Profits, labor woes hit Alberta

Conference Board of Canada predicts 25% drop in profits this year, but expects 2008 rebound

Gary Park

For Petroleum News

The Canadian oil industry is headed for a 25 percent jolt to its bottom line this year as lower commodity prices earlier in the year and rising industry costs cut into profits, the Conference Board of Canada predicts.

Total profits in the sector are forecast at C$12.6 billion, which the independent research organization said are still high by historical standards, but pale after the record C$16.7 billion posted in 2006.

However, the setback is expected to be short-lived, with profits resuming their upward climb in 2008, growing by 10 percent a year as production and productivity rise to reach C$18.5 billion in 2011.

The report did not cover the natural gas business, which has been hit with a double-whammy of softer prices and high storage levels in the United States.

The board predicted oil prices, despite nudging US$80 per barrel recently, will be 4 percent lower on average than last year, although production growth should see revenues hold steady at about C$91 billion, similar to 2006.

Cost increases for materials expected to moderate

The report said inflation in labor and materials costs in Alberta has pushed the cost of new projects to “near-prohibitive levels,” but it is confident the overall financial picture will be helped by a moderating of cost increases for materials to 6.7 percent this year.

It forecasts that growth in both the labor and capital categories will decelerate this year, increasing by 9.44 percent and 8.1 percent respectively.

Over the balance of the forecast period to 2011, total costs will rise by an average 12.66 percent.

The greatest influence on industry profits is tied to the Alberta oil sands, where production is predicted to climb by 10.7 percent this year to 1.25 million barrels per day and 20 percent in 2011, averaging 17 annual percent growth over the next four years to reach 2.57 million barrels per day.

Conventional crude volumes are expected to stage a modest recovery from 2006, partly because of the return to full production at Hibernia and Terra Nova, two of Newfoundland’s offshore projects, while the third at White Rose, which came on line in mid-2006, has regulatory approval to increase to 140,000 bpd.

With offshore output on track to grow by more than 30 percent this year, total conventional production is set to add 4.9 percent this year, despite a flat lining in the Western Canada Sedimentary basin.

However, the conventional outlook is troubling for the balance of the forecast period.

All three Newfoundland projects have shrinking profiles and, with easily recoverable reserves from the WCSB exploited, volumes will average a 3.3 percent annual decline.

Crude exports to the United States rose by more than 10 percent in 2006 and, given the anticipated modest increases in Canadian demand, are forecast to increase by 6.8 percent this year and average 9.2 percent over the 2008-2011 period.

Five oil sands unions threatening strikes

The strike mandate covers 25,000 electricians, pipefitters, boilermakers, plumbers and refrigeration mechanics.

They are critical to maintaining the current pace of expansion in the oil sands by keeping about C$125 billion worth of projects on track, although a spokesman for the electrical workers said a total walkout by the five trades is unlikely.

“We want a contract, not a strike,” he said. “This is all about getting back to the table.”

The spokesman said some progress has already been made in fresh negotiations, but the strike mandate is “another tool in our collective bargaining tool kit.”

Alberta labor law could also head off or diminish the impact of strike action by forcing all five unions to coordinate their activities.

That could result in disruptions of various lengths at work sites across Alberta, or rotating walkouts at selected locations.

Legislation also prevents strikes if three-quarters of Alberta’s construction unions accept contract terms, thus blocking the remaining unions from taking legal measures against their employers.

The Construction Labor Relations Association of Alberta, which negotiates on behalf of 16 of 25 construction contractors, but not the electrical companies, said 14 unions have reached settlements and two more ratification votes are pending.

If 18 unions accept new contracts, the holdouts will be forced to go with the majority.

The other skilled trades which have agreed to terms will see wage hikes of 23-24 percent over 2007-2011, starting with 6.5 percent this year.