Alberta’s oil and gas services sector is girding for a prolonged slowdown which is already starting to bite into business for some local firms.
As the Petroleum Services Association of Canada forecasts a sharply reduced well-drilling schedule for the new year after this year’s record numbers, the chair of Edmonton’s oil, gas and chemical cluster says diversification and maintaining a long-term vision is crucial to surviving the economic downturn.
“The members of the cluster I’ve spoken to recently are concerned, as everyone is, about a slowdown in the economy,” says Gil Nault, who is also manager of economics and forecasting for ATCO Electric.
“It further renews their desires and efforts to be involved in finding new business opportunities and collaborate on efforts that can expand the total amount of business they have available to them.”
The oil, gas and chemical group is one of eight clusters within the Greater Edmonton Competitiveness Strategy launched in 1991. Clusters are geographic concentrations of interconnected companies and institutions in a particular field that are seen as integral to the region’s economic growth. Economic Development Edmonton (EDE) is helping co-ordinate and market action plans developed by the clusters to promote the region, its products and services on a global scale.
The oilfield services sector is of huge importance to the 22 communities that make up the Edmonton region, says PSAC president Roger Soucy.
“It has developed into a central area for the service industry because of the activity around Edmonton and going north,” he says. “It’s been a central location for servicing a lot of conventional industry, and when you move into things like oilsands, it is the largest centre towards Fort McMurray and the whole oilsands development. It’s becoming a fairly significant supply point for the oilsands.”
But many of the small and medium sized firms that help service drilling ventures are already feeling the pinch since oil prices tumbled from $30 a barrel in January to about $20 a barrel. Natural gas has dropped from $10 per 1,000 cubic feet (MCF) to $2 during the same time period. The Canadian Energy Research Institute is predicting an average oil price of $18.50 next year, bottoming out under $15 in the fourth quarter.
For smaller companies such as Alberta Wire Cloth, a division of Edmonton-based Wenzel Downhole Tools Inc., the slowdown is already part of the bottom line. “Our domestic market has slowed down probably 35 per cent,” says general manager Rob Taylor of his company, which manufactures shaker screens for the oil industry.
“Usually at this time of year, everybody is gearing up for winter drilling, and it seems like the cutback with all the various oil companies, they’re not spending the money or doing the exploration work that they thought they’d be doing. It’s putting a hold on a lot of people.”
Taylor says he hopes the downturn will be short-lived. “Usually by Jan. 1, everybody is back going full gear. But this year, who knows if that’s going to happen.”
Nault says expenditures on conventional oil and gas activity are expected to be about $20 billion for the current year, and forecasters are looking at a $2-3 billion dip in 2002.
“That’s a significant reduction,” Nault says. “But there’s still going to be $17-$18 billion of activity. That’s significantly higher than any year during the 1990s when capital spending got to be as low as $5 billion for conventional for a couple of years.”
The service sector expects its load factor will drop from 80-to 90-per-cent capacity utilization over the past year to about 60-70 per cent next year, says Nault, who notes the decrease in activity will be mitigated somewhat by the expected $5 billion in oilsands expenditures.
As well as expansions announced by Suncor and Syncrude in the oilsands, Calgary-based Nexen, formerly Canadian Occidental, has plans to build a huge plant near Fort McMurray with private partner Opti Canada, which could produce up to 70,000 barrels per day of synthetic light oil in five years’ time.
PSAC, the national trade association that represents the service, supply and manufacturing sectors within the upstream petroleum industry, has forecast a western Canada record well count of 18,207 in 2001, and a 20-per-cent decrease in activity by 2002. The Canadian Association of Oilwell Drilling Contractors estimates 13,600 new wells next year, compared to 17,299 wells this year, about two-thirds of which were for gas.
“We’re forecasting a bit of a bump in the road in 2002,” Soucy said. “But we’re coming down from all-time record high, so although we do see a downturn, at this point we’re not expecting a crash.
“This is a very difficult year to forecast going forward simply because the oil companies are very slow in determining what they’re going to do,” he adds.
“A lot of that comes from the uncertainty of the price of both oil and gas and where it’s going to go. It’s come down so dramatically, that a lot of projects that were economical when gas was $5 or $6 an MCF are not economical at $2. And is the $2 price going to stay for a while or go up?”
“The oil industry today is very much a cash-flow business, in that there’s very little outside equity capital coming in to the industry, there’s not a lot of debt capital coming in, and so the oil companies are really living off their cash flows and cash reserves . . . and cash flows change significantly when you’re selling your product at $10 from when you’re selling it at $2.”
Soucy adds the ability of service companies to obtain the prices they’ve seen over the past year is likely going to be eroded more quickly and significantly than the actual level of activity.
“The johnny-come-latelys will probably be the hardest hit, and a lot will will probably disappear. But that happens in every cycle,” he says.
The oilfield services sector has been struggling with a chronic labour shortage, so the coming year will provide an opportunity to complete needed training and education initiatives with staff, says Soucy.
Nault says Edmonton companies are finding new markets beyond the oilfield services sector. He points to Poly Pacific International Inc., a small coating-removal company in Edmonton’s Refinery Row that just inked a contract worth $3.2 million US to supply the U.S. military with its MultiCut paintstripping product.
“Here’s a small company that found a niche,” and went on to develop expertise that made it possible for them to move beyond Alberta and make sales across North America, says Nault.
“Being aware that there will be ups and downs, one thing we can do as a group of businesses working together within the Edmonton region is try to look for the little things we can do to increase our competitiveness, open up opportunities for other business within the area, and open up export opportunities.”
