruns to oilsands projects. Nonetheless, they appear to continue. In May, Imperial Oil Limited announced that the cost of the 110,000 barrel-per-day Phase 1 of its Kearl project was, at $10.9 billion, about a third more than the original estimate of about $8 billion.

Fabricators with much of their focus elsewhere might be in a better position than those tied to the oilsands. Some mid-size firms like MaXfield Inc., which does fabrication for transport, agriculture, liquefied petroleum gas storage and transfer systems, and other products for the natural gas sector, as well as oilsands equipment, have seen strong growth, recently. “We’re very busy, up 30 per cent from last year,” says Tony Giasson, president and chief operating officer at MaXfield.

Surprisingly, though, Giasson, McFarlane and others worry that, if and when fabrication activity really ramps up, there won’t be enough skilled trades—in the United States or Canada—to meet requirements. This is despite continued high unemployment in the United States, some slow years in the sector since 2008, and, according to the latest data from Statistics Canada, stalled job creation in Canada, with construction employment falling by 24,000 in August. Also, employment in natural resources declined for the second consecutive month in August, down by 12,000, according to the agency.

The staffing issue, which is disputed by the Alberta Federation of Labour, could become moot, however. Giasson expects continued growth provided two things do not happen—another recession or the price of a barrel of oil dropping another $15 or $20.