Alberta steel fabricators cash in on oil sands, NGL growth
Unconventional turn benefits Pillar Resource Services and Waiward Steel
A pipe rack assembly unit built by Pillar
photograph courtesy of Pillar Resource Services Inc.
They are the silent armies of the oil patch. And whether it is Imperial Oil Ltd.’s $10.9-billion Kearl oil sands project or a single well program operated by a junior explorer, companies that manufacture and fabricate steel are behind the growth plans of virtually every oil and gas firm in Western Canada. With the oil and gas industry enjoying a resurgence following the economic downturn of 2008-2009 – thanks in large part to oil prices that got as high as US$113 a barrel in May before falling back to the US$80-90 range by the fall – it’s made 2011 a good year for Alberta’s steel manufacturing and fabricating sector.
But Dean Samaska insists oil and gas companies haven’t forgotten the cost escalation that characterized the boom days of 2006-2007, nor the beating they took during the recession that followed. “Customers are being a lot more cautious in their approach,” says the vice-president of corporate development for Calgary-based Pillar Resource Services Inc.
The customers Samaska is talking about operate in just about every facet of the petroleum industry. Pillar Resources, which Samaska says focuses on work in Alberta, Saskatchewan and British Columbia, has completed projects that have supported the construction and modification of everything from natural gas plants to heavy oil tank storage. The company also does specialized fabrication at its Calgary facilities.
All of the work requires manipulating steel for machinery the oil and gas industry needs to meet forecasts that could see oil sands production reach three million barrels per day by 2020 and conventional oil production hovering at 900,000 to one million barrels per day over the next decade. The growth is good news for the Alberta steel industry after a couple of lean years. That’s certainly the view of Edmonton-based Waiward Steel Fabricators Ltd. “Albertans really haven’t been that busy for two-and-a-half years,” says Waiward Steel CEO Don Oborowsky. “But the last two quarters of 2011, we expected activity to ramp up and the industry to require lots of our services.”
The oil sands have been a key market for Waiward Steel. The 500-employee firm has supplied hundreds of thousands of tonnes of steelwork for expansions like Suncor Energy Inc.’s Millennium project. Billions of dollars in investment in the oil sands is expected over the next 20 years, and that represents a lot of work for steel manufacturers and fabricators. But the activity is dependent on economic factors that are beyond the private sector’s control. A shaky global economy is surely giving the industry some pause, as organizations like the International Energy Agency and the Organization of Petroleum Exporting Countries cut their oil demand forecasts this fall over worries that the global economy was headed for a recession.
Ironically, steel is adding to the economic stress. For as much as the petroleum industry needs steel, it’s also a significant cost. In a recent report on the opportunities and challenges facing the oil sands sector, Ernst & Young Canada listed cost inflation as the number one risk. Rising steel prices were a contributing factor, as the per-unit cost of steel was up 30 per cent from the 2010 average because steel prices typically rise with oil prices.
Yet the cost escalation concerns haven’t stopped an industry stampede to shift its focus away from chasing dry gas to exploring for unconventional oil and gas plays rich in natural gas liquids (NGLs). The active average rig count for the third quarter of 2011 in Western Canada was 455, above the five-year average of 351 rigs.
That shift has resulted in firms like Pillar Resources getting less work on the natural gas side of its business, although the industry’s current love affair with NGLs is keeping companies interested in the cleanest burning fossil fuel. “There’s less compressor stuff but there are still gas projects on the move,” Samaska says. “With the growth in natural gas liquids, there are larger plant projects and larger terminal facilities being built for that.”
A compressor on the move west of Calgary
photograph courtesy of Pillar Resource Services Inc.
The increasing focus on unconventional oil and gas and the complex and lengthy horizontal drilling required to extract the stuff is also causing drilling companies to retool their rig fleets, which happen to require a lot of steel. Take Precision Drilling Corporation: The Calgary-based drilling giant had an $880-million capital program for 2011 that included building 42 new drilling rigs destined for use in Canada and the United States on unconventional oil and natural gas plays.
Samaska and other firms in the steel business are also watching the progress of West Coast export schemes like Enbridge Inc.’s controversial Northern Gateway pipeline and several proposed liquefied natural gas (LNG) export terminals. The National Energy Board’s fall approval of the Kitimat LNG project led by Apache Canada Ltd. was seen as a positive move by Samaska. He says accessing new markets will increase demand for natural gas and drive up prices that have languished in the US$4 range. That will provide industry with the financial incentive to continue producing the fuel, creating the need to build more gas plants, compressor stations and flare systems that Pillar specializes in. “I see a recovery coming on the natural gas side,” Samaska says. “The bigger players haven’t given up on it.”
Ultimately, Samaska believes in the resilience of the oil patch and the steel manufacturers and fabricators that depend on it for work. The economic outlook may be cloudy now, but Samaska says it’s just another valley in an industry that’s always been cyclical. “From a business perspective, I’m very optimistic about the industry. It’s been around for many, many years and there are ups and downs. You’ve just got to plan to withstand the ups and downs.”
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