Industrial outlook

Alberta's industrial construction sector is seeing a shift in its centre of gravity.

In recent years, oilsands development in the Fort McMurray region has accounted for the lion's share of industrial construction projects in the province. This has been the pattern since the current round of expansion began around 2000. But it is about to change. And with the announcement of more than six heavy oil upgraders for the Edmonton area, the region could soon account for nearly half the province's oilsands-related construction.

Although planning for new upgraders and refining capacity has been ongoing for some time, the shift to the Edmonton area of actual construction activity for oilsands-related projects is a recent development.

"Actual construction work here in the Edmonton region only began this year [2007], but by sometime next year, the amount of oilsands construction in the Edmonton area could rival the amount around Fort McMurray," says Mike Senger, a VP at Graham Industrial Services Ltd., a division of Graham Construction.

Costs can vary, but heavy oil upgraders have hefty price tags, often in the $5- or $6-billion range. Given this and the potential these days for cost overruns-they have dogged projects in the oilsands sector since the early 2000s-it's not hard to see how the Edmonton area's oilsands-related construction could soon catch up with Fort McMurray's, especially if these upgrader projects all go ahead.

The year 2007 saw construction starts on two Edmonton-area upgrader projects. After receiving board approval in November 2006, construction began on the expansion of Shell's upgrader at Scotford in Strathcona County. Construction on the $5.6-billion project is scheduled for completion in 2010. BA Energy's Alberta Heartland upgrader also saw a construction start in 2007. Phase 1 has an estimated cost of $1.1 billion, according to the provincial government. It is being built northwest of Bruderheim, with completion scheduled for 2008.

As is the case with so many oilsands projects, other phases of the Heartland upgrader to be built stretch well into the future. Phase 1 should see the start of operations in 2008. According to the company's website, this will produce about 77,000 barrels of upgraded oil per day. But, by 2013, when a projected third phase should be complete, production is supposed to hit more than 200,000 barrels per day.

BA Energy does not include the cost of all three phases, perhaps because a meaningful estimate of the actual cost would be hard to arrive at. The completion year, 2013, is five years away and the inflation rate in the province's construction sector as a whole has been oscillating between and one and two per cent per month since late 2005.

Big projects ahead

There are several upgrader projects that could help put the Edmonton area on par with Fort McMurray for oilsands construction.

Total E&P Canada Ltd. has announced plans for a $5-billion first phase of an upgrader in Strathcona County. Completion is pegged for 2014. Beyond its expansion of its Scotford upgrader, Shell has also announced plans for Scotford Upgrader 2, a further Scotford upgrader expansion.

Shell's Scotford upgrader and expansions, in tandem with further capacity development of its Albian Sands mining operations north of Fort McMurray, comprise a series of construction projects with an estimated timeline between 2009 and 2012 and a price tag in the $22- to $27-billion range.

Norwegian Statoil, which bought North American Oil Sands Corp. last spring, has also announced an upgrader located in Strathcona County that would refine the company's oilsands production from the Fort McMurray region. The proposed $7.5-billion project would be built in two phases, from 2009 to 2014.

North West Upgrading Inc. began some preliminary earthwork and site preparation on Phase 1 of an upgrader near Redwater in Sturgeon County. The $2.9-billion project should see construction complete in late 2009. Two further phases are also planned to be built between 2010 and 2015 at a projected cost of $2.9 billion. Phases 2 and 3 received regulatory approval in August.

Petro-Canada's refinery conversion to upgrade bitumen, also in Strathcona County, is underway and should be complete sometime in 2008 at a cost of $1.6 billion.

According to the September 2007 issue of the Inventory of Major Alberta Projects, industrial construction projects that are in the works total $161 billion. Of this, a staggering $148 billion accounts for oilsands projects. This total would be spent roughly between 2005 and 2015-and that's if everything announced gets built, which no one expects to happen.

For instance, although Synenco Energy Inc. submitted a regulatory application for its Northern Lights upgrader in September 2006, the project, slated for building in the Edmonton area, has been put on hold. Some observers have interpreted that as meaning the project has yet to find a partner with sufficiently deep pockets.

Just how much of what appears on the books will in fact go ahead? The Canadian Association of Petroleum Producers (CAPP) and an association that represents oilsands operators known as the Regional Issues Working Group early in 2007 completed a survey that indicates as much as $110 billion on oilsands projects could be spent in the 2007 to 2011 period. The Alberta government's Oil Sands Industry Update released in June 2007 noted, however, that the groups dealt with the uncertainty factor by adjusting their forecast on the basis of projects' status within the regulatory process. The provincial update noted, "The total discounted or adjusted capital expenditure profile of the industry for the 2007 to 2011 period is estimated at $77 billion."

$30-billion jump

That's still about 70 per cent more-in five years-than the estimated $47 billion the oilsands industry actually spent on new projects in a 10-year period from 1996 to 2006.

Today's spending levels are in sharp contrast to those of even four or five years ago. Statistics Canada figures from 2002 to 2004 show spending on oilsands projects at $6.9 billion, $5.2 billion and $6.3 billion, respectively. Capital expenditures on oilsands projects jumped to $9.9 billion in 2005 and then to $11.6 billion in 2006.

In 1997, before the current rush for oilsands development got underway, capital spending was $1.7 billion. That was when there was no major new project under construction. The reason for such an outlay, despite no major new project, stems from the fact that large heavy oil production facilities require "huge volumes of sustaining capital," says Herb Holmes, Edmonton manager for Construction Labour Relations.

For instance, hardly a year goes by that Imperial Oil doesn't spend a couple hundred million dollars on additions, new wells, and other development work at its Cold Lake heavy oil facility.

Stephen Rodrigues, research manager at CAPP, says that CAPP expects a total of about $16 billion will be invested in new oilsands projects in 2007 with about the same level of capital expenditure in 2008. He says that CAPP now expects that about $80 billion total will be spent on new oilsands projects for the period 2007 and 2010. Subtracting the expected total for 2007 and 2008-$32 billion-that leaves about $48 billion to be spent in 2009 and 2010. Rodrigues says that CAPP has not broken out the $48 billion into per annum spending for 2009-2010.

At $16 billion worth of oilsands development per year, resources are stretched, many analysts and industry people agree, in terms of equipment, materials, and skilled trades. There is also an acute shortage of engineers for almost all aspects of oilsands construction and development. At the same time, the number of oilsands projects in the works keeps growing.

A crunch is coming, and many observers believe it's likely to hit in either 2009 or 2010. Averaged out, CAPP's figure of $48 billion for 2009-2010 means $24 billion per year spent on oilsands development. Given how stretched resources are already, industry watchers are saying that the capacity is simply not there.

"Unless something radical happens, it's impossible for the work to be done on schedule," Holmes says. "By radical, I mean for example a huge influx of workers. Also needed would be tools, machining equipment, engineers. We are seeing shortages now and we are not yet at the peak."

Also, he notes, as new projects start operations, further demand on equipment and skilled trades comes into effect. Oilsands operators are inclined to hire skilled construction trades and supervisors as their skills are easily transferable to oilsands plant and mining operations, he says.

Pipefitters and skilled pressure welders are the trades most consistently in demand for such construction projects, Holmes says. Other trades, such as insulators, are typically required for a relatively short period during the life of an oilsands construction project. Still, even with insulators, the sheer size and growing volume of projects, could spark a supply squeeze.

"Projects are so big that when you need insulators and it's the same time that, say Opti and Petro-Canada need them, then you can run out," Holmes points out.

If construction is being done at a brownfield site and the existing facility is shut down for major maintenance work, the current practice in the Fort McMurray area is to halt much of the construction as workers are switched from construction to shutdown work. Holmes notes that major shutdowns at oilsands facilities or large refineries can require as many as 3,000 workers.

Gary Cutmore, business development manager at the Sherwood Park office of Lockerbie and Hole, shares module construction forecasts that he does twice a year. He says that his April 2007 forecast put peak oilsands module assembly in the second and third quarters of 2009. That's changed. Pointing to several projects that are behind schedule, he says the crunch is more likely to hit in the first half of 2010.

"Projects have moved out by about 6 to 12 months, so there is a levelling of the peak," says Cutmore, who is working on a new forecast.

Module requirements are huge. Opti-Nexen's SAGD/upgrader project at Long Lake used 783 modules-348 for SAGD and 435 for the upgrader. Modules are around 90 to 100 ft long, 20 ft high and 20 ft across.

Contractors such as PCL are taking note of the fact that, as Ian Johnston, senior VP heavy industrial at PCL, puts it, "the entire world is busy." PCL is involved with several projects, including site and other work for Suncor and Shell.

Both Asia and the Middle East are seeing a surge in major oil and gas projects, in tandem with India and China's rapidly growing economies. "So more energy is spent on procurement. We are trying to share our lessons and gain experience from other corners of the company," Johnston says. Still, "there will be a huge challenge in 2009-2010."

It seems that Alberta's industrial construction is almost all about energy. Vegreville could be the site of a $400-million ethanol plant that will convert straw into biofuel. The project, however, is not in the bag yet. Ottawa-based Iogen Corp. is also considering sites in Idaho and Saskatchewan for the facility.

Besides oilsands projects, other energy sectors are also facing challenges to get their projects off the ground. There are more than half a dozen wind power projects waiting in the wings, all in southern Alberta.

In 2007, Naturener, with offices in California and Spain bought Alberta-based West WindEau Inc. and plans to build an 80-turbine wind farm south of Medicine Hat. The company, says CEO Jose Maria Sanchez Seara, is "developing its own transmission line from south of Medicine Hat to the Empress sub-station."

The estimated $400-million project, says Sanchez, will "no doubt be going ahead." He says construction will start in the first quarter of 2009.

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