By Jonathan Hamelin.
These days, Alberta manufacturers are hardly having a gas.
The devastating drop in crude prices — from more than $107 per barrel only two years ago to the $40 mark being edged upon this summer — has caused a downward jolt in capital investment, delaying or cancelling many projects altogether. In April, the Canadian Association of Petroleum Producers forecasted capital investment in the country’s oil and gas sector to drop to $31 billion this year, down from a record $81 billion recorded in 2014.
For companies servicing the industry, it has been a rocky ride.
“All of the business is drying up,” says Tony Lam, executive vice president of engineering and operations for Stream-Flo, an Edmonton-based manufacturer of wellheads, as well as gate, check, and surface safety valves. “There are no longer any new projects. They might go back to make some changes to improve production; but otherwise all of the drilling projects for heavy oil have disappeared.”
The sluggish Canadian dollar has been no friend, either.
“It has been challenging trying to purchase raw materials. With the struggling [loonie], suppliers in Canada can’t really compete, so we’ve had to outsource raw materials overseas in U.S. dollars,” explains Lam, adding the conditions also make it difficult to manage costs. “It’s a tough situation trying to buy materials in U.S. dollars and sell in Canadian dollars without overpricing. It’s a tall task to achieve.”
Stream-Flo is not alone.
Through the first half of 2016, Alberta manufacturing sales failed to hit $30 billion for the first time since 2010, coming in just shy of $29.6 billion — a 14 per cent year-over-year decline. Durable goods, meanwhile, of which machinery and fabricated metal products are a major contributor, were down nearly 24 per cent over the same timeframe.
On a whole, the sector has shed 8,500 jobs since January, and 33,500 since the five-year employment high set in August 2014.
Few experts are surprised by those numbers, especially given lacklustre exploration activity. According to the Canadian Association of Oil Well Drilling Contractors, only 30-or-so drilling rigs were in operation throughout Western Canada during the first week of May — a utilization rate of about four per cent.
To fully understand the impact to manufacturing, Calgary economist Mike Holden says it is important to look both downstream and upstream.
“On the downstream side, petroleum refining is one of Alberta’s largest manufacturing industries,” he explains. “When the price of oil goes down, the value of crude goes down, the value of petroleum goes down, the value of refining goes down, and the value of petrochemicals goes down.
“Secondly, there’s the supply chain, which goes upstream. Massive cuts to capital spending in the oil sands and elsewhere have caused a drop in demand for manufactured goods made in Alberta, such as steel, pipes, valves, gauges, and machinery.”
The key, says Holden, is diversification — although he acknowledges that doesn’t happen overnight, nor is it reasonable to transplant an industry like aerospace into the province and expect it to prosper. But that doesn’t mean manufacturers should sit around and wait.
“In spite of the challenges and the declines in energy, it still makes sense to diversify around that industry in Alberta, whether it means selling our goods in other countries, or using the expertise we have to branch off into additional or related industries,” he says. “An obvious example would be technologies that will help reduce the greenhouse gas emissions profile of the Alberta energy sector.”
At Stream-Flo, diversification has been positioned front-and-centre, as the company redistributes resources towards driving innovation during operational downtime.
“We’re not standing still. We are working really hard to come up with new products that are going to help out customers,” says Lam. “On the other hand, we also have to be able to spend the time right now looking to markets outside North America. Even though we already export to different parts of the world, we want to expand on this. This is not the time to be conservative.”