The oilsands hit the pause button

But for Fort McMurray, even the downturn has an upside

Let's clarify one thing at the start: Fort McMurray is not-repeat, not-immune to the global economic slowdown. As long as oil prices stay low, the city and surrounding Wood Buffalo region will feel the slump.

But even as oilsands production and upgrader projects are being shelved or scrapped, there are signs of construction activity. A drive through parts of the city reveals multiple construction projects underway. And other big projects are planned.

There are even those who say the downturn
isn't all bad.

"Fort McMurray seriously needed breathing time," observes Dave Kozlowski, associate dean of the Trades & Heavy Industrial Division at Keyano College in Fort McMurray. "While we're going through a bit of a blip now, I don't see it as a long-term happenstance."

Wood Buffalo Mayor Melissa Blake says the slowdown gives her city the chance to catch up on infrastructure needs that have fallen behind the pace of rapid growth.

Blake estimates the population has been revenues and cut construction jobs following Suncor Energy's decision to slash capital projects this year. That has already led to cutbacks-and the loss of workers-at Suncor's Firebag 3 in situ project north of Fort McMurray. More layoffs could come later. But workers will also be transferred to the company's other operations.

Flint isn't the only company affected by Suncor's decision. Lockerbie & Hole Inc. of Edmonton says it will defer approximately $35 million in revenue from fiscal 2010 "until a later date" because of the Firebag delay. Last November, Lockerbie & Hole said portions of its engineering, procurement, and construction services contract for the Fort Hills Oil Sands Project were also delayed. The delay was expected to defer approximately $30 million and $100 million in revenue for its 2009 and 2010 financial years, respectively.

The slowdown has affected other operations. Suncor also recently announced it was putting its massive multi-billion-dollar Voyageur upgrader in "safe mode," meaning construction was being halted.

Suncor CEO Rick George told investors in a conference call that he wasn't sure when the projects would proceed. "We just don't know…about how long this trough lasts, when we'll see the commodity cycles moving back in, and when we'll see oil prices move back up," he said.

Bob Dunbar, president of Strategy West Inc., says the oilsands industry needs oil prices of between US$70 and $100/bbl (in real 2008 figures) to justify new investment. But, he also says, that the cost of building new projects may fall as costs drop.

According to the Daily Oil Bulletin, Dunbar says that while oilsands industry growth will likely resume after a global economic recovery, the rate will depend on oil prices and the resolution of policy, environmental, and regulatory issues.

Still hiring

Shawn Davis, a Suncor spokeswoman, says that while contractors are being affected, "we have not laid off any permanent employees." As well, Suncor is still looking for people to fill positions.

And, in a speech in Edmonton in February, Alberta Premier Ed Stelmach pointed out that even with the slowdown, nearly $10 billion is forecast to be invested in oilsands projects this year. He also said that industry expects to spend up to $15 billion in the oilsands annually for maintenance and operations.

An executive at one engineering company that works on projects for clients in the oilsands region says companies that are innovative and nimble will do okay during this time of uncertainty.

"There will be companies that have a really tough time," predicts Richard
Campbell, a principal with Vista Projects in Calgary. "It's going to be a very competitive environment based on how good a company is. It's no longer based on just having capacity."

Here's how Campbell explains recent developments with oilsands projects:

"I think what happened is that in the froth of high oil prices there're a lot of
projects that were proposed or started that really didn't make sense outside of this bit of exuberance. I think there are still a lot of good projects out there. Unfortunately, the cost base has crept up so rapidly-specifically on the construction and field side, where there's been so much competition for the limited number of resources-that we're going to see a bit more drop than makes sense as the prices readjust. I think if we look six to nine months from now, projects at $50 [a barrel] oil made sense four years ago and they'll make sense again once labour and materials come back into line.

"The other thing that we believe is that the future of this industry is not going to be what the past was. We've been involved in SAGD [steam assisted gravity drainage] for a long time. Within the last five
years it's gone from being an also-ran to the way to do things. We're also involved with Petrobank [Energy and Resources Ltd.], which is doing the [toe to heel air injection recovery] process. Their capital cost expenditure is significantly lower. We see the future really focusing on changing technology. The companies that are going to benefit from this are those that are open to new ways of doing things."

Just about anyone you talk to believes that it's only a matter of time before the slump in oilsands activity reverses itself.

Once the price of oil rises again, they say, projects will resume.

In the meantime, companies can use this period to look at ways of doing business more efficiently-and more cheaply. And Blake says it will bring much-needed relief to dealing with critical needs in the region, such as housing and infrastructure.

"I think this time of deflated pricing will give us the opportunity to not only
get us caught up to date on the past needs, but also what's coming for the future," Blake says. "The real detriment would be if we lose opportunity where we should be focused."

The Canadian Press contributed to this story



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