Fabrication outlook

Wednesday, 17 November 2010 13:59

Fall 2011 and 2012 look promising, thanks to oilsands projects, but longer-term prospects are murky

By Godfrey Budd

In Alberta, the level of oilsands construction activity is a critical factor in the health of the province’s steel fabrication sector. For instance, during the boom years from 2005 to the second half of 2008, Alberta's oilsands sector accounted for about 75 per cent of the province's manufacture of pressure vessels, says Bob Saari, manager of the Alberta Pressure Vessel Manufacturers Association (APVMA). That has dropped to around 40 per cent.

Continued exports, accounting for an estimated seven to 10 per cent of Alberta’s pressure vessel output, have eased some of the pain. But overall, the level of activity has declined steeply since the boom years, and, at present, the province’s pressure vessel manufacturers, in common with the rest of its steel fabrication sector, including the key oilsands-related subsectors, steel pipe and structural, are utilizing about 50 per cent of plant capacity.

Although the general consensus among APVMA members for much of the last year or so has been that there was more work in British Columbia and Saskatchewan than in Alberta, “At a recent meeting (of APVMA members), people were more optimistic about Alberta,” says Saari. “Things are picking up and orders are starting to come in from smaller companies. Things are moving in the right direction. But it’s still a trickle not an avalanche.”

The pressure vessel sector’s output capacity is about 10,000 tonnes per month but Saari says full capacity utilization is likely three or four years away.

The long lead times for oilsands construction mean that the heavy oil projects announced in early 2010 are unlikely to translate into a surge of activity in the province’s steel fabrication sector much before the third quarter of 2011.

“Things should ramp up in about a year,” says Don Oborowsky, CEO of Waiward Steel Fabricators Ltd.

Eastern interest

Besides unused capacity, other factors could eat into the sector's profitability. There is more competition. More firms, including ones from the U.S. and eastern Canada, are bidding on projects in Alberta.

“We don't have it that bad, but we're not used to bidding against so many people,” Oborowsky notes. Also, owners are putting out contracts in smaller packages, which, he suggests, can increase the unit cost for fabrication. “Every little package is considered a separate job, but with every job, there's lots of back-up paper,” he says.

Four oilsands projects, which got the green light in early 2010, are the source of some of the optimism for late 2011 and 2012 in the steel fabrication sector. The projects:

Sunrise, owned by Husky and BP, is a thermal in situ operation, also known as steam-assisted gravity drainage (SAGD), with a production start in 2014 at an estimated cost of $2.5 billion.

Firebag Stages 3 and 4, owned by Suncor Energy Inc., a SAGD project, with production for Stage 4 to start in 2012, with a remaining $2.9 billion to be spent.

The Surmont expansion, owned by ConocoPhillips and Total SA, also SAGD, with a production start in 2015.

The two companies didn’t reveal an estimated cost when they announced the expansion, but said it would raise production from 27,000 to 110,000 barrels of oil per day.

But the biggest project in the works, owned by Imperial Oil and ExxonMobil, has so far been a disappointment to the fabrication sector. When the go-ahead for the $8 billion open-pit bitumen-mining project was announced in spring 2009, the province’s fabrication sector must have heaved a collective sigh of relief. After all, over the roughly 12-month period before the Kearl announcement, more than $100 billion worth of heavy oil projects had been put on hold indefinitely, delayed or canceled in the province.

Korean competition

But hopes in the fabrication sector sagged with news that the Imperial/ExxonMobil partnership on Kearl had awarded a $250 million order to a South Korean manufacturer, Sungjin Geotec Co., to supply the first 200 or so modules for the project. The modules are to be shipped this fall by barge from the Port of Vancouver, Washington, to Lewiston, Idaho. From there, the modules will be trucked to the Montana-Alberta border at Coutts, on their way to the Kearl area near Fort McMurray.

A story in USA Today reported that Imperial is spending $40 million in Montana to upgrade roads and relocate utilities to accommodate the modules and loads of up to 334,000 pounds. Imperial has countered criticism of the deal by saying that 80 per cent of the off-site pre-assembly is being done in Alberta, as well as more than 90 per cent of total construction. The Missoulian, a Montana newspaper, reported recently that the first Kearl shipment from the Korean manufacturer arrived at the Port of Vancouver in early October.

Although Imperial says its contract with Sungjin, an affiliate of POSCO, one of the world's biggest steelmakers, is for highly specialized units and represents a one-off deal only, “that view is contradicted by the Korean supplier,” according to a May 15 2010 story in the Edmonton Journal. The story quoted two Sungjin sources – the CEO and a local manager in Calgary – as indicating they anticipated lots more module work for Kearl.

Regardless of future sourcing arrangements for Kearl, it is difficult to see how the infrastructure upgrades in Montana, and in Alberta, between Coutts and Brooks, won't set the stage for more overseas-made modules being trucked along the route from Lewiston.

Harvest Operations Corp., until last year Harvest Energy, but now a wholly owned subsidiary of Korea National Oil Corp., has begun discussions with the Idaho Transportation Department (ITD) about shipping 40 to 60 modules, destined for an oilsands project near Conklin, starting next June, according to The Missoulian.

Nonetheless, worries stemming from the Kearl-Sungjin deal could be overblown. Much of the planning for Kearl – and likely the purchase order for the first 200 modules – was done during the boom, prior to October 2008, when construction costs in Alberta were increasing by about 20 per cent per year. With hindsight, Imperial might well have bought the modules in Alberta, says Brian McCready, vice president of Canadian Manufacturers and Exporters (Alberta).

Lower costs

“Industry is looking more carefully at capacity this time to ensure that bid curves are level, not vertical, as happened from 2005 to 2007,” he says, noting that the fabrication and module assembly sector increased capacity during that period.

Costs have come down. When Husky announced the go-ahead for its $2.5 billion Sunrise project in early 2010, the company pointed out that the price tag was more than $1 billion under the original estimate of $3.8 to $4 billion.

Despite the drop in costs, however, “Not much has been announced since January (2010),” says Don McFarlane, president and general manager of CESSCO Fabrication & Engineering Ltd. Two projects, the North West Upgrader in Sturgeon County and the Phase 2 and 3 expansions at CNRL's Horizon oilsands mine, might move forward in 2011, he says. Both projects have received regulatory approval.

In August, CNRL said that no decision had been made on a construction timetable, but that it was planning its Phase 2 and 3 expansions.

While the Obama administration's recent indication it will approve a new pipeline from Alberta to the U.S. Gulf coast, and these projects – both those already announced and the possible CNRL and North West projects – are grounds for optimism, the medium to longer term future still looks uncertain for fabricators hoping for more oilsands work. Shell has said that future expansions of its oilsands mining operations will be smaller than originally planned, citing high costs in Canada, and opportunities in the conventional sector in other parts of the world. In early October, it announced it had withdrawn its application for a new upgrader.

Other factors could also slow the amount of investment dollars flowing into the oilsands. European investors, citing “dirty oil,” are starting to put pressure on companies like BP, Shell and StatoilHydro regarding their oilsands operations. Iraq's massive oil potential is likely to receive more industry attention, and natural gas opportunities seem to be expanding almost everywhere – in B.C., the U.S. and overseas.

And then there’s the lingering economic uncertainty and the possibility of a double-dip recession. Some energy analysts believe that this could hurt oil prices – and slow oilsands development.