Oil price threatens to incinerate jobs

NORVAL SCOTT
Globe and Mail
October 28, 2008

10,000 construction positions at risk as oil sands companies defer projects, look for ways to cut costs

CALGARY -- The plummeting price of oil threatens to derail so many projects in Alberta's oil sands that as many as 10,000 construction jobs could be lost over the next year, stalling the engine that has long driven the province's economy.

Many energy companies are now seeking cheaper ways to build their projects or even deferring their plans altogether. These changes will likely slash the number of construction jobs in the oil sands by almost one-third, industry observers say.

"There's still billions of dollars of expenditure, but the frenzied pace of development is slowing down," said Richard Cooper, leader of Deloitte Inc.'s Canadian energy department. "The pent-up heat that was in the system is being driven out, and things are returning to some sort of equilibrium."

Just three months ago, record oil prices of $147 (U.S.) a barrel meant it was full speed ahead to develop the oil sands, despite the upward pressure that put on the price of labour, materials and services.

Now, the price of oil is just over $63 a barrel, as fears that the financial panic will cause lower oil demand. But with construction in Alberta continuing and costs still through the roof, only a few new projects will be viable if prices stay at that level.

Oil sands projects that include a mine and an upgrader, which processes the bitumen produced by a mine so that it can be processed by more refineries, need a long-term oil price of $100 a barrel, according to UBS Securities analyst Andrew Potter. Those that use steam injection to extract crude and don't include an upgrader require $70 a barrel.

Without certainty that prices will hit those levels, some companies have already cut back their multibillion-dollar oil sands plans. Suncor Energy Inc., Petro-Canada, Nexen Inc./OPTI Canada Inc. and BA Energy Inc. have already said they'll slow, remodel or postpone their projects, and others could follow.

Those deferrals mean that while the oil sands was expected to need 44,000 construction workers in 2009 and 2010, the region will now need only 26,000, Mr. Potter said. The oil sands now employ about 36,000 construction workers.

Producers are now likely to delay or cancel their Alberta upgraders and instead pursue what appears to be the most cost-effective solution for the oil sands - getting bitumen to an existing refinery in the United States that's been adapted to take heavy crude. That path appears viable at $50 a barrel or over, and has already been taken by EnCana Corp. and Husky Energy Inc.

Oil services companies, many of which have been stretched by the pace of oil sands development, are already feeling the slowdown. Flint Energy Services Inc., a major oil sands contractor, said it has recently scaled back its recruitment efforts as it no longer desperately needs new workers.

"Some of the gold rush mentality has gone," Flint spokesman Guy Cocquyt said. "If one project falls through, there's lots of other work to go around - but we'll see less expense on things like overtime. Some of the pressure [on the sector] will come off."

Even so, wages in the oil sands aren't expected to fall much. Most construction jobs are unionized, and Alberta's unions and employers agreed to a new three-year pay deal last year. Employers instead hope that Alberta's productivity will improve as workers find their jobs are no longer guaranteed.

"Companies know how much they are supposed to pay an [Albertan worker], but they've long missed how productive he'll be," said Neil Earnest, vice-president of Dallas-based energy consultancy Muse Stancil. "Now, some of the boom mentality is being set aside, and that should feed back into the marketplace."