Scaling the scaffolding slowdown

Delay in oilsands projects are sure to have ripple effect

For some, it no doubt marked a respite from an overly hectic pace where the pressure of being in catch-up mode had become what seemed like a permanent feature of most construction activity in Alberta. But last fall those in the scaffolding business noticed something they had not seen in a while: a slowdown.

"A change happened between the beginning and the middle of November," Wendy Larison recalled in late November. "Typically, workers have gone to the industrial [sector] first, but that is slowing down, so there are more workers available. In the last two weeks, more resumés have come in."

But that doesn't mean all is gloom and doom. As the last month of the year approached, Larison pointed out, "We are just as busy as last month," and that "there is not a drastic slowdown in commercial just yet."

Larison is in a position to know. She's a manager at Urban Scaffolding as well as the secretary-treasurer for the western chapter of the Scaffold Industry Association of Canada (SIAC).

The scaffolding sector is probably a good bellwether for the entire construction industry. In fact, it's a safe bet that virtually every big project in the institutional, commercial, and industrial sectors has scaffolding on site. Of the nearly 220,000 workers in Alberta's construction sector, 7,500 to 8,000 are employed in scaffolding.

If the slowdown continues, as many expect, there will certainly be repercussions. Bad and good.

For example, scaffolding contract rates could start to drop as project owners "try to leverage suppliers to get better rates," says Brian Roy, a manager at Aluma Scaffolding who is responsible for projects in southern Alberta, Saskatchewan, and Manitoba. However, despite the fact that the price of a barrel of oil had dropped nearly two-thirds from its high of US$147 last summer, he says, "I'm still waiting for the freight companies to cut the fuel surcharge."

Still, the precipitous drop in oil prices and the flurry of announcements last fall from oilsands operators on delayed projects and possible cancellations do not bode well for the scaffolding sector. Rick Beaulieu, president of the western chapter of SIAC and scaffold services manager at Quinn Contracting Ltd., estimates that three-quarters of scaffolding work in Alberta is in the industrial sector. The oilsands make up the lion's share of that construction.

Several multi-billion-dollar projects are on hold. Petro-Canada and its partners, UTS Energy Corp., and Teck Cominco Ltd., announced last fall that they would delay making a decision on building the $24-billion Fort Hills oilsands mine until sometime this year. Neil Camarta, Petro-Canada's senior VP for oilsands, said during a conference call in mid-November, "All of our contracts can be cancelled." He suggested that Petro-Canada, which has a 60 per cent stake in the project, would try and cut costs by re-negotiating existing contracts with suppliers and contractors.

So far, the partners have spent $1.7 billion on the project. The price tag has ballooned from an original estimate of about $14 billion. As well, the partnership's proposed Sturgeon County upgrader was put on hold indefinitely.

Nexen Inc. and Opti Canada, partners in another Fort McMurray-area oilsands project, have said they will delay a decision on expanding their Long Lake operations because of the credit crunch.

Suncor reduced its capital spending budget for 2009 by more than one-third to $6 billion, partly as a result of scaling back investment in its Voyageur upgrader and delaying its completion to 2013, not 2012 as originally planned.

Last September, as signs of a global economic meltdown began to show, construction was halted on BA Energy's Heartland $4-billion upgrader near Fort Saskatchewan, owned since spring 2008 by Calgary-based Value Creation Inc. Canadian Natural Resources Ltd. (CNRL) is cutting oilsands spending by $4 billion this year. It is also delaying a proposed expansion of its Horizon project, which began operations late 2008.

Shell has put expansion plans for its Albian Sands operation on hold. This does not affect construction at the Jackpine Mine site, set to start producing 100,000 bbl/d of bitumen by late 2009 to bring the production total to 225,000 bbl/d. But further development of an already approved 100,000 bbl/d Jackpine Mine expansion is delayed. Construction was to start in 2010.

It seems unlikely that much of the impact from these delays and possible cancellations will be felt in 2009, but 2010 could see a sharp downturn in activity, as current projects are completed.

The slowdown in the oilsands could have a positive impact elsewhere, though.

As layoffs have loomed, some firms have wasted no time looking for work outside the oilsands. The recruiting arm of Quinn Contracting, which supplies a range of trades to the construction sector, began checking last fall to see what contracts were lined up in the southern part of the province, Beaulieu says.

During the boom, the scaffolding sector struggled to supply industry with enough equipment and skilled workers.

In the years 2005 to 2008, Beaulieu says owners often needed to book scaffolding services at least a year in advance. Now, he says, three or four months' notice might suffice.

The boom years in industrial, commercial, and institutional construction coincided with increased demand for safety, says Dean Dancy, western regional manager at Peri Formwork Systems Inc. The result is that scaffolding is now widely seen as part of safe access to work areas and is used more extensively than in the past.

Dancy says that Peri's western business "has grown 45 to 50 per cent for each of the last three years." He expects a possible 10 per cent slowdown in 2009. He's hopeful, however, that infrastructure construction will take up some of the slack should oilsands work fail to pick up steam again within about 18 months.

Layoffs began late last fall, but this spring could see an uptick in oilsands construction and scaffolding work.

Construction on some oilsands projects was expected to be delayed over the winter to save on costs. Beaulieu says that building in winter can add as much as 25 per cent to costs because of heating requirements and other issues. Earlier in 2008, CNRL had cited cold weather in winter 2007-08 for causing some delays and driving up costs.

Oil production, inevitably, will have an impact on Alberta's scaffolding sector. When some projects that are now under review were first announced several years ago, oilsands company senior executives were bullish about projects making a profit with oil at US$40/bbl. By last summer, however, analysts were saying that about US$80/bbl was the break-even point for new oilsands projects. The new break-even point was mainly, but not entirely, as a result of Alberta's oilsands-fuelled boom.

Analysts are unanimous that oilsands mining operations are sensitive to capital costs. As a result, it remains to be seen when oil prices and constructions costs will line up in such a way as to make these projects feasible again.

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